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Profits from gaming, pet care, and more

Your questions continue to pour in on a wide range of topics, ranging from gaming ETFs to RRSPs. So, let’s take a look at the inbox and answer some of them.

Profits from gaming

Q – I’d like some ideas on how to get in on the gaming issue. There are game producers and then of course the infrastructure folks, particularly chip makers who are so busy on gaming that they are shorting auto manufacturers. ETFs would be interesting. – David C.

A - If you’re looking for a Canadian ETF, there is only one that I know of in this sector. It’s the Evolve E-Gaming Index ETF, which trades on the TSX under the symbol HERO. It’s a new fund, launched in June 2019, so we don’t have much history to work with. But what we have is impressive; the fund gained 68 per cent over the year to Jan. 19.

This is a broadly-based international portfolio with 77 positions in a wide range of countries. The U.S. and Japan each account for about a quarter of the assets, with China at about 19 per cent and Singapore at 11 per cent. Top holdings include Sea Ltd., Activision Blizzard, Nintendo, NetEase, and Electronic Arts.

If you want to look at the U.S. market, consider Wedbush ETFMG Video Game Tech ETF (NYSE: GAMR), currently trading at around US$87. This was the first ETF to target the video game industry. We recommended it in my Internet Wealth Builder newsletter in November 2017, and it has just about doubled in value since.

Like HERO, this is a global ETF. U.S. stocks comprise 28.9 per cent of the portfolio, developed Asia has 23.4 per cent, and Japan has 16.5 per cent. Top holdings are Gamestop Corp., Bilibili Inc., Zynga Inc., and Activision Blizzard. – G.P.

Interested in PAWZ

Q - I’d like your opinion on PAWZ, a U.S.-based ETF on the pet care industry. It seems to be a reasonable way to play the pet care market. Thanks. – Jack J.

A – PAWZ is the trading symbol for ProShares Pet Care ETF. This is an international fund (although heavily concentrated in the U.S.) that invests in a range of companies that stand to potentially benefit from the proliferation of pet ownership, and the emerging trends affecting how we care for our pets. It’s a new fund, launched in November 2018.

So far, it has performed very well, with a one-year gain of over 60 per cent in 2020. But these have been unusual times, to say the least. There have been many media reports of people buying pets to combat pandemic-induced loneliness, which in turn has increased demand for pet care supplies and services.

This is a growing industry – there are projections that pet care businesses could reach US$270 billion by 2025. But it would be unrealistic to expect the fund to continue to deliver returns of this magnitude.

Most of the top holdings will be unfamiliar to investors. For example, Idexx Laboratories, which produces a range of animal healthcare products, makes up 10.1 per cent of the ETF’s total assets. Chewy Inc., which makes pet food and a number of other products, is close behind at 9.96 per cent. In fact, the top five holdings account for more than 47 per cent of the fund’s assets, so this is a heavily concentrated portfolio. If even one of those major companies slips, it will have a disproportionate impact on the performance of the ETF. For that reason, I would rate it as higher risk.

If you decide to invest, remember this is a niche market. Don’t commit a large proportion of your resources. – G.P.

Transferring funds to an RRSP

Q - I’m retired with no income and have been taking money out of my RRSP as the need arises. I find myself in a situation where I have some excess mutual funds in a cash account, which I would have to pay capital gains on when I sell them. Would it make sense to put those funds into the RRSP? – Susan D.

A - Before you transfer the mutual funds to the RRSP, consider the tax consequences. The Canada Revenue Agency considers the transfer as a sale and, since you’ve made some profits, you’ll be assessed capital gains tax when you file your 2021 tax return. Withdrawals from the RRSP count as income, but if you’re not taking out a lot, you may not have to pay much, if anything. But check it out first.

You’ll eventually have to pay tax on the full amount (current value plus future profits) when the money is withdrawn from the RRSP. In effect, you’ll end up paying tax twice. But again, if your income is very low at that time, no tax may be payable. Do some projections before acting. - G.P.

RRIF planning

Q - My wife (60) and I (67) are approaching retirement in the next couple of years with around $300,000 each in our RRSPs. We will likely convert into a RRIF soon. We expect with drawdowns that it should last us 20 years. We are generally buy and hold income investors (financials, utilities, communications).

Does the decumulation phase of a portfolio require a different investment perspective or practice? There doesn’t seem to be much information on this stage of retirement. Should I remove DRIP from the stocks? Should I continue to invest the cash quarterly and then sell what I need at the end of the year? There is also the question of the amount of risk recommended or tolerated. Maybe it will become clearer when I get there. – S.P.

A - For starters, my advice is not to convert before you need to, which is Dec. 31 of the year in which you turn 71. In your wife’s case, that is 11 years away. Keeping the money in an RRSP is much more flexible than having it in a RRIF. You can withdraw what you need when you need it, with no minimum withdrawals. You can continue to contribute to an RRSP, which you cannot do with a RRIF.

However, there is one exception to this suggestion. Anyone over 65 can claim a pension amount of $2,000 a year for withdrawals from a RRIF. That would apply in your case (but not your wife’s), so I suggest you set up a small RRIF to take advantage of this tax break. You’re allowed to have both a RRIF and an RRSP at the same time until age 71.

As for RRIF strategy when the time comes, your emphasis on low-risk, dividend-paying stocks should be continued. I would stop the DRIPs and allow cash to accumulate for the minimum withdrawals. It’s not a good idea to wait until year-end and sell securities to meet the withdrawal requirements. If the market is down at that point, you may have to take a loss. Keep the timing of any sales as flexible as possible. – G.P.

Solving a mystery

Q - I am thinking of adding to my portfolio. The stocks that I am looking at are BEP and BEPC. I have done some research on them but, quite frankly, I don’t understand the difference between the two. Can you help me unfold this mystery? – Kathie S.

A – For starters, we’re talking about the same business. BEP and BEP.UN are the trading symbols for Brookfield Energy Partners, a limited partnership based in Bermuda. BEPC is the symbol for Brookfield Renewable Corporation. It was spun out of the limited partnership a few months ago to create a trading vehicle that would be eligible for the Canadian dividend tax credit and would attract institutional investors like pension plans that are unable or reluctant to invest in partnerships.

BEP and BEPC hold similar (but not the same) assets, pay the same distribution/dividend, and were expected to trade at about the same price. BEP.UN closed in Toronto on Jan. 22 at $62.70, to yield 2.34 per cent. The same day, BEPC finished at $74.66 to yield 1.97 per cent.

Both entities look expensive at these prices but if you want to invest at this time, I recommend BEP/BEP.UN for its higher yield. – G.P.

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

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