Four Strategic ways to invest in U.S. Stocks using BMO ETFs

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Image courtesy BMO ETFs/Getty Images

By Erin Allen, Vice President, Direct Distribution, BMO ETFs

(Sponsor Blog)

As of May 31, 2024, the U.S. stock market accounts for approximately 70% of the MSCI World Index1, making it a significant component of global equity markets: and likely a substantial portion of your investment portfolio as well.

While Canadian investors often favour domestic stocks for tax efficiency and lower currency risk2, incorporating U.S. stocks can enhance exposure to sectors where the Canadian market — predominated by financials and energy — falls short, particularly in technology and healthcare.

For Canadian investors looking to tap into the U.S. market affordably and without the hassle of currency conversion, there are numerous ETF options available. Here are four strategic ways to build a U.S. stock portfolio using BMO ETFs, catering to different investment objectives.

Low-cost broad exposure

If your objective is to gain exposure to a broad swath of U.S. stocks that reflect the overall market composition, the S&P 500 index is your quintessential tool.

This longstanding and highly popular benchmark comprise 500 large-cap U.S. companies, selected through a rigorous, rules-based methodology combined with a committee process, and is weighted by market capitalization (share price x shares outstanding).

The S&P 500 is notoriously difficult to outperform: recent updates from the S&P Indices Versus Active (SPIVA) report highlight that approximately 88% of all large-cap U.S. funds have underperformed this index over the past 15 years.3

This statistic underscores the efficiency and effectiveness of investing in an index that captures a comprehensive snapshot of the U.S. economy.

For those interested in tracking this index, BMO offers two very accessible and affordable options: the BMO S&P 500 Index ETF (ZSP) and the BMO S&P 500 Hedged to CAD Index ETF (ZUE), both with a low management expense ratio (MER) of just 0.09% and high liquidity.

While both ETFs aim to replicate the performance of the S&P 500 by purchasing and holding the index’s constituent stocks, they differ in their approach to currency fluctuations.

ZSP, the unhedged version, is subject to the effects of fluctuations between the U.S. dollar and the Canadian dollar. This means that if the U.S. dollar strengthens against the Canadian dollar, it could enhance the ETF’s returns, but if the Canadian dollar appreciates, it could diminish them.

On the other hand, ZUE is designed for investors who prefer not to have exposure to currency movements. It employs currency hedging to neutralize the impact of USD/CAD fluctuations, ensuring that the returns are purely reflective of the index’s performance, independent of currency volatility.

Large-cap growth exposure

What if you’re seeking exposure to some of the most influential and dynamic tech companies in the U.S. stock market, often referred to as the “Magnificent Seven?”

For investors looking to capture the growth of these powerhouse companies in a single ticker, ETFs tracking the NASDAQ-100 Index offer a prime solution. As of June 27, all of these companies are prominent members of the index’s top holdings4.

The NASDAQ-100 Index is a benchmark comprising the largest 100 non-financial companies listed on the NASDAQ stock exchange. This index is heavily skewed towards the technology, consumer discretionary, and communication sectors, from which the “Magnificent Seven” hail.

BMO offers two ETFs that track this index: the BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ) and the BMO Nasdaq 100 Equity Index ETF (ZNQ). Both funds charge a management expense ratio (MER) of 0.39%. Again, the key difference between them lies in their approach to currency fluctuations.

Low-volatility defensive exposure

You might commonly hear that “higher risk equals higher returns,” but an interesting phenomenon known as the “low volatility anomaly” challenges this traditional finance theory.

Research shows that over time, stocks with lower volatility have often produced returns comparable to, or better than, their higher-volatility counterparts, contradicting the expected risk-return trade-off. Continue Reading…

Retired Money: Review of Die with Zero and 4,000 Weeks

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Chapters Indigo

My latest Retired Money column looks at two related books: Die with Zero and Four Thousand Weeks.

You can as always find the full version of the MoneySense column by clicking on the highlighted text: Why these authors want you to spend your money and die with $0 saved.

I start with Die with Zero because it most directly deals with the topic of money as we age. In fact, as most retirees know, one of the biggest fears behind the whole retirement saving concept is running out of money before you run out of life.

But it appears that many of us have become so fixated with saving for retirement, we may end up wasting much of our precious life energy, and being the proverbial richest inhabitant of the cemetery. For you super savers out there, this book may be an eye opener, as is the other book, 4,000 Weeks.

As I note in the column, this genre of personal finance started with Die Broke, by Stephen Pollan and Mark Levine, which I read shortly after it was first published in 1998. That’s where I encountered the amusing quip that “The last check you write should be to your undertaker … and it should bounce.”

The premise is similar in both books: there are trade-offs between time, money and health. Indeed,  as you can see from the cover shot above, its subtitle is Getting all you can from your money and your life. As with another influential book, Your Money or Your Life,  we exchange our time and life energy for money, which can therefore be viewed as a form of stored life energy. So if you die with lots of money, you’ve in effect “wasted” some of your precious life energy. Similarly, if you encounter mobility issues or other afflictions in your 70s or 80s, you may not be able to travel and engage in many activities that you may have thought you had been “saving up” for.

A treatise on Life’s Brevity and appreciating the moment

Amazon.com

The companion book is Four Thousand Weeks : Time Management for Mortals, by Oliver Burkeman. If you haven’t already guessed, 4,000 weeks is roughly the number of weeks someone will live if they reach age 77 [77 years multiplied by 52 equals 4,004.] Even the oldest person on record, Jeanne Calment, lived only 6,400 weeks, having died at age 122.

I actually enjoyed this book more than Die with Zero. It’s more philosophical and amusing in spots. Some of the more intriguing chapters are “Becoming a better procrastinator” and “Cosmic Insignificance Therapy.” I underlined way too many passages to flag here but here’s a sample from the former chapter: “The core challenge of managing our limited time isn’t about how to get everything done – that’s never going to happen – but how to decide most wisely what not to do … we need to learn to get better at procrastinating.”

 

 

How your part-time job can support your retirement

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By Mark Seed, myownadvisor

Special to Financial Independence Hub 

You probably know from my site, including the last few years, I love sharing case studies.

Part of the reason I enjoy doing so is because of positive reader feedback.

Another reason: I believe any case studies help the process of planning even if your personal finance situation is different.

You can learn from others – what you want and what you don’t want.

Here are some other popular case studies on my site before we get into this one today: how your part-time job can support your retirement.

How much do you need to retire on $5,000 per month?

And this one:

How might you retire on a lower income?

How your part-time job can support your retirement

During the pandemic, that caused so many impacts to so many people on various hardship levels, I recognized that some individuals took income matters into their own hands – they developed a side hustle.

In doing so, these folks aspired to resolve a few issues:

  1. it allowed them to further develop skills they already had or follow their passions, while
  2. making financial ends meet out of necessity.

Now that the global pandemic is thankfully over, many newer entrepreneurs continue to enjoy their side hustle during full-time work or even some retirees continue to work not because they have to, but because they want to.

Beyond maintaining a strong sense of purpose, the financial math suggests working part-time or even occasionally can make a HUGE difference to support your retirement plan.

Over the last few years running Cashflows & Portfolios, I’ve met many people in their 40s, 50s and 60s who are looking to scale back from full-time work, a bit, and instead work part-time or occassionally as they consider semi-retirement.

I am one of them on that path! 🙂

In fact, I shared in our recent Financial Independence Update that my wife has just started a bit of her semi-retirement / work on own terms journey in the last week or so. She is optimistic this can continue for the coming year or potentially longer. That would be ideal for us. I just need to catch-up and try and accomplish the same thing!

So, some folks may work in semi-retirement because they need the money. Not ideal but that works of course.

Others may work mainly because they like what they do, they want to stay busy with a strong sense of purpose, and they even enjoy their co-workers too! Far more ideal which is our plan.

We’ve always considered retiring to something, and transitioning to full-on retirement after a few years of part-time work. We’ll keep that approach alive now that we’re debt-free.

via GIPHY

Consider this question:

Would you rather have really rich experiences when you’re 50 or be really rich when you’re 80?”

We know our answer.

How your part-time job can support your retirement

Given quite a few My Own Advisor readers and Cashflows & Portfolios members are also considering a better life-work balance as they age, I thought it would be interesting to profile a couple that seeks this very objective: how part-time work can support their retirement plan.

Our case study participants today are Brandon and Stacey.

They live here in Ottawa, near me.

After a few full-time decades in the workforce, Brandon and Stacey feel:

“Controlling your time is the highest dividend money pays.” – The Psychology of Money

My couple today wants to know how much they need to earn to meet their retirement income goals.

Today’s post will tell them and it will provide some guidance for you as well. Continue Reading…

Private Equity: A Portfolio Perspective

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So don’t ask me no questions
And I won’t tell you no lies
So don’t ask me about my business
And I won’t tell you goodbye

  • Lynyrd Skynyrd
Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

I know virtually nothing about investing in private companies. However, I do know a thing or two about the theoretical and practical aspects of asset allocation and portfolio construction. In this vein, I will discuss the value of private equity (PE) investments within a portfolio context. Importantly, I will explain why PE investments may contribute less to one’s portfolio than is widely perceived.

Before I get into it, I am compelled to state one important caveat. Generalized statements about PE are less meaningful than is the case with public equities. The dispersion of returns across public equity funds is far lower than across PE managers. Whereas most long stock funds fall within +/- 5% of the average over a several year period, there is a far wider dispersion among underperformers and outperformers in the PE space. As such, it is important to note that the following analysis does not apply to any specific PE investment but rather to PE as an asset class in general.

The Perfect Asset Class?

PE allocations are broadly perceived as offering higher returns than their publicly traded counterparts. In addition, they are regarded as having lower volatility than and lower correlation to stocks. Given these perceived attributes, PE investments can be regarded as the “magic sauce” for increasing portfolio returns while lowering portfolio volatility. In combination, these attributes can significantly enhance portfolios’ risk-adjusted returns. However, the assumptions underlying these features are highly questionable.

Saturation, Lower Returns, & Echoes of Charlie Munger

It is reasonable to expect that average returns within the PE industry will be lower than in decades past. The number of active PE firms has increased more than fivefold, from just under two thousand in 2000 to over 9000 today. This impressive increase pales in comparison to growth in assets under management, which went from roughly $600 billion in 2000 to $7.6 trillion as of the end of 2022. It seems unlikely if not impossible that the number of attractive investment opportunities can keep pace with the dramatic increase in the amount of money chasing them.

Another reason to suspect that PE managers’ returns will be lower going forward is that their incentives and objectives have changed. The smaller PE industry of yesteryear was incentivized to deliver strong returns to maximize performance fees.  In contrast, today’s behemoth managers are motivated to maximize assets under management and management fees. The name of the game is to raise as much money as possible, invest it as quickly as possible, and begin raising money for the next fund. The objective is no longer to produce the best returns, but rather to deliver acceptable returns on the largest asset base possible. As the great Charlie Munger stated, “Show me the incentive and I’ll show you the outcome.”

There are no Bear Markets in Private Equity!

It is also likely that PE investments on average have both higher volatility and greater correlation to stocks than may appear. The values of public equities are determined by exchange-quoted prices every single day. In contrast, private assets are not marked to market daily. Not only do PE managers value their holdings infrequently, but they also must employ a significant degree of subjectivity in determining the value of their holdings. Importantly, there is an inherent bias for not adjusting private valuations when public equities suffer losses. Continue Reading…

Unique Strategies to Reduce your Car Expenses and Save Money

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It may not seem like it, but owning and driving a car will be a major part of your financial picture throughout your adult life. As with all financial aspects, it pays to be a smart and savvy decision-maker and shopper and to know how to save money on car expenses.

Adobe stock image: Syda Productions

By Dan Coconate

Special to Financial Independence Hub

Cars, believe it or not, are considered an asset. However, it’s good to remember that cars are indeed a depreciating asset. Every year, they decline in value due to wear and tear and also due to the release of newer models. As a result, cars are not a smart investment since they only hold value for a short amount of time.

So be wise about your cars. Making sound financial choices about the cars you drive, and the car insurance you obtain, will equal more money in your pocket in the long run.

First, let’s take a look at some tips on how to save money when you are buying a car. If you’re aiming for a stress-free and independent retirement phase, you’ll love these unique strategies to reduce your car expenses and save money.

Transitioning to early retirement is an exciting chapter that requires a smart approach to manage your finances. Car expenses are significant parts of any driver’s budget, and you can actually save money with a few strategic adjustments. Here are some unique strategies to reduce your car expenses and save money for more pressing needs.

Negotiate with your Insurance Company

One of the most effective ways to reduce car expenses is to negotiate with your insurance company. Many people assume their premiums are non-negotiable, but that’s not true.

By contacting your insurance provider and discussing your current rates, you might find opportunities for discounts or better rates. Highlight your clean driving record or inquire about senior discounts.

Consider Bundling Car Insurance with other Policies

Insurance companies often offer discounts to customers who bundle multiple policies. If you have homeowner’s or renter’s insurance, consider combining it with your car insurance.

This strategy will simplify your payments and provide a discount on your premiums. The savings from bundling can add up over time, helping you reduce your car expenses and invest more in your retirement savings!

Take a Defensive Driving Course

Defensive driving courses are excellent for lowering your insurance premiums. Many insurance companies offer discounts to drivers who have taken these courses. Completing a course shows your insurer that you’re committed to safe driving practices.

Lower your Driving Speed

Driving at low speeds can reduce your car’s fuel consumption. When you maintain a moderate speed, your engine works more efficiently, conserving fuel and reducing wear and tear. Small fuel savings can add up over time, making a noticeable difference in your car-related expenses. Continue Reading…