Canada’s ETF industry is a Krakatoa of new-product eruptions – 23 new exchange-traded funds in February alone and 813 in total.
Kudos to investors for keeping their heads amid all this commotion. Sales trends for the first two months of the year show a preference for prudent, cautious investing that is very much in keeping with the uncertainty being caused by a slowing global economy. Here are four things ETF investors are doing right.
Focusing mainly on aggregate bond ETFs
Aggregate bond ETFs are meant to be your one and only bond fund and, thus, provide a diversified mix of short-, medium- and long-term government and corporate bonds. The benefit of this diversification can be seen in what’s happened in the bond market in the past few years.
We’ve gone from falling yields in the bond market to rising yields, and back to falling. If you built a conservative bond portfolio of short-term bond funds, you’ve done well when yields were rising and lagged when yields fell. Long-term bonds excel when rates fall, but get clobbered when rates rise. The aggregate bond fund is a perpetual balance between the two. Buy and forget.
Putting money into both bonds and stocks
Total inflows to bond ETFs totalled $805-million, while inflows to equity ETFs totalled $654-million. With bond yields heading lower and concerns rising about an economic slowdown, bonds have some appeal. As for stocks, investors did the right thing by digging in after the market plunge that ended 2018.
Buying multi-asset ETFs
Balanced ETFs combine different assets – basically, stocks and bonds – into diversified portfolios pegged to different risk tolerances and investing goals. They are ideal for ETF novices who need structure and for experienced investors who value a simple, low-cost approach.
Almost $355-million flowed into multi-asset ETFs in the first two months of the year, which suggests balanced ETFs are being welcomed by investors. That’s progress.
Buying low-volatility and dividend ETFs
In choppy stock markets, dividend-payers and low-volatility stocks (they fluctuate up and down in price less than the broader market) can potentially offer a less bumpy ride. A total $576-million went into ETFs of these two types in the first two months of the year. This cautious approach may help investors stay with their equity ETFs rather than succumbing to the urge to sell if stocks fall hard.
Many dividend stocks were hit hard when interest rates rose in 2017-18, and low-volatility stocks should be expected to lag in a raging bull market. Neither of those outlooks seems very likely right now.
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Stocks to ponder
Power Corp. of Canada (POW-T). There is only one index member stock, North West Co Inc., trading at technically attractive oversold levels this week. The lack of options for oversold stocks led Scott Barlow to Power Corp. of Canada, the frothiest, most overbought benchmark constituent for the focus chart this week. Like most domestic credit and interest rate sensitive stocks, Power Corp. took a beating in the latter half of 2018 and has recovered strongly year to date. By and large, however, the stock price has remained in a range between $25 and $35 for the majority of the past 36 months. The stock has been oversold for most of this month. The price ended Thursday at $31.42 and the next technical test, the three-year high of $33.68, will be an important one if it happens. (for subscribers).
Investors should be prepared on how to weather a recession
How should financial advisors prepare their clients when it looks like a recession is on the way? This problem is a practical, not a hypothetical one. A recent survey from Boston Consulting Group Inc. found that 73 per cent of investors, including portfolio managers and buy- and sell-side analysts, expect a recession within the next two years. The survey of 260 investors, whose firms manage as much as US$15-trillion in assets, found that a third (33 per cent) said they’re bullish about the market’s potential over the next 12 months. Advisors and their clients alike should take these surveys with a grain of salt, says Darren Coleman, senior vice-president, private client group, and portfolio manager at Coleman Wealth, a division of Raymond James Ltd. in Toronto. David Israelson reports.
Investors pull more than $20-billion out of stocks as pessimism takes hold
Global equity funds saw massive outflows this week, a sharp reversal from last week’s inflows as pessimism over economic growth gripped investors once again, driving them instead to search for yield in credit and buy safer assets like bonds. Some $20.7 billion was pulled from equity funds in the week to March 20, while $12.1 billion was plowed into bond funds, the biggest inflows since January 2018, Bank of America Merrill Lynch (BAML) strategists said on Friday citing data from EPFR. Reuters reports.
Federal budget opens door to better Canadian pensions
Buried deep within this week’s federal budget is an announcement that can substantially improve Canadian retirements. It has to do with annuities – not exactly a sexy area for most of us, but one that deserves attention as millions of baby boomers march into retirement. The retirement wave is becoming a growing national concern. The problem? At the same time as many Canadians are reaching retirement age, traditional corporate pensions are becoming an endangered species. More and more employers are turning away from defined-benefit plans, the once-standard type of pension deal that guaranteed you a set monthly cheque for as long as you lived. The most significant change in this week’s federal budget is a promise to revise rules to allow what are known as variable payment life annuities, or VPLAs. Forget the unlovely name: Think of these plans as a way for members of defined-contribution plans to efficiently convert the savings they have built up within the plan into an actual pension – one that would last for life, be professionally managed at low cost and pool risks across a large number of people. Ian McGugan reports (for subscribers).
Fixed mortgage rates are diving. Here’s where to get the best deals
This housing market has nine lives but which one is hard to tell. Its latest saviour comes from fixed mortgage rates, which are falling like rocks. They’re following Canadian bond yields, which just hit a one-and-a-half-year low. The net effect: Payment burdens are easing for hundreds of thousands of borrowers. And even the mortgage stress test should get easier to pass once big banks decide to cut their five-year posted rates. This latest rate dip is largely thanks to the U.S. Federal Reserve. On Wednesday, it told the world that U.S. interest rate increases are virtually off the table this year. Fed officials now project just one measly hike through 2021. And who knows if we even see that? Robert McLister gives his view on where to snag the best rates right now.
We don’t have enough to buy a house. How can we invest with similar returns to real estate?
Rob Carrick takes a look at a reader’s question about how they can invest their cash – which isn’t enough to buy a home – to match or beat real estate returns. It’s easy right now as, for example, Toronto home prices only gained 1.6 per cent on average in February. He explains (for subscribers).
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Ask Globe Investor
Question: I have a question about investing in my retirement. I just turned 41. I have no debt except our mortgage, which will be paid off in nine years. I have no investment savings. I am a stay-at-home mom. I do work occasionally; I bring home about $3,000 a year. My husband is the breadwinner and he has retirement savings.
I just recently read your book, “The Ultimate TFSA Guide," thinking this would be my best option to start off with. I would only be able to afford about $200 per month. I also would like to have an emergency fund. So, my thoughts are for the emergency fund I open a TFSA with some cashable GICs.
For my retirement fund, I realize I will have to be more aggressive to really get caught up, so I am thinking stocks and ETFs. I have done a lot of reading on the subject of investing, but it still does not make sense. I am just not sure where to put my money to get the best bang for my buck.
I have spoken with our adviser at Investors Group, one at my credit union, and an acquaintance at RBC. All suggested mutual funds. I also checked out PC Financial because of the fact that they pay interest when the balance exceeds $1,000, but right now their interest rates look very low. I guess I am asking who and where to give my money to.
Answer: In investing terms, you’re trying to match apples and oranges. Let’s separate the two.
As far as an emergency fund goes, yes, a TFSA is a good idea and cashable (also called redeemable) GICs are one option. However, their rates are lower than locked-in GICs and there may be penalties for redeeming early. Check the terms carefully. An alternative is a high-interest savings account or a short-term bond fund. More on that to follow.
Saving for retirement requires a different approach, as you are aware. The advisers you consulted all recommended mutual funds for the simple reason that’s what they sell, and they earn commissions from them. However, mutual fund fees can be expensive and eat away at your savings.
An alternative is to open a TFSA with a discount broker. Try to find one that does not charge a commission on ETF purchases.
Direct the amount you want to go into an emergency fund to a high-interest savings account or a short-term bond fund such as iShares Core Canadian Short Term Bond Index ETF (XSB-T). It gained 2.69 per cent in the year to Feb. 28 and has a low management expense ratio of 0.17 per cent. Build the emergency fund to your desired level first.
Then add some low-cost growth index funds. The iShares Core S&P 500 Index ETF (CAD hedged) (XSP-T) has an MER of 0.11 per cent and an average annual gain of 13.8 per cent over the three years to Feb. 28. To further diversify your retirement portfolio, include a bond ETF, a Canadian stock ETF, and an international stock ETF.
Over time, you’ll build a healthy retirement fund, with some emergency money always available. And when it comes time to withdraw some cash, it will all be tax-free!
Do you have a question for Globe Investor? Send it our way via this form. Questions and answers will be edited for length.
What’s up in the days ahead
Value investors just can’t catch a break. Their latest blow was this week’s change of heart by the U.S. Federal Reserve. Is there any hope? Ian McGugan will share his insight
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Compiled by Gillian Livingston