Skip to main content

Investment Ideas This big bank ETF looks like a buy, the most missed opportunity in charitable giving, and a TFSA story gone wrong

With talk of recession risks on the rise, investors are getting nervous about bank stocks.

You can see this in the fate of the $1.1-billion BMO Equal Weight Banks Index ETF (ZEB). In August, it led all mainstream ETFs in outflows with a decline in of $212-million.

The ZEB sell-off makes sense to some extent – loan losses would rise in an economic downturn and increasing revenues to fund future dividend increases would be tougher than ever. But if you’re a yield-focused investor, ZEB and its underlying banks have some appeal.

Story continues below advertisement

ZEB’s yield as of the second week of September was just a tick below 4 per cent, which compared with 1.5 per cent for a five-year Government of Canada bond and the high 2 per cent range at best for guaranteed investment certificates (though Oaken Financial was at 3 per cent as of Sept. 10). In non-registered accounts, ZEB’s yield looks all the more impressive because of the dividend tax credit. Bond and GIC income is treated less advantageously when held in taxable accounts.

Bank stocks might get thrashed at some point, so the risk level in holding ZEB is considerable. But lots of income-seeking investors have veered out of bonds/GICs and into stocks in search of income in recent years. In some cases, they have bought preferred shares; in others, shares of blue chip companies like banks, electrical utilities and pipelines.

You’d think preferred shares would have been the more conservative play for these yield-seekers, but that’s not how things have played out. For reasons I outlined in a recent column you can read here, pref shares have been nasty. While ZEB had a pretty bad time of it in the past 12 months, losing 5.5 per cent on a total return basis, the BMO Laddered Preferred Share Index ETF (ZPR) lost 16.8 per cent over that same period.

If interest rates fall further because of concern about the economy, expect both banks and preferred shares to suffer. Likewise, both have rebound potential when the economy and rates stabilize. But ZEB is the more appealing choice if your goal is not just dividend income, but also dividend growth. As its bank holdings have increased their dividends, so has ZEB hiked its monthly payouts over the years. You won’t get that kind of steady dividend growth from preferred shares.

ZEB’s biggest drawback might be its pricey management expense ratio of 0.62 per cent. That’s the price you pay for the convenience of tapping into the dividend production of the Big Six banks in one purchase.

-- Rob Carrick

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

Story continues below advertisement

Stocks to ponder

BRP Inc. This stock is surging higher on the back of record earnings and improved guidance. But valuations are still attractive on an historical basis. Jennifer Dowty profiles the stock.

Stella-Jones Inc. The company appointed Eric Vachon as its new chief executive on Thursday, removing some uncertainty that had been weighing on the stock over the past two months when the previous CEO announced he was stepping down. The best part of this leadership transition for investors: After a recent sell-off, the stock looks cheap. David Berman explains

The Rundown

Forget recession. The real challenge for investors now is slow growth

A growing number of people are beginning to think about what was once considered unthinkable – the prospect of zero, or even negative, interest rates in the world’s largest economy. What should investors make of this chatter? If zero rates, or negative rates, do come to pass, the big winners would be bondholders, since the price of bonds goes up as rates fall. The problem with this investing thesis is that it is by no means certain rates will fall much from here, no matter what Donald Trump tweets. Ian McGugan reports

Story continues below advertisement

What the recent ‘equity earthquake’ means for Canadian investors

The past five years have seen the momentum investment style – buying stocks with the strongest recent price appreciation – outperform valuation-conscious investing strategies by such a large margin that “The death of value” columns had become ubiquitous in financial media. That all changed at the end of August. Scott Barlow has thoughts on what’s behind the sudden change and whether it may have staying power.

Lessons learned from this TFSA story gone wrong could save you a huge headache

Tim Cestnick shares the true story of a man whose financial institution made an error related to his tax-free savings account – but not in his favour, because it led to a court challenge with the Canada Revenue Agency. We can learn a few things from his plight.

Others (for subscribers)

The week’s most oversold and overbought stocks on the TSX

Story continues below advertisement

Where the bulls are: Ten U.S. large-cap stocks poised for a breakout

Playing defence: 15 U.S. large-cap dividend stocks with growing cash flow

Thursday’s analyst upgrades and downgrades

Friday’s analyst upgrades and downgrades

Thursday’s Insider Report: Chairman invests over $1.2-million in this dividend stock

Friday’s Insider Report: Chairman cashes out over $19-million from this soaring large-cap stock

Story continues below advertisement

With rate cut likely, market wonders how low Fed will go

Others (for everyone)

Canadian market sees flood of new ETFs in August

Stock-picking fund managers are clawing back. Can it last?

How the rise of ‘technical debt’ is posing a danger to investors

Globe Advisor

Story continues below advertisement

IIROC opens door to greater use of technology in the investment industry

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: I’m planning to make a donation of $10,000 to a local charity, either with cash or securities. My adviser is happy with the current balance in my portfolio and doesn’t think we need to sell anything. However, I suggested that I could donate securities to take advantage of the tax break on capital gains and then use some of the cash in my account to repurchase the shares to keep my investment mix the same. Do you see any flaws in this approach?

Answer: Donating listed securities that have appreciated in value is a win-win. The charity receives funds to spend on worthy causes, and you get a donation tax credit and - thanks to a further tax break on in-kind donations of listed securities - avoid capital gains tax on any appreciation in the value of the shares. Even though this tax relief on capital gains has been available since 2006, many investors aren’t aware of it.

“Donating securities ‘in-kind’ is perhaps the most missed opportunity in charitable giving,” says Jamie Golombek, managing director, tax and estate planning, with Canadian Imperial Bank of Commerce.

“I call it ‘tax-gain donating’,” Mr. Golombek says. “While most of us might be more familiar with the concept of tax-loss selling, which involves crystallizing a capital loss so it can be used to shelter capital gains, tax-gain donating involves crystallizing gains on winning stocks or mutual funds by donating them ‘in-kind’ to charity.”

Here’s how it works. Say you plan to donate $10,000 of shares that have an adjusted cost base of $2,000. If you were to sell the shares first and donate the cash, you would have to pay tax on the $8,000 capital gain. Assuming your marginal tax rate on regular income is 50 per cent, you’d pay capital gains tax of 25 per cent - or $2,000.

But if you instead donate the $10,000 of shares, no capital gains tax applies. What’s more, in both cases you would also receive a charitable donation receipt for $10,000. Depending on the province or territory, your gift would produce a charitable donation tax credit worth at least 40 per cent, or $4,000. (This assumes you have already made $200 in charitable donations, as the charitable tax credit is significantly higher above this threshold.)

Wondering how large your tax credit would be? The federal government has an online charitable donation tax credit calculator at http://bit.ly/2kuKRey The government also maintains a database of charities and other qualified donees that can issue official receipts for donations. Find it here http://bit.ly/2kHtB5N

Here a couple of things to keep in mind. Only listed shares (or other eligible securities such as listed bonds or fund units) that are held in a non-registered account can be donated. You may claim the entire donation credit in the current year, or spread it over the next five years. “You would only do this if you are caught by the donation income limitation, which generally limits donations in a year to 75 per cent of your net income, which is not a problem for most of us,” Mr. Golombek says. Either way, the charity receives the full value of the gift immediately.

Regarding your plan to repurchase the securities in your account, it makes perfect sense, Mr. Golombek says. “You get the donation tax receipt, pay no tax on the capital gain to date and increase the adjusted cost base of the securities back up to their current fair market value, reducing your ultimate tax bill on a future sale,” he says.

-John Heinzl

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

For the first time in this decade-plus bull market, value stocks are suddenly springing back to life - leaving momentum and growth investments in the dust. But a closer look at the long term should leave little optimism this trend has staying power. Ian McGugan will explain why.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

Click here share your view of our newsletter and give us your suggestions.

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter