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Your questions keep pouring in so let’s look at the latest batch.

Investing in HISA ETFs

Q - There has been plenty of talk recently about investors flocking from stocks to bonds (particularly Treasuries). These bonds currently offer similar yields to high dividend stocks, but Treasuries are essentially a guaranteed investment with a much lower risk profile.

But what about HISA (high interest savings account) ETFs? They offer similar yields to treasuries right now (over 5 per cent).  For an investor who is looking to maximize yield and minimize risk, wouldn’t these be the truly risk-free option?

My issue with bonds is that there is still risk associated with their value. If yields continue to increase, then the value of my bonds will decrease. By buying bonds now, I am making a bet on market timing. This doesn’t sound low risk to me.

Unless I’m mistaken, any money I place in a HISA ETF is a safe and guaranteed investment (barring an earth-shattering bank failure), and I have total autonomy to buy and sell units at any time with no chance of taking a loss.

My question is this: why would a risk-conscious investor want to buy Treasuries right now, when they could just put their money safely in these ETFs? - Matthew G.

A - Returns from HISA ETFs are not “guaranteed”. These are not GICs. They’re a new type of product that’s well-suited for the current environment, but we haven’t seen how they will perform over the long term. Most especially, we don’t know what will happen when interest rates turn down again. Will investors suddenly turn around and pull all their money out? If so, what happens to the ETFs’ market value?

As for bonds, there is no risk to principal if they are held to maturity, assuming the issuer doesn’t default. But there will be fluctuations in market value along the way which may make some people nervous. And inflation will erode the purchasing power of your original investment. As the old saying goes, there’s no free lunch. – G.P.

Wants U.S. cash flow

Q - I am looking to hopefully generate some U.S. dollars in dividends and down the road some stock appreciation. Proceeds might be used for purchasing a U.S. property or renting. – Dennis F.

A – For starters, you need a U.S. dollar trading account, if you don’t already have one. Then it’s a case of selecting which dividend securities you want to own. There are two possibilities.

The first is to invest in one or more U.S. dividend ETFs. This provides diversification and relieves you of the burden of selecting individual stocks. One interesting fund to look at is the Invesco S&P High Dividend Low Volatility ETF (SPHD-N). It’s coming off a bad year, but that’s because a large percentage of the portfolio is invested in interest-sensitive securities. Rising interest rates hit those stocks hard but it now appears that rates have stabilized and may turn down in 2024. That would be a great boost for real estate securities, which make up almost 18 per cent of the portfolio, and utilities, which account for 17 per cent. If the market reacts as expected in 2024, that will set the stage for some nice capital gains on top of healthy monthly distributions. These are currently about $0.17 per unit for a projected twelve-month yield of 4.8 per cent based on a recent price of $42.46. (All figures in U.S. dollars.)

For a more conventional ETF, consider the iShares Core Dividend Growth ETF (DGRO-A). It invests in a well-balanced portfolio of dividend stocks with financials as the top sector at 18.4 per cent, followed by information technology (17.4 per cent) and healthcare (16.9 per cent). As you can see, this is a very different approach than that of the Invesco fund. This ETF has a better short-term record (up over 10 per cent year-to-date) and has performed well long-term (10.5 per cent average annual return since its inception in 2014).

Alternatively, you can pick your own stocks. Some of the highest yielders on our recommended list are Atlantica Sustainable Infrastructure PLC (AY-Q, yield 8.2 per cent), Western Union (WU-N, yield 8 per cent, Verizon (VZ-N, yield 7.1 per cent), AT&T (T-N, yield 6.7 per cent), and Duke Energy (DUK-N, yield 4.2 per cent). – G.P.

Pay mortgage or keep TFSA?

Q - I am 63 years old and may be retiring at 65. I have a mortgage of $451,000 at 2.69 per cent and a line of credit with a balance of $120,000 at prime (8 per cent). The mortgage renewal is coming July 1st.

I have $85,000 in my TFSA, growing at 5 per cent this year.

What is better for me? Pay $85,000 on the line of credit? Pay down $85,000 on the mortgage, knowing that the renewal is coming at very high interest? Or leave the money growing in the TFSA? José P.

A – The 5 per cent return on your TFSA in 2023 is not impressive. The TSX is up 8.4 per cent for the year (as of Dec. 27). The Dow has gained 13.6 per cent while the S&P 500 has added 24.5 per cent. It appears that you are holding very conservative securities in your TFSA, without much growth potential.

Based on that, the money would be better used paying down the mortgage or the line of credit, whichever is carrying the higher interest rate. Right now, that’s the line of credit. – G.P.

Investing in Europe

Q - I read an article in the G&M titled “16 Outperforming Passive ETFs” by Ian Tam and wanted to ask for your opinion. The ETF that caught my attention was the Horizons Europe 50 Index ETF (HXX-T). It interests me because of the foreign content aspect and the need to diversify out of North America inside my wife’s RRSP. Its performance is respectable over the last five years, and it even outperformed the S&P this year. – Paul C.

A – HXX invests in 50 of the largest companies in Europe. European stocks had lagged until this year, but the fund is now on track for its best annual performance since it was launched in late 2016. It showed a year-to-date gain of just over 22 per cent as of the end of November. The five-year average annual compound rate of return was 9.44 per cent. The MER is 0.19 per cent.

I checked the results of European stock funds from BMO, iShares, Vanguard, CI, and Brompton. Only the CI WisdomTree Europe Hedged Equity Index ETF (EHE-B-T) comes close to matching the Horizons fund in year-to-date returns, However, it’s an inferior performer over five years with an average annual compound rate of return of 6.51 per cent. The MER is also much higher, at 0.6 per cent.

In this category, the Horizons fund looks like the best choice for your wife’s RRSP. – G.P.

Betting it all on banks

Q - Recently I liquidated all our managed portfolio (USD and CAD equities) with a Canadian bank and bought a self-managed CAD portfolio of ZEB and HCAL ETFs plus a couple of Canadian bank stocks. Am I too overweight on Canada bank stocks? I have 20 per cent in BCE stock as the only countervailing balance.

Am I risking all in Canada bank stocks? I got in at the right time at the end of October and the dividend yield is about 6.6 per cent.

What would you suggest? – Partha T.

A – Let’s begin by stating the obvious. You are grossly overweighted in the banking sector. ZEB is the symbol for BMO Equal Weight Banks Index ETF while HCAL is Hamilton Enhanced Canadian Bank ETF. Plus, you have a couple of Canadian bank stocks and a 20 per cent position in BCE. No one would view this as a balanced portfolio!

Presumably, you did this deliberately, anticipating a turnaround in the banking sector. So far, it’s worked out well. As of the close on Dec. 27, the S&P/TSX Capped Financials Index was up 11.55 per cent for the fourth quarter. If we begin to see rate cuts in 2024, that should further strengthen the banks.

It seems a relatively safe bet. But if something goes wrong – such as a recession – you are very exposed. The answer is greater diversification, but presumably that’s what you had in the portfolio you liquidated. Are you looking for third party vindication of your moves? If so, you’ve come to the wrong place. I have always been a strong believer in the need for a diversified portfolio. It’s okay to overweight a sector – but not to put almost all your money there.

You asked what I would suggest. I would gradually start taking bank profits and redeploy the money to other sectors. This would include selling HCAL, which is underperforming ZEB by a considerable margin.

I would also reduce the 20 per cent position in BCE and add a bond ETF – either XBB (a universe bond fund from BlackRock) or XLB (a long-term bond fund from the same company). XBB is the more conservative.

In short, build a more broadly based portfolio. But since that’s what you had before, you may want to continue making big bets and accepting the accompanying risk. – G.P.

If you have a money question you’d like answered, please send it to gordonpape@hotmail.com and write Globe Question on the subject line. I can’t guarantee a personal reply but I’ll answer as many questions as possible in this space.

Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.

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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 18/04/24 11:59pm EDT.

SymbolName% changeLast
DGRO-A
Dividend Growth Ishares Core ETF
+0.26%58.55
AY-Q
Atlantica Yield Plc
-2.33%22.63
WU-N
Western Union Company
-0.38%13.14
VZ-N
Verizon Communications Inc
-0.47%40.06
T-N
AT&T Inc
+0.58%17.4
DUK-N
Duke Energy Corp
+1.02%103.89
HXX-T
GX Europe 50 Index Corporate Class ETF
+0.25%52.35
EHE-B-T
CI Wisdomtree Europe Hdg Eqty Idx ETF NH
-0.8%30.86

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