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U.S. investors sold US$23-billion worth of the SPDR S&P 500 ETF Trust last week in a move contrary to everything we know about long term portfolio performance. Josh 'The Reformed Broker' Brown was suitably exasperated with this investor behavior when he wrote 'Passive My A**' on Tuesday.
The proven success of index investing over individual stock picking is founded in buying and holding -- that's why it's called 'passive'. The idea is to trust the diversification inherent in an index and not to tinker with our portfolios by attempting to pick individual company winners or time the market.
The US$23-billion that fled the S&P 500-tracking ETF – an amount of money double all assets invested in Canadian ETFs over the past year by the way -- represents a failure to trust a passive investing strategy. These investors also to some extent gave in to temptation by panicking during a sell-off.
This might seem like a weird time to be discussing index investing in Canada, with the S&P/TSX Composite up a mere 0.76 per cent (that's not average annual returns, 0.76 is it) since the June, 2008 market peak. But that, however, is only simple return – including dividends the benchmark has returned 34 per cent for that period.
There are, of course, hundreds of ETF products on the market and the more niche-y of them are not suitable for long-term holding. In those cases, investors should remember that trading these products through the business cycle might be more effective than buying related individual securities, but it carries the same market timing risks that led people to broader index investing in the first place.
The academic research is clear on the fact that portfolio returns decline as the number of transactions rises – and not just because of fees.
Investors who care about long-term returns should stop trading their ETFs.
-- Scott Barlow, Globe and Mail market strategist
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Stocks to ponder
National Bank of Canada (NA-T). Currently it is an oversold stock and it has a history of earnings beats and dividend increases. This company that appears on the negative breakouts list, which will be reporting its quarterly earnings in approximately two weeks. For the past four quarters, the company has reported better-than-expected earnings. Montreal-based National Bank is the sixth largest bank in Canada with total assets of $246-billion as at Oct. 31. The company has four main business segments: personal and commercial, wealth management, financial markets, and U.S. specialty finance and international. Jennifer Dowty reports.
SNC-Lavalin Group Inc. (SNC-T). SNC-Lavalin Group Inc. has been stuck in a volatile trading range for the past decade, but the combination of big infrastructure spending and a proven ability to win major contracts should push the stock to new heights. Just last week, investors got a good look at what the engineering and construction company can achieve: It was tapped to build and equip Montreal's electric-powered light-rail transit (LRT), a fully automated 67-kilometre network supported by a mammoth $6.3-billion budget. David Berman reports.
Fortis Inc. (FTS-T, FTS-N). Gordon Pape got a note from a reader complaining about Fortis, saying while it had risen for several years, now the stock was declining and he was planning to sell. Gordon Pape explains why that's not a good idea as the stock has been a solid performer and has raised it dividend for more than 40 years.
The Rundown
Lessons from the great stock-market wobble
Think of the market's wild gyrations in recent days as a test of your investing nerves. If you watched the havoc unfold with zen-like peace, congratulations. Your asset mix is appropriate to your tolerance for risk. But if you found your pulse racing, you should regard the recent wobble as a wake-up call. Take a few minutes to re-assess whether your current mix of investments is still on target. A good place to start is by checking your expectations against what the pros consider reasonable. Ian McGugan explains.
Are you ready for further market volatility? These 3 investing strategies should help
Buyers have stepped back into the stock market, but is this recovery sustainable? Has the market put in a bottom or will it make another material move lower? The short answer is no one knows. Trying to time the market should not be your primary focus. Instead, choosing solid investments and adhering to a disciplined investment approach are priorities. Jennifer Dowty outlines steps investors should take.
A simple secret to laughing at market mayhem
When markets are tumbling and the financial media are pumping out one scary headline after another, it's easy to lose sight of what those two- or three-letter stock symbols in your brokerage account actually mean. If you think a stock is just a piece of paper or collection of pixels on your computer screen to be bought and sold in the hope of making a profit – or, in the case of this week's exceptionally volatile trading, avoiding a loss – you're missing the point. When you hold shares of a company, you are a part owner of a business. As a stockholder, you are entitled to share in the earnings the business generates. The earnings might be paid out as dividends or reinvested in the business to produce even more earnings down the road. It's a simple concept, yet many investors don't think like business owners at all. They think like traders. Instead of focusing on the underlying health of the company and the long-term trajectory of its earnings – which is what really matters – they obsess about short-term movements in its stock price. John Heinzl explains.
Why portfolio manager David Barr isn't sitting back amid market gyrations
While many investors have been running for cover amid the current market volatility, David Barr and his colleagues are stepping into the storm looking for buying opportunities. "We are a lot more excited today than we were three months ago," says Mr. Barr, chief executive and a portfolio manager at Vancouver-based PenderFund Capital Management. "We are seeing more opportunities to get aggressive and deploy cash." Brenda Bouw recently interviewed Mr. Barr.
Rob Carrick's 2018 ETF Buyer's Guide: Best Canadian equity funds
Some of the best bargains in the investing universe can be found in the ETFs that track Canada's stock market. There are funds listed in the Canadian equity fund instalment of the 2018 Globe and Mail ETF Buyer's Guide with management expense ratios as low as 0.03 to 0.06 per cent. The largest Canadian equity mutual funds have an average fee of about 2 per cent. Remember that comparison if you're concerned about the impact fees have on your returns. Rob Carrick takes a look at ETFs starting with the best Canadian equity funds.
Mining for dividend diamonds in the rubble of a falling stock market
As an income investor, you have to love stock market corrections. Falling stock prices mean rising dividend yields. As a result of the big market declines of last week, the menu of blue chip stocks listed on the TSX with dividend yields above 4 per cent is as varied as it's been in a while. If you have new money to invest, you have a chance to earn yields of more than double the 1.9 per cent inflation rate. Rob Carrick reports.
Vanguard's new CEO on Canada's rapid ETF growth and just how low investing costs will go
When asked how low his company can go when it comes to the management fees investors pay, Vanguard Group's new president and CEO, Tim Buckley, doesn't hesitate with his response of "zero." "[Low cost] is in our DNA," he says. "It is how we are built. We are built to be asymptotic to zero." Clare O'Hara recently interviewed Mr. Buckley.
Trump's surprising ignorance about stock markets (and what rational investors should do after a brutal week)
You'd think that as a businessman, Donald Trump would know more about the stock market. But it seems not, at least based on his Twitter comments last week. The U.S. president berated investors for selling off their shares in the wake of good economic news. Jobs are being created. Wages are rising. What were they thinking? It wasn't like that in "the old days" he complained. Good news then meant stocks went up. I'm not sure what "old days" he was referring too. I'm older than he is and I have written many times over the years on why stocks often sell off despite good economic news. The reason is simple: good economic news implies higher interest rates and a possible resurgence in inflation, both of which can spell trouble for stocks. Gordon Pape explains.
Top Links
A lot of ETF investors are doing things completely wrong
Top 'buy the dip' stock picks from Goldman Sachs
Others
Tuesday's Insider Report: Companies insiders are buying and selling
Monday's Insider Report: Companies insiders are buying and selling
The Globe's stars and dogs for last week
Bet on high-growth tech with these niche ETFs
Pros and cons of investing in naughty themes
How traders learned to stop worrying and love the volatility
Stocks still too pricey for top-performing Canadian hedge fund
How should investors handle the choppy ride?
History suggests strong U.S. economy can ward off bear market
Number Crunchers
Fourteen defensive, wealth-creating blue chips
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What's up in the days ahead
Our income investing guru John Heinzl has been accumulating a fair bit of cash with all those dividends coming in. In Wednesday's Globe Investor, he'll reveal where he's putting that money to work. Meanwhile, Tim Shufelt looks at the strength of this earnings season in both Canada and the U.S.
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Gillian Livingston