It has been a few weeks since I have looked into the Q&A inbox, so let's see what has been on your mind.
New ETF
Q - What do you think of BMO Shiller Select U.S. Index ETF (ZEUS-T)? It employs an equal weight strategy that combines value and adds a momentum screen. For a registered account, would you like to buy it for RRSP or RESP or TFSA? Thanks. – Jatinder G.
A – Dr. Robert Shiller is a highly respected economist and Yale University professor who is recognized as one of the world's most influential experts in the field. He developed the Shiller price/earnings ratio as a tool to better interpret the historical performance of the S&P 500. It calculates the average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted PE Ratio (CAPE Ratio).
The BMO ETF tracks the Shiller Barclays CAPE U.S. Single Stock Index, which includes the top 100 securities with the highest 10-year CAPE yield based on price and sector. A momentum filter is applied to remove 20 securities with the lowest price momentum over the last 12 months. Each security is equally weighted and the index is rebalanced on a quarterly basis. The objective is to generate capital gains by applying the old principle of buy low, sell high.
This is a brand new listing, having been launched on Oct. 4 of this year so we have no history to judge its performance. Nor do we have any idea of how much cash flow it will generate (distributions are to be paid quarterly) or what form they will take for tax purposes. The fund is very small, with only about $8-million in assets so far, and trading volume is very light.
What this all comes down to is that we don't have enough information to make an informed call about how well this ETF will do or whether it should be held in a registered or non-registered account. If you want to take a position, consider two things. One, the Shiller p/e index is higher today than just before the crash of 1929. Two, Mr. Shiller has warned repeatedly in recent months that the stock market is too high. "I'm nervous because it could fall a lot," he said recently. – G.P.
Looking at bond funds
Q - I am retired, 68, and looking for your thoughts on where I might put approximately $50,000 at this time. I am reluctant to put it into Canadian equities as the market seems to be in a state of flux and going nowhere. I have TFSAs for my wife and I and they are fully topped up. I have a non-registered account with about $200,000 in Canadian and U.S. equities. My thinking is to invest the $50,000 in a bond ETF or fund until I feel comfortable with the equity markets. I see in your portfolios that you have a few bond positions, such as XBB, PIMCO Monthly Income, etc. I was wondering if you could advise me on a selection. I don't understand the bond market. - Gord Z.
A – Let me start by saying that securities laws do not permit me to give specific personal advice. You need to assess any comments that you read and discuss them with your financial advisor.
That said let me look at the two funds you mention. XBB is the trading symbol for iShares Core Canadian Universe Bond Index ETF. It covers the entire Canadian bond market, including government and corporate issues, with maturities from less than a year out to 20 years and beyond. The current weighted average maturity is 10.21 years. The weighting average yield to maturity is 2.38 per cent. The management fee is a very low 0.09 per cent.
Recent performance has been disappointing. The one-year return to Oct. 31 was negative 0.69 per cent. Over the past five years, the average annual compound rate of return was only 2.72 per cent. On the plus side, the fund provides downside protection in the event of a stock market crash.
The PIMCO Monthly Income Fund is a different matter. It invests globally, with very few of the assets held in Canadian dollar securities. This is an actively managed fund (the iShares is a passively run index fund) so the management expense ratio is considerably higher at 1.38 per cent. The fund has an explicit mandate to avoid concentrated risk. As a result, no more than 50 per cent of the assets can be held in below investment-grade securities.
Interest distributions are paid monthly, with a year-end capital gains distribution if applicable. The October payment was $0.0409 per unit and year to date the fund has paid out $0.4115 per unit.
Performance has been good. The year-to-date return to Nov. 3 was 6.51 per cent. The five-year average annual compound rate of return was 6.37 per cent. Of special interest is the fact this fund has never lost money over a 12-month period since it was launched in January 2011. Its worst performance was a gain of 0.19 per cent in the year ending Feb. 29, 2016.
There you have it. The choice is a purely Canadian ETF with a very low management fee or an international bond fund with a high fee but a very good performance record. It's your call. – G.P.
Rogers Sugar
Q - I am curious as to your thoughts on Rogers Sugar (RSI-T). I have been following this stock for over a year now and it has had its periods of positive movement and has had decent quarterly reports but it seems a bit range-bound between $6 and $7. It pays an excellent dividend and I like its long-term prospects as an investment…but am waiting for the stock to drop below $6 (which it did very briefly not that long ago, in fact) to wade in on this one. - Doug H., Ladysmith, BC
A – Rogers and its operating company Lantic is the largest distributor of refined sugar in Canada. The stock has a history of volatility but has traded consistently in the $6 to $7 range for the past year. It's now at the lower end of that range, closing on Nov. 3 at $6.24. The shares pay a quarterly dividend of $0.09 ($0.36 per year) to yield 5.8 per cent at the current price. The dividend has not changed since 2014. At that time, the company cut it by 50 per cent, which dampened investor confidence.
The company recently released interim results for the third quarter of fiscal 2017 (to July 1). It showed adjusted net earnings per share of 10 cents, up from 8 cents the year before. For the nine-month period, adjusted EPS was 35 cents, up from 29 cents in 2016. Free cash flow for the third quarter was $6.9-million, down from $8.6-million in the comparable period last year. That was less than the total dividends pair out of $8.6-million. However, for the first nine months of the fiscal year, free cash flow of $34-million was well in excess of dividends of $25.4-million.
An important new development is the recent acquisition of L.B. Maple Treat Corporation, located in Granby, Que., for $160-million. LBMT is one of the world's largest branded and private label maple syrup bottling and distribution companies. It has three bottling plants in the heart of the world's maple syrup harvesting region (Quebec and Vermont).
This deal could be a game-changer for what has been seen as a rather stodgy company. It enables Rogers to diversify into the large and growing market of maple syrup, a natural sweetener, and will provide opportunities to grow organically, leverage sales and operational gains, and look at other acquisitions.
I don't expect to see much in the way of capital gains in the near future but the distribution looks safe at this level and the LBMT deal may create new opportunities down the road. The past history of dividend cuts and volatility is a concern but if that is not a problem for you go ahead with your purchase at your price target. – G.P.
Minimizing taxes
Q - I hold some Bank of Nova Scotia shares in a Dividend Reinvestment Plan (DRIP). The administrator of this account does not allow for these to be transferred into a TFSA. What's the best way to draw down on these to minimize tax implications? This pays a neat dividend. - N.D.
A – I assume you can't transfer the shares to your TFSA because it is not a self-directed plan. If it were, you could move them as a contribution in kind, although you would have to pay tax on any capital gains to that point.
Holding the shares in a non-registered account enables you to take advantage of the dividend tax credit plus only 50 per cent of your capital gains are taxed. That's very favourable tax treatment but if it is not enough for you, set up a self-directed TFSA and transfer the BNS shares to it (the administrator can handle that). But remember, you'll pay tax on any gains to this point. – G.P.
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I'm always happy to receive questions from readers and I answer as many as possible. If you have a financial inquiry, send it to me at gpape@rogers.com and write Globe Question on the subject line. I'll publish the best ones here from time to time.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca. Follow Gordon Pape on Twitter at twitter.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney
Gordon Pape