Canada ain’t just Shopify!
The compelling narrative that “performance sells” is a well-known fact, underscoring the importance of delving deeper than surface-level news. A recent Bloomberg article exemplifies this, highlighting the allure of performance-driven stories, especially in the context of investment. It’s crucial to recognize that true investment success isn’t about celebrating a solitary winner; real, sustained performance requires a portfolio of winners, particularly those undervalued stocks poised for a turnaround.
The spotlight on Shopify’s stellar ascent, outshining the Nasdaq 100, captures the essence of a Canadian success story. However, this narrative misses a crucial point: the overall underperformance of the TSX 60, which lagged behind the NDX 100 by more than 40%, even with Shopify’s remarkable growth. This raises questions about the intent behind such reporting - is it to marvel at a singular winner, or to drive investment towards it? This ambiguity serves neither traders nor investors, and instead, it may confound beginners who turn to Bloomberg for market education, contributing to unnecessary market volatility.
Shopify’s success hasn’t been enough to elevate the TSX 60 significantly. A key factor in this underperformance is the curse of Market Capitalization (MCAP) Indexing, which fails to represent Canadian market performance adequately for investors relying on indexes for their ETFs. The TSX 60’s structure, with ten stocks holding more than 3% weight each, results in a skewed investment in these top Canadian stocks. Expecting a single entity like Shopify to rescue the index is unrealistic, especially when the other significant stocks haven’t delivered impressive returns. This was different from the weightage of E&R Canada 60 which was more diversified.
The MCAP curse lies in heavily investing in a few large stocks, hoping past winners continue their streak, a strategy often leading to disappointing outcomes. Passive investing strategies, often touted as foolproof, aren’t immune to this issue. Relying on a single high-performer like Shopify to bolster an entire index is as futile as expecting one major company to single-handedly uplift the S&P 500.
The fixation on past winners is more about market psychology and news-selling than sound investment strategy. It’s a trend that, once bought into, can lead to prolonged underperformance. However, the era where active managers couldn’t outperform the average market returns is changing, with a shift towards them potentially outdoing the S&P 500.
In contrast, the Canadian TSX 60’s design flaw lies in its overemphasis on a few heavyweight stocks. The E&R Canada 60, using a Machine Beta model, offers a different approach. It diversifies better, distributing the majority of the investment across a broader spectrum of Canadian stocks. This strategy paid off in 2023, pushing the model to a respectable 12% annual return.
Join the Future of Investing:
By choosing AlphaBlock, you’re not just embracing innovative wealth generation; you’re also embracing responsible and sustainable practices. Together, we can forge a brighter financial future for both you and the planet. Take the next step in your investment journey—contact AlphaBlock today and become a part of the revolution. Unlock alpha. Embrace the future. Choose AlphaBlock.
Check out the Exceptional & Rich Smart Beta codebase, simulations, validations, research and a lot a more on our Github Sandbox.