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Your questions keep coming so let’s see what’s in the latest batch.

Pharmaceutical ETFs

Q - Can you recommend some top ETFs that invest in international pharma companies? My preference is to go the ETF route versus buying individual pharmaceutical companies. – Mike E.

A – First, it’s important to make a distinction here. The request is for pharmaceutical ETFs, not health care ETFs. That narrows the field considerably.

I was not able to find any Canadian funds that focus only on pharmaceutical companies, but there are several in the United States.

The largest, with US$387-million in assets under management, is the iShares U.S. Pharmaceuticals ETF (IHE-A). It’s been a steady performer over the years, with an average annual compound rate of return of 10.46 per cent since it was launched in May, 2006. However, it is down 3.7 per cent so far in 2022 (to May 20). The fund is heavily weighted in two stocks, Johnson & Johnson (23.6 per cent) and Pfizer Inc. (20.8 per cent). The management expense ratio is 0.42 per cent.

Other pharma ETFs to consider include these.

Invesco Dynamic Pharmaceuticals ETF (PJP-A). This ETF is more equally balanced than the iShares entry. There are 27 stocks in the portfolio, with the largest positions in Eli Lilly and Co. (6.9 per cent of the assets), Merck & Co. (6.5 per cent), Johnson & Johnson (6.2 per cent), and Amgen Inc. (6.1 per cent). The fund has a 10-year average annual compound rate of return of 10.8 per cent (to April 30) but is down about 6 per cent year-to-date. The MER is 0.58 per cent.

VanEck Vectors Pharmaceutical ETF (PPH-Q). This is an international fund. About two-thirds of its holdings are in U.S.-based companies, 10 per cent in the U.K., and the rest scattered around. The portfolio consists of 25 stocks, more or less equally weighted. Top holdings include Merck & Co. (5.5 per cent), Eli Lilly (5.4 per cent), Bristol-Myers Squibb Co. (5.4 per cent), and AstraZeneca PLC (5.3 per cent). The 10-year average annual compound rate of return is 9.5 per cent (to April 30). In contrast to the other funds mentioned here, this one was modestly in the black for the first four months of this year, with a gain of 1.3 per cent. The MER is 0.35 per cent.

SPDR S&P Pharmaceuticals ETF (XPH-N). This fund has the worst track record of the four we’ve discussed. The 10-year average annual compound rate of return is only 5.7 per cent and it’s down more than 10 per cent year-to-date (to April 30). The reason for the underperformance may be the lack of exposure to the big international pharmaceutical companies. This is also a equal weight portfolio, with no big bets on any one stock. Top holdings are Merck & Co. (5.8 per cent), Bristol-Myers Squibb (5.8 per cent), and Eli Lilly (5.6 per cent). The MER is 0.35 per cent.

I would not advise investing in any of these ETFs – I would prefer a more broadly based health care fund for greater diversification. But if you want only pharma, the iShares or the Invesco entries are the best choices, based on historical performance. – G.P.

Successor annuitant

Q – I am in my mid-70s. I have cancer and a short life expectancy. I have been taking the minimum payout from my RRIF since turning 71. My wife is the successor annuitant for my RRIF and, being still in her 60s, has several years before she needs to convert her own RRSP to a RRIF. When she takes over my RRIF, I believe she will start to receive the payout that would otherwise be made to me. I wonder if there are other options, such as merging my RRIF with her RRSP, so that she could defer payouts from the merged account until she turns 71. – Richard S.

A - I’m sorry about the cancer diagnosis. Hopefully, you’ll receive treatment that will result in remission.

The successor annuitant route is the best one for your wife, but not perfect for her situation. Your RRIF will simply carry on after you pass, paying her at the same rate you are receiving. The payment schedule does not revert to her age level. There is no provision in the law for merging your RRIF with your wife’s RRSP. In this situation, you have correctly identified the best course: If she does not need extra income, delay collapsing her RRSP until the last minute (Dec. 31 of the year she turns 71). - G.P.

Claiming tax loss

Q - I bought a stock in a non-registered account for $1. It is now trading at 10 cents. I haven’t given up completely on this stock as I am still thinking it has hopes of a comeback. I was thinking of buying this stock at 10 cents in my TFSA, and then selling the stock in my non-registered account, so that I can claim the capital loss. Can I claim the loss if I do this? – Vince

A – Be careful of a twist called the superficial loss rule. CIBC Wood Gundy explains it this way: “If you sell a security to trigger a loss, and you or an affiliated person (for example, your spouse, a corporation you control, or a trust where you have a major beneficial interest, including an RRSP) purchases an ‘identical security’ within 30 calendar days before or after the sale date, and that person still owns that security 30 calendar days after the sale date, then the capital loss is denied to you and added to the cost base of the person who bought it.”

A TFSA, like an RRSP, would be governed by the superficial loss rule. So, to be on the safe side, you should wait 30 days after selling the shares in your non-registered account before repurchasing them in your TFSA. – G.P.

Tax filings

Q – For the past five years I have had an online broker account (non-registered) with about $50,000, all invested in seven or eight different stocks. I sell off approximately two positions each year. I have never reported these on my income tax filings and understand this might be required? I’m not even sure what forms are required. Can you please clarify how important this is given how minimal my gains or losses have been over the past five years? – Phil B.

A – There’s no way to put this gently. You are in violation of the tax laws. If the Canada Revenue Agency twigs to the fact you haven’t declared your capital gains for the past five years, you would be reassessed and charged penalties and interest on the money due.

The CRA makes it easy to change returns going as far back as 10 years. For details, go here.

In future, complete Schedule 3 when you’re doing your taxes. That will enable you to calculate your gains or losses. Gains are reported on line 12700 of your return. Do not report losses there, however. Keep track of them and use them to reduce capital gains of other years. – G.P.

Mawer fund

Q - Given that rising rates are adversely impacting bonds, what is your opinion on holding the Mawer Balanced Fund (MAW104) with its 30-per-cent bond exposure? – David D.

A - This fund has had a good long-term record. As of March 31, the 10-year average annual compound rate of return was 8.7 per cent, which puts it near the top of its category. Morningstar gives it a four-star rating.

That said, it is going through a rough period right now and the 30 per cent bond exposure is not helping. The fund lost 7.7 per cent in the first quarter and almost certainly dropped more in April/May (Mawer publishes returns quarterly).

If you own the fund, I’d hang in because the long-term record says it will recover. But I would not commit new money at this time. - G.P.

If you have a money question you’d like answered, send it to me at gpape@rogers.com and write Globe Question in the subject line. I can’t guarantee a personal response 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. For more information and details on how to subscribe, go to buildingwealth.ca/subscribe

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