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investor clinic

In February, 2022, I bought 47,500 units of the iShares Canadian Financial Monthly Income ETF (FIE), which provide me with $22,800 in distribution income annually. Unfortunately, the unit price has fallen, and I have an unrealized capital loss of $60,000 (or a net loss of $37,200 if I factor in the distributions already received). My question is: Should I hold the ETF for another year or two so I can make up the capital loss with additional distributions, and then sell my units? Is my thinking rational? I’m a retiree and love the monthly cash flow, but I want to sell without losing too much and get more diversified with individual dividend-paying stocks.

It’s hard for me to provide specific guidance without having a complete picture of your financial situation and the rest of your portfolio. But I’ll provide some general comments that I hope will clarify matters so you can come to your own conclusion.

First, this sounds like a case of buyer’s remorse. I could be wrong, but my guess is that you would not be contemplating an exit plan if FIE’s unit price had held steady or even risen. Further, I’d wager that you don’t like looking at your portfolio and seeing that big, ugly paper loss next to FIE’s name. So you want to undo your “mistake” by hanging on just long enough to recoup your losses and then wash your hands of the whole episode.

Second, I wonder if your expectations are unrealistic. If you’re going to own equities, occasional losses are a normal part of investing. FIE is a good example. It is composed largely of common shares of Canadian banks, insurers, wealth managers and real estate investment trusts, plus a chunk of preferred shares and corporate bonds. Many of these sectors have been pummelled by rising interest rates, inflation and economic worries, which is why FIE fell about 25 per cent from peak to trough last year. But it doesn’t mean there is anything intrinsically wrong with the securities it holds.

Indeed, as some of these external pressures have eased, FIE’s unit price has rebounded by almost 10 per cent from its October lows – more if you include dividends. Speaking of which, even during its recent slump FIE has continued to pay its distribution of 4 cents per unit every month, as it has done without fail since the ETF’s inception in 2010 (with the exception of its very first distribution, which was 2 cents). As its name implies, FIE – which yields about 7 per cent thanks to a combination of dividends, capital gains and return of capital – is designed to be primarily an income vehicle, and it’s performed well in that regard.

Just to be clear, I’m not trying to sell you on the merits of FIE. I’m simply pointing out that, just because you have a paper loss that is not, in and of itself, a reason to consider selling.

To be sure, FIE has some drawbacks. Apart from its concentration in the financial sector, the ETF has a relatively high management expense ratio of 0.84 per cent. Based on the current unit price, you’re paying about $2,800 in costs annually to own this fund – whether it goes up, down or sideways. That’s a stiff price for an ETF.

What to do?

Well, you could improve your diversification and cut your costs by owning a dividend fund such as the BMO Canadian Dividend ETF ZDV-T, which has an MER of 0.39 per cent. You could cut your costs even further with a simple Canadian index fund such as the iShares Core S&P/TSX Capped Composite Index ETF XIC-T, with an MER of just 0.06 per cent. But neither of these ETFs, or the many others like them, will provide the same level of income as FIE. Nor will a portfolio of individual stocks, unless you are prepared to take additional risk by focusing on companies with above-average yields. Ask yourself: Do you need all the income that FIE provides, or would you be comfortable with a lower-cost ETF or stock portfolio that provides less cash flow but greater potential for capital gains?

Finally, if, after weighing the pros and cons, you decide to sell all or part of your FIE holdings, there is no reason to wait until you collect enough in distributions to break even. Again, this appears to have more to do with your aversion to losses than with making the most prudent financial decision. The fact that you have lost money on FIE is water under the bridge. All that matters now is how you expect FIE to perform in the future and whether it meets your cost, diversification and income needs as an investor.

E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 19/04/24 3:55pm EDT.

SymbolName% changeLast
ZDV-T
BMO Canadian Dividend ETF
+0.66%19.82
XIC-T
Ishares Core S&P TSX Capped Comp ETF
+0.52%34.77

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