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

Key Concepts

• Market Outperformance & Diversification: The US market’s recent outperformance led many to question the value of international diversification, a strategy proven beneficial in 2025.
• Stock Market vs. Economy: The stock market is forward-looking and often reacts differently than economic indicators, which are backward-looking.
• Value & Small Cap Investing: Canadian value and small-cap stocks experienced significant returns in 2025, highlighting the importance of sticking to long-term investment strategies.
• Dimensional & Avantis Funds: Discussion of factor-based investing, specifically small-cap value tilts, and the increased accessibility of these strategies through Avantis ETFs.
• Gold & Bitcoin: Analysis of the contrasting performance of gold (strong returns) and Bitcoin (negative returns) and their implications for portfolio allocation.
• Real Estate & Renting: Examination of the declining real estate prices and rents in Canadian cities and a re-evaluation of the rent vs. own debate.
• Market Concentration & Valuation: Concerns about US market concentration and high valuations, and their potential impact on future returns.
• ETF "Slop": Critique of the proliferation of complex and potentially harmful ETFs marketed to retail investors.

Market Performance & Diversification in 2025

2025 presented unexpected market results, with significant returns in stocks, gold, Bitcoin, and real estate defying prior expectations. Early in the year, a pessimistic outlook prevailed, but the Canadian stock market, specifically, returned 29.46% from January 1st to December 17th, 2025, surpassing international, developed, and emerging markets and tripling the Canadian dollar return of a US total market index fund. This contrasted sharply with the prevailing sentiment favoring US equities.

For the five years ending December 31st, 2024, the US market had outperformed the Canadian market by nearly 5 percentage points annualized, and outperformed international, developed, and emerging markets by an even wider margin. Concerns about Canada’s productivity crisis, proposed capital gains tax increases, and potential US tariffs fueled a belief that the Canadian market would underperform. However, the market proved these assumptions incorrect.

The Disconnect Between Market & Economic Reality

A key takeaway from 2025 is the distinction between the stock market and the economy. The stock market reflects expected future cash flows of businesses, making it a forward-looking indicator. Economic data, conversely, are backward-looking. By the time economic news is released, the market has likely already priced in the information. In some cases, positive stock market reactions can even occur alongside negative economic news if the news is better than anticipated. Ben Felix argues that basing investment decisions solely on economic headlines is generally ill-advised.

The Resilience of International Diversification

Despite the US market’s recent dominance, 2025 underscored the continued importance of international diversification. The US experienced a significant intra-year decline of over 16% in Canadian dollar terms in April 2025, but ultimately recovered. This highlights that negative intra-year returns do not necessarily predict negative annual returns. The principle of sticking to a long-term plan, rather than attempting market timing, was reinforced. A single country’s stock market, including the US, can experience prolonged periods of poor performance, making diversification crucial. The “US lost decade” serves as a reminder of this risk.

Value & Small Cap Rebound: The Power of Staying Invested

Canadian value and small-cap stocks experienced particularly strong performance in 2025. The iShares S&P TSX Small Cap Index ETF returned 47.94% and the iShares Canadian Value Index ETF returned 33.63% from January 1st to December 17th, 2025. Remarkably, despite trailing the market over the previous 10 years, Canadian value stocks now outperformed over an 11-year period. Small caps, while still trailing, significantly closed the gap. This demonstrates the importance of remaining invested in a chosen strategy, as returns often occur in concentrated bursts, and missing these periods can be difficult to recover from.

Factor-Based Investing & the Avantis Launch

Ben Felix, while advocating for total market index funds, clarified that PWL Capital utilizes funds from Dimensional Fund Advisors (DFA), which tilt towards small-cap value and highly profitable companies. A significant development is the partnership between Avantis Investors, a DFA competitor, and CIBC to launch a suite of Canadian-listed ETFs. These ETFs, like DFA funds, are low-cost, broadly diversified, and tax-efficient, but employ a more flexible implementation approach, tilting towards small-cap value and high profitability. The Avantis CIBC All Equity Asset Allocation ETF has an annual management fee of 0.28% and a preliminary MER of around 0.35%, making it a potentially attractive option for Canadian investors.

Gold, Bitcoin & Contrarian Returns

Gold experienced an exceptional year, returning 57.53% in Canadian dollar terms. However, Ben Felix maintains his skepticism towards gold as a long-term investment, citing its lack of productive assets and its historical returns roughly in line with inflation. He attributes gold’s appeal to fear-driven demand, as articulated by Warren Buffett: “what motivates most gold purchasers is their belief that the ranks of the fearful will grow.”

Bitcoin, conversely, declined by 13.09% in Canadian dollar terms. This divergence during a period of geopolitical uncertainty was noted as interesting, given Bitcoin’s purported role as a “safe haven” asset.

Real Estate & the Rent vs. Own Debate Revisited

Canadian real estate markets experienced a downturn in 2025, with Toronto composite prices falling nearly 26% from their 2022 peak, including a 6.5 percentage point drop in 2025 alone. Single-family homes experienced a larger percentage decline than apartments.

A re-analysis of a previous study comparing renting versus owning in 12 Canadian cities revealed a shift in favor of renting. As of November 2025, renters outperformed owners on average across the cities, with a renter-to-owner wealth ratio of 1.14, compared to 0.99 at the end of 2024. The gap between owner and renter wealth narrowed significantly in cities like Kitchener-Waterloo, where ownership previously held a substantial advantage. Ben Felix emphasizes that owning a home is not inherently bad, but renting is a viable financial strategy for those who save diligently and invest in a well-diversified portfolio.

Market Concentration, Valuation & ETF "Slop"

Concerns were raised about the high concentration of the US stock market, with the top seven stocks comprising 32% of the total market value – the highest level since 1927. However, Ben Felix argues that market concentration alone is not a reliable predictor of poor future returns.

High stock valuations, however, may be a more legitimate concern. Historical data suggest a correlation between high current valuations and lower future returns, although this relationship is not statistically definitive. High valuations should prompt more moderate return expectations, but should not necessarily trigger market timing decisions.

Finally, Ben Felix cautioned against the proliferation of complex and risky ETFs marketed to retail investors, labeling them “ETF slop.” He specifically criticized buffer ETFs, single stock covered call ETFs, and leveraged ETFs, arguing that they cater to emotional biases and are unlikely to contribute to long-term financial success.

Conclusion:

2025 served as a powerful reminder of the unpredictable nature of markets and the importance of disciplined, long-term investing. Diversification, sticking to a well-defined strategy, and avoiding emotional reactions to short-term market fluctuations were key themes. The emergence of Avantis ETFs offers Canadian investors increased access to factor-based strategies, while the performance of gold, Bitcoin, and real estate highlighted the need for careful consideration of asset allocation and risk tolerance. The proliferation of complex ETFs underscores the importance of prioritizing simplicity and evidence-based investing.