CapitalTime

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#xiutop - Top stocks of XIU index

XIU.top methodology

2019-08-25

The XIU.top method uses individual stocks to approximate the TSX 60 index by holding the largest weight (largest market cap) stocks for each sector. The resulting stock portfolio mirrors iShares XIU and is expected to have similar performance.

There are 5 equal weight sectors: Energy, Financial, Industrial, Telecom, Utility. Although the TSX 60 contains more sectors, I am strictly dealing with this subset. For small or moderate portfolios, I suggest holding one stock per sector (5 total), though this can easily be expanded to two stocks per sector (10 total) for larger portfolios.

At the end of each year, the portfolio is updated using the following method:

  1. Looking at TSX 60 (XIU) holdings, identify the largest weight in each sector. Let's call this stock the candidate for its sector.

  2. If the candidate is the same as our existing holding, there's no change.

  3. If the candidate is different than our existing holding, then compare market value to the existing holding. Use the candidate if market value is at least 50% higher. Otherwise, keep the existing holding.

  4. Always rebalance back to equal weights.

Step 3 is needed to avoid replacing stocks in the portfolio due to market volatility. When a stock definitively overtakes another and becomes a much larger weight in the XIU portfolio, then we update the portfolio.

I back-tested several methods back to the year 2000, and found the best results using the steps above. This creates relatively little turnover, creating a passive portfolio that maintains good sector diversification.

— Jem Berkes