2025 Was Nut(s): A Canadian CIO's Review

0:00 This year was nuts, both in markets,

0:02 which I'll get into in a minute, and personally for me.

0:05 I had testicular cancer, down to one testicle now.

0:08 I had surgery on the same day in January that PWL Capital,

0:12 the firm that I've worked for for 12 years,

0:14 announced it had been acquired by 1 Digital.

0:17 We were previously a small privately owned Canadian firm,

0:20 now owned by a much larger American firm.

0:23 As a PWL Capital shareholder and employee,

0:25 the acquisition was actually good news and it's unleashed

0:28 PWL's potential to improve our offering and expand across Canada,

0:32 which has been a ton of fun.

0:33 Okay, my personal news aside, 2025 was a wild ride.

0:37 Early in the year, it looked like we were in for a bad time,

0:40 but things turned around and returns in stocks, gold,

0:44 Bitcoin, and real estate were not what anyone was expecting.

0:47 I'm Ben Felix, Chief Investment Officer at PWL Capital,

0:50 and I'm going to tell you what we can learn from 2025.

0:57 I want to say a quick thank you to everyone watching this channel.

1:00 It had by far the most views and largest increase

1:03 in subscribers since I started posting videos here back in 2017.

1:07 I'm grateful that you all like to nerd out

1:08 with me and hope we can keep it going in 2026.

1:12 In this video, I want to talk about some of the unexpected

1:14 things that happened in 2025 that I think investors can learn from.

1:19 I was having a lot of conversations in late 2024 with people

1:22 who wanted to go all in on the US stock market,

1:24 either abandoning international diversification

1:27 entirely or reducing their exposure

1:29 to Canadian and international stocks in favor of more US exposure.

1:34 This wasn't really surprising.

1:35 At the end of 2024, the US market had been crushing other markets for years.

1:40 For example, for the five years ending December 31st, 2024,

1:44 the US market had outperformed the Canadian

1:46 market by nearly five percentage points annualized.

1:49 And it outperformed international developed and emerging

1:52 markets by an even wider margin, all measured in Canadian dollars.

1:56 And that's just five years.

1:57 Go back further, 10 years, it was still a big outperformance in the US.

2:01 In addition to that, there was plenty of doom

2:03 and gloom about Canada's stock market and Canada's economy.

2:07 We had a productivity crisis.

2:09 We had a proposed hike to our capital gains inclusion rate.

2:12 Uh capital was fleeing the country when Trump was elected as the 47th President

2:17 of the United States and started threatening

2:19 tariffs that could damage Canada's economy further.

2:22 All of those concerns were exacerbated.

2:25 I'm not suggesting these are not real economic issues.

2:27 They are.

2:27 But if you had read these headlines and then

2:30 not looked at the stock market all year,

2:32 you would probably assume the Canadian market went on to have a terrible year.

2:36 That assumption would be wrong.

2:38 As of December 17th, 2025, the Canadian stock market index fund

2:42 had returned 29.46% since January 1st, 2025,

2:48 placing it ahead of international developed and emerging markets and more than

2:51 tripling the Canadian dollar return on a US total market index fund.

2:55 Missing a big year like that is hard to come back from.

2:58 I think there are a couple of important lessons here.

3:01 One is that the stock market is not the economy.

3:03 The stock market prices forward-looking information about

3:05 the expected future cash flows of businesses.

3:08 The economy does affect those expected future cash flows,

3:11 but economic data are backward-looking.

3:14 By the time we hear a headline about Canada's economy,

3:16 the market has likely already priced it in months prior.

3:19 If economic data end up being bad,

3:21 but better than what the market had been expecting,

3:24 we can even see a rise in stock prices on bad economic news.

3:28 It's crazy to think about.

3:30 This makes basing investment decisions on economic news

3:33 a pretty bad idea most of the time.

3:34 The other related lesson is that while the future is hard enough to predict,

3:38 future stock returns are probably even harder.

3:41 Some news, like unexpected tariffs, can affect stock prices in the short term.

3:46 Looking back to early 2025, it seemed like tariffs would be putting

3:50 significant downward pressure on all stock markets.

3:53 Again, the market is always looking ahead.

3:56 A shock like tariffs can result in stock prices falling on the news,

4:00 but as new information about the actual

4:02 impact of tariffs become known, markets adjust.

4:05 The US stock market was down more than

4:07 16% in Canadian dollar terms in April 2025.

4:11 One of the things I said in a video earlier this year, around that time,

4:14 looking at historical data for the US stock market,

4:17 was that negative intra-year returns don't

4:19 always predict negative returns for the year.

4:22 It's not uncommon for stocks to enter

4:24 negative territory at some point during the year,

4:27 while then finishing the year with positive returns.

4:29 And that is exactly what we saw in 2025.

4:32 This is one of the many reasons that sticking

4:34 to your long-term plan is generally much better than trying to get

4:37 in and out of the market or otherwise changing your portfolio

4:40 based on whatever might be happening in the world around you.

4:43 I think the other big lesson here

4:44 is that international diversification is still not dead.

4:48 There's been an increasing perception that the US stock market

4:51 is the only market that anyone needs to invest in.

4:53 I and many other people smarter than me have been saying for years now

4:56 that international diversification continues to be one

4:59 of the most important principles for long-term investors,

5:02 despite the recent outperformance of the US market.

5:05 2025 was a good reminder of why this is true.

5:08 A single country stock market, including the US market,

5:11 can go through both short and long periods of poor performance.

5:15 The US lost decade wasn't all that long ago, but it's easily forgotten.

5:19 In those periods, international diversification often pays off,

5:23 as it did this year.

5:24 Canada's incredible stock returns this year seem to have largely gone unnoticed.

5:27 The other story that I've not seen mentioned much

5:29 is the returns of Canadian value and small-cap value stocks,

5:33 which have had an even bigger year than the Canadian market as a whole.

5:36 The iShares S&P TSX Small Cap Index ETF

5:39 returned 47.94% from January 1st through December 17th,

5:44 2025, and the iShares Canadian Value Index ETF returned 33.63%.

5:50 I know it doesn't make sense to focus on one year of returns,

5:53 but the crazy thing here is that if we looked at the data a year ago,

5:56 the 10-year returns of Canadian value and small-cap stocks trailed the market.

6:01 Value stocks were only a little bit behind.

6:03 Small caps were way behind.

6:05 Fast forwarding to December 17th, 2025, so now we're looking at just under 11

6:09 years of data from the same starting point,

6:12 Canadian value has now outperformed for the full period,

6:15 and while small caps are still trailing the market,

6:17 it's a lot closer than it was.

6:19 The lesson here is that if you believe in an investment strategy,

6:22 staying in your seat is extremely important.

6:25 Returns often come in short spurts.

6:27 Missing out on them is easy to do if you don't stay invested,

6:30 and missing out is very hard to recover from.

6:33 It's kind of like getting up to pee during a hockey game and missing a big goal.

6:36 The small cap and value examples are of particular interest to me.

6:40 While I am a big believer in total market index funds,

6:43 and I talk about them on the on this channel all the time,

6:45 that is not how I invest my money or the money of most of PWL Capital's clients.

6:49 We use funds from a company called Dimensional Fund Advisors,

6:52 which look a lot like total market index funds,

6:55 but they tilt toward small-cap, value, and highly profitable companies.

6:59 That approach has struggled at times in recent history,

7:02 but the Dimensional Canadian Equity Funds similarly had

7:05 a big year in 2025 due to their exposures.

7:08 People get annoyed when I bring up Dimensional Funds because

7:11 they're not available directly to DIY retail investors in Canada,

7:15 but on that point, I have some really good news.

7:17 Avantis Investors, a direct competitor to Dimensional Fund Advisors,

7:21 is partnering with CIBC to launch a suite of Canadian-listed ETFs.

7:25 Like Dimensional, Avantis Funds are very similar to index funds in principle.

7:29 They're low cost, broadly diversified, and tax efficient,

7:32 but they have a more flexible implementation approach,

7:35 and unlike a total market index fund,

7:37 which holds stocks at their market capitalization weights,

7:40 Avantis uses financial economic theory and evidence to tilt toward small-cap,

7:45 value, and highly profitable stocks.

7:47 These tilts are designed to increase expected long-term returns.

7:51 The big development here is that while Dimensional Funds

7:53 in Canada are only available through advisors like PWL Capital,

7:57 Avantis ETFs will be available directly to retail investors.

8:01 I used US-listed Avantis ETFs in my old model portfolios that were designed

8:06 to give retail investors in Canada a way to implement this investment approach.

8:10 I will definitely make a dedicated video

8:12 when I have something more to talk about.

8:13 We do know the fees listed in the preliminary prospectus,

8:16 which look very reasonable.

8:18 The Avantis CIBC All Equity Asset Allocation

8:21 ETF has an annual management fee of 0.28%.

8:25 This is not the MER, to be clear,

8:26 the management expense ratio, which includes other costs and taxes in it.

8:30 For example, XEQT has a management fee of 0.18% and an MER,

8:36 management expense ratio, of 0.2%.

8:39 Even if the Avantis fund comes in at 0.35% uh for the MER,

8:44 it still looks pretty good for what you're getting.

8:47 It's like uh like an asset allocation fund that looks a lot like VEQT or XEQT,

8:52 but it's got built-in tilts toward small-cap,

8:54 value, and high-profitability stocks.

8:57 Based on the preliminary prospectus,

8:58 it will have a long-term strategic asset mix of 45% US stocks,

9:02 32% Canadian, 15% international developed, and 8% emerging markets.

9:07 Again, very similar to an XEQT or a VEQT.

9:11 This is definitely a development to watch in 2026

9:14 if you're as much of a nerd as I am.

9:16 To be clear, I'm not affiliated with or being paid by Avantis,

9:20 and I gain nothing from you using their products in Canada or in the US.

9:23 I just think this is good news for the nerdiest of us Canadian

9:26 investors who want an easy-to-use evidence-based

9:29 alternative to low-cost total market index funds.

9:32 Gold has had an incredible year.

9:34 The iShares Gold Bullion ETF returned 57.53% in Canadian

9:38 dollar terms from January 1st through December 17th, 2025.

9:43 I have never been a proponent of holding gold in portfolios for the simple

9:46 reason that it's not a productive

9:47 asset with a meaningfully positive expected return.

9:51 Gold has long-term returns.

9:52 By long-term, I mean 100 years or longer,

9:55 roughly in line with inflation, maybe a little higher.

9:58 Short-term returns will fluctuate wildly around its real value and a mixed

10:03 track record as a hedge against bad markets and inflation.

10:06 Its place in a portfolio is not obvious to me unless you

10:08 have a belief that its price will go up while you hold it,

10:11 which to be fair worked out great for people who were holding it this year.

10:15 As Warren Buffett has said, what motivates most gold purchases is their belief

10:19 that the ranks of the fearful will grow.

10:21 It makes sense to buy gold if you think other

10:24 people are going to want to buy gold in the future.

10:27 I don't love that reason to invest in something,

10:29 which is why I don't hold it or suggest holding it.

10:31 The question I keep getting based on gold's returns this year is

10:34 whether my views on gold have changed in light of its recent performance.

10:38 I am totally open to updating my beliefs when I receive new information,

10:42 but I would not consider high short-term returns to be sufficient new

10:45 information to update a prior belief that gold has low expected returns.

10:50 Academic research using huge amounts of data and applying economic theory

10:53 suggests that gold has an expected return of around 1% above inflation.

10:57 And that's on the high end of the estimates I've seen,

11:00 which is roughly what its historical return has been,

11:02 at least over the sample period in that paper.

11:04 When we look back through history, gold has had big jumps in price before,

11:08 and the most common outcome of the resulting

11:10 high gold prices is lower future gold returns,

11:13 bringing its real value and its long-term returns

11:16 back in line with its long-term historical performance.

11:19 I'm not predicting a gold crash, but I think the data on this do warrant

11:24 caution for anyone who's enticed by its recent returns.

11:27 If you have been holding gold, congratulations on a great year.

11:31 If you're looking at gold's recent high

11:32 returns and just now considering buying gold,

11:35 I think it's worth remembering that investors have a tendency to buy

11:37 things after they have done well and sell after they have done poorly,

11:41 leading to bad investment outcomes.

11:43 I don't mean that nobody should invest in gold right now,

11:46 but I do mean that you should have a very good

11:48 understanding of why you want to invest in gold right now,

11:51 other than the fact that it's gone up a whole bunch recently,

11:54 and keep in mind that the base rate

11:56 expected long-term return return for gold is low.

12:00 Bitcoin went in the opposite direction this year.

12:02 The Purpose Bitcoin ETF dropped 13.09% in Canadian

12:06 dollar terms from January through December 17th, 2025.

12:10 For similar reasons to gold,

12:11 I've never been a proponent of including Bitcoin in long-term portfolios.

12:16 This one bad year doesn't prove anything.

12:18 It doesn't mean I was right.

12:19 Obviously, Bitcoin's gone up a ton other than this year so far.

12:24 Uh but Bitcoin's divergence from gold over

12:26 a period with lots of geopolitical uncertainty,

12:29 where Bitcoin's kind of meant to shine, was pretty interesting to see.

12:32 We'll We'll see what happens in the future.

12:34 Another story from 2025 that I don't think is getting enough attention is

12:37 the continued drop in real estate prices

12:40 and rents in some of Canada's largest cities.

12:42 It was not that long ago that real estate going up seemed

12:46 like a constant fact of life in Canada and rents going up.

12:50 But things like changes to our immigration policies and a rise in interest rates

12:53 have put a ton of pressure on the demand for housing in some cities.

12:57 From the 2022 peak, composite real estate prices in Toronto,

13:01 that's combining all types of housing in Toronto,

13:03 had fallen nearly 26% through November 2025.

13:08 From January through November 2025, so just this year up until November,

13:12 that drop was 6.5 percentage points.

13:14 A common narrative that I've heard here is that most of this drop

13:17 is coming from the tiny shoebox apartments that were overbuilt in Toronto,

13:21 but the peak to trough drop in single-family homes has actually

13:24 been a larger in percentage terms than the drop for apartments.

13:27 Prices in other cities have been more resilient,

13:29 but 2025 was a tough year across the board.

13:32 An interesting related topic is the status

13:34 of hypothetical renter and owner wealth across Canada.

13:38 Earlier this year, I did a video and a paper comparing a hypothetical

13:41 renter and owner in 12 Canadian cities using real data on rents,

13:46 house prices, inflation, and stock returns from 2005 through 2024.

13:51 So, I had this hypothetical uh renter who was deciding,

13:54 do I keep renting or do I buy a house?

13:56 And if they kept renting, they invested in the stock market.

13:58 If they bought, they they bought the house.

14:01 And then they saved and invested.

14:02 The renter saved and invested the cost

14:04 difference between renting and owning over time.

14:06 Then I just tracked how did their wealth evolve over this full period?

14:10 The analysis at that time showed mixed results,

14:13 with renting leading to more wealth in some cities, but not in others.

14:16 And on average across all cities that I looked at, it was basically a tie.

14:20 There was a tiny tiny advantage for owning.

14:22 I measured the outcome as the ratio of renter wealth to owner wealth,

14:26 so a number above one means the renters were better off,

14:29 and below one means the owners were better off.

14:32 The average owner uh the average renter to owner wealth ratio,

14:35 as you can see, is uh was 0.99 at the end of 2024.

14:40 And then so far in 2025, real estate is down, as I mentioned.

14:45 Rents are flat or maybe down a bit, and stock markets are way up.

14:49 I will do a full update once I have

14:51 the year-end data for 2025, but as of November,

14:54 renting is beating owning on average across the 12 cities,

14:57 with an average renter to owner wealth ratio of 1.14.

15:01 Again, above one means renters have more wealth

15:05 than owners on average across these 12 cities.

15:08 In some cities that previously had a huge

15:10 advantage for owners over renters in the sample,

15:13 uh like over the original 2005 to 2024 sample,

15:17 uh Victoria and Kitchener being the big

15:19 Kitchener-Waterloo being the biggest examples, that gap,

15:22 the the uh wealth gap between owners and renters, has narrowed to close to zero.

15:28 I want to be clear that this does not mean that owning a place to live is bad.

15:31 I own my house.

15:32 I've probably taken a beating financially recently, too.

15:36 I'm okay with that because I like my house.

15:38 My point on renting and versus owning has always

15:40 been that renting is not a bad financial decision

15:42 as long as the renter saves diligently and and invests

15:46 in a portfolio with sufficiently high expected returns,

15:49 like a total stock market index fund portfolio.

15:52 2025 has put an exclamation point on that point.

15:56 Right now, as the year comes to a close,

15:57 investors seem to be mostly worried about the high

16:00 valuations and market concentration in the US stock market.

16:04 The top seven stocks in the US market make up 32% of the market's total value,

16:09 which is the highest level of market concentration going back to 1927.

16:13 I don't think that market concentration is something to worry about.

16:15 Many other countries around the world have

16:17 had and currently do have more concentrated

16:20 stock markets than the US market without

16:22 it resulting in poor returns for those countries.

16:25 Even within the US market,

16:26 the historical relationship between current market concentration and future

16:30 returns is weak at best and statistically insignificant.

16:34 High stock valuations could be more of an issue.

16:36 Historically, looking at 10 developed countries,

16:38 there is a clear relationship between

16:40 high current valuations and low future returns.

16:44 The relationship is not statistically reliable, but it's clearly there.

16:47 You can see in the chart.

16:49 The thing is, even if valuations do have some information about future returns,

16:54 they do not predict the future.

16:56 It's possible for high current valuations to be followed by high future returns,

17:00 as the US market has proven in recent

17:02 history and other countries have demonstrated in the past.

17:05 I don't think high stock valuations are a market timing signal.

17:08 They They don't say you should get out of this stock market right now,

17:11 but they should lead to more moderate expected returns for that stock market.

17:15 When you're thinking about what returns do

17:17 I expect from this part of my portfolio, a country with high stock valuations,

17:22 you might want to use lower expected returns,

17:24 but that doesn't mean that the future returns are actually going to be low,

17:28 so I wouldn't suggest trying to time the market based on that information.

17:31 The last comment I have as we close out 2025 is

17:34 that investors are being increasingly inundated with what I'm calling ETF slop.

17:39 Issuers ETF ETF issuers are launching a ton of complex and risky ETFs

17:45 and marketing them really aggressively to retail

17:48 investors through influencer campaigns and social media ads.

17:51 I'm pretty confident saying that most investors don't need Buffett ETFs,

17:56 which I will do a video on next year,

17:58 single-stock covered call ETFs, leveraged single-stock ETFs,

18:02 or leveraged covered call ETFs.

18:04 Like, what are we even doing?

18:06 The ETF industry needs to make money, which is fine.

18:09 Low-cost index funds are not a profitable business for most ETF issuers.

18:13 Index funds are literally available for free,

18:16 at least in one case, from Fidelity.

18:18 The result is that issuers who want to make money need to come up

18:21 with products that they can charge higher fees

18:23 on and that investors will want to buy.

18:25 We end up with a whole bunch of ETF products

18:27 designed to cater to the emotional and cognitive biases of investors,

18:32 not to give them the best chance at meeting their long-term financial goals.

18:35 I'm Ben Felix, Chief Investment Officer at PWL Capital.

18:38 Enjoy the holidays and I'll see you in 2026.