In periods of high macro uncertainty/market volatility, certain countries’ financials tend to hold up better – i.e., decline less in corrections. Most prominent among these low beta countries are Canada, Australia and virtually all Northern European countries (HFY has ~20% exposure). These countries are all wealthy and importantly their financial sectors have healthy dividend yields.

2018 has been a very challenging year, with many global financial indices experiencing declines of between 5% and 15%, while HFY is down a more modest 3.2%. In challenging markets like this, a global fund like the Hamilton Capital Global Financials Yield ETF (HFY) would be expected to underperform these low beta countries since it has exposure to over 15 countries, many of which have experienced substantial declines, including the U.S.

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However, this has not been the case as HFY has performed as well or better than virtually all low beta countries, including the Canadian financials. One of the main reasons is the strong underlying performance of its holdings as evidenced by this most recent quarterly earnings season where portfolio-weighted EPS growth was over 18% (with 80% of firms reporting). In effect, HFY has been providing investors with exposure to higher growth, while generating the same volatility as the lowest beta financial sectors. For 2019, HFY has consensus portfolio-weighted EPS growth of ~12.6% with a P/E multiple of ~11.1x, which combined with a dividend yield of 5% puts it in a good position to benefit once the market volatility stabilizes.

To highlight how well HFY has held up in these difficult markets, below are three charts comparing the performance of HFY over three periods relative to the low-beta Canadian, Australian, and Nordic financials: year-to-date, the last 12 months, and since inception (February 2017).

Note: Comments, charts and opinions offered in this commentary are produced by Hamilton Capital and are for information purposes only. They should not be considered as advice to purchase or to sell mentioned securities. Any information offered is believed to be accurate, but is not guaranteed.

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