Playing Defence with Canadian Utilities

Posted By |

 

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

The utility sector is known for its defensive qualities, providing a stable investment option in times of market uncertainty. By overweighting defensive sectors, investors can lower the volatility (risk) of their portfolios. Many will refer to Canadian utilities as ‘bond proxies’ due to their steadiness. However, the true strength lies not in the dividends they offer but in the inherent defensive nature of these companies. Utility stocks are considered defensive because they tend to perform well during economic downturns. Consumers continue to need electricity, water, and other essential services even when the economy is struggling. So here we’ll take a look at Canadian utility stocks and ETFs.

There are a few reasons for an investor to embrace the utilities sector. They may want a portfolio that is less volatile. A retiree can witness a real financial benefit as a portfolio that experiences lesser drawdowns in recessions can create greater and more durable income over time.

Defensive sectors

In this post, the Defensive sectors for Retirement, the three defensive sectors were almost twice as good as a traditional balanced stock and bond portfolio. That is to say, the portfolio moved through the financial crisis of 2008-2009 and left the retiree with a portfolio almost twice as large as the traditional 60/40 balanced portfolio.

Keep in mind past performance does not guarantee future returns. That said, consumer staples, utilities and healthcare have a long history of offering greater portfolio stability.

Canadian utility stocks and ETFs

That above posts looks to U.S. staples, utilities and healthcare stocks. There’s no better place to find multinational consumer staples and healthcare stocks. The healthcare sector is non-existent in Canada. Our consumer staples sector in Canada (XST.TO) is very good, but is mostly domestic. More on that later.

In the Globe & Mail Rob Carrick offered an article (sub required) on Canadian utility ETFs. Rob noted that the fees for these ETFs are quite large compared to market index-based ETFs. The fees are in the 0.32% to 0.61% range. That said, that is the norm for ‘specialty’ or sector ETFs. Rob looked at three Canadian utility ETFs …

The two high-fee funds are the BMO Equal Weight Utilities Index ETF ( ZUT-T), with assets of $500-million and 14 total holdings; and the iShares S&P/TSX Capped Utilities Index ETF ( XUT-T) with assets of $379-million and 15 holdings.

A third fund, the Global X Canadian Utility Services High Dividend Index ETF ( UTIL-T) will on March 4 reduce its current MER of 0.61 per cent to an estimated 0.32 per cent. UTIL has assets of $379-million and 15 holdings.

Core utilities or extended universe?

One key decision that an investor will make is: what types of utilities do you want to own? You can stick to the traditional power/electricity producers, or you can include pipelines and the modern utilities known as the telcos.

ZUT.TO and XUT.TO are traditional power utilities. They are very similar, except the BMO ZUT is equal-weighted while the iShares XUT is cap-weighted (the largest companies get the greater weighting within the index). I’d give the edge to the BMO ETF. Continue Reading…

How Trump’s Policies inspired my Shift from Canadian Stocks to U.S. Small-Caps

Posted By |

By Alain Guillot

Special to Financial Independence Hub

Shortly after Donald Trump was elected, I sold some of my Canadian index (XIU) holdings in Canadian dollars and bought a small-cap stock index in the U.S. called the Russell 2000, in U.S. dollars.

The Russell 2000 is a stock market index that represents the 2,000 smallest publicly traded stocks in the U.S. I purchased the ETF IWM, which tracks the Russell 2000, at $240.

What are small companies?

Small companies are those with a market value between $300 million and $2 billion. These companies are underrepresented in major indexes such as the S&P 500.

Reading the writing on the wall

I usually don’t let politics influence my investment decisions, but sometimes you have to read the writing on the wall.

In this case, Donald Trump made it clear that he:

  • Wanted to reduce taxes
  • Wanted lower interest rates
  • Wanted to increase tariffs

More precisely, he intended to impose a 25% tariff on Canadian goods. It would have been irresponsible for me to ignore this information and do nothing.

Reducing Canadian Exposure

My decision to sell the Canadian index was partially motivated by fear. Donald Trump’s clear stance on imposing tariffs on Canadian products signaled potential trouble for the Canadian economy and currency. Based on this, I decided to reduce my Canadian exposure and increase my U.S. exposure.

Why Small-Cap Stocks and Not Large-Cap?

Since much of my wealth is already invested in the S&P 500, which represents large corporations, I thought diversifying by market capitalization would be beneficial. Continue Reading…

Trump administration offers investment opportunities (Podcast Transcript)

Posted By |
Dennis Mitchell, Starlight Capital

Dealing with the new administration in Washington won’t be easy, but it may offer opportunities for Canada and for investors. So says Darren Coleman’s guest Dennis Mitchell [pictured left] on the latest episode of the podcast, Two Way Traffic.

Mitchell is CEO and CIO of Starlight Capital, which is a wholly-owned subsidiary of Starlight Investments, a global real estate investment and asset management firm based in Toronto.

Mitchell advises  investors to take President Donald Trump “seriously, but not literally.” In lieu of the on-again-off-again tariffs, he singled out an industry like auto manufacturing. “It would take decades for the U.S. to replicate Southern Ontario auto manufacturing,” Mitchell said, implying this won’t happen anytime soon. He also said Canada’s biggest challenge right now involves inter-provincial trade barriers and that Trump presents an opportunity to get this right and diversify our domestic economy. With an eye to prudent investing, the discussion with Coleman and Mitchell explored the following …

  • Investors should take a hard look at technology because the Trump administration will give the sector carte blanche over the next four years.
  • Don’t forget Canada has what the world needs in terms of energy, valuable minerals, water, etc.
  • Investing in the right sector but with the wrong company is a mistake which is why it’s best to seek professional advice.

Here’s a link to the full podcast …

https://podcasts.apple.com/ca/podcast/two-way-traffic-with-darren-coleman/id1494816908

Darren Coleman

Today I’m joined by my friend, Dennis Mitchell, CEO and Chief Investment Officer for Starlight Capital in Etobicoke, Ontario. He’s been a fixture of the Canadian investment and U.S. investment landscape for a long time. He’s regularly on BNN and CNBC and has been a successful investor in North America. We’re going to talk about Canada and what we do. We’re dealing with the Trump tariff tantrum and we have a lot of concern, not just in Canada, but globally. Is President Trump using tariffs as a bit of a stick to get his policy decisions implemented? So I want to talk about your impression as a very successful investment manager. How much should we be worrying about this? What action are you taking, or should investors be thinking about? I’ll open it there and get your thoughts and comments and what should we be focused on.

Dennis Mitchell

With Trump, a number of people have said you have to take him seriously, but not literally. And I think that’s great advice for markets as well. Two ways to evaluate Trump’s impact on markets. The first is longer term: what can you expect versus the trajectory we were on before. So longer term, what you can expect is less regulation and more growth. You can expect a focus on manufacturing domestically, driving more foreign investment into the United States. And a focus more on fossil fuels and less on renewable energy. So that’s sort of a longer-term playbook.

As for an investment strategy, to the extent that you need to tweak, it should be tweaked along those longer-term trends. In the short term, you have to ask yourself: How is this? How does Trump usually operate? To put it charitably, he operates chaotically. I think you have to use the volatility that he creates around things like seizing the Panama Canal, acquiring Greenland, turning Gaza into a resort, and  implementing tariffs against allies. You have to use the volatility of those announcements and those actions to invest along your long-term trajectory. Because long term we should all be investing in high-quality businesses that are driving free cash flow growth. To the extent that Trump volatility creates a sell-off in any of those types of companies, that’s where you should be allocating your capital to capture those outsized returns that his chaos and volatility create.

Darren Coleman

Many people have not read The Art of the Deal, where he gives a guidebook to the way he’s going to play the game, and it might be a little too early to pick definite winners and losers. There are certain winners and losers, for example, like hybrid cars or electric cars. It looks like some of the subsidies might be going away. It looks like they’re on a real mission to eliminate a lot of government spending, which makes sense given the size of the debt. Are there certain industries right now that you like?

 

Dennis Mitchell

I think based on not just Trump, but who he’s put in Cabinet, you can look at energy, the traditional fossil fuel energy industry, as an area that’s going to be attractive going forward. Clearly, technology. The tech oligarchs have all lined up, not just at his inauguration, but they’ve all lined up to pay fealty to Trump and work with him. And you have to look at anything being manufactured outside the United States that could conceivably shift to the U.S. I say conceivably, because I think a lot of people are concerned about the auto industry in Canada. It would take decades to replicate the supply chain of southwestern Ontario within the  continental US. So that is not an industry investors, in the short and intermediate term, have to worry about in terms of replication and capital flowing outside of the country and into the U.S.

I mentioned his Cabinet, RFK Jr. taking over Health and Human Services. That is of concern for healthcare businesses. You have to think there will be continued downward pressure on drug costs. There will be increased review and oversight and downright skepticism around some of the treatments that exist out there, whether it’s women’s reproductive health, vaccines, even the vaccines that Trump himself spearheaded and created for COVID 19. You have to be concerned about increased oversight and questioning and potential outright bans of some of these industries and some of these treatments and technologies based on who Trump has put in various Cabinet positions. But I think technology and energy, specifically, are two areas that will benefit from a Trump administration. The previous administration was very focused on renewable energy and was not necessarily a big fan and partner of the tech oligarchy.

Darren Coleman

Let’s spend some time on those two industries. On the energy side, in his first day, he said ‘Drill baby drill’ in his speech. So that was pretty clear that fossil fuels are going to be around a long time. And he’s signing agreements with places like Japan for liquid natural gas. Canada had a shot at those agreements, and we decided not to. So if we’re going to see a focus on the energy sector, is that good for American energy companies, or positive for Canadian energy companies?

Dennis Mitchell

I think it’s good for both and the simple reason is that the demand for energy in the U.S. in particular is almost insatiable and will not be met without significant investment on both sides of the border. So if we take a step back, the energy industry, the traditional fossil fuel energy industry in North America, has gone through a significant restructuring over the last 20 years. Gone are the days where guys are going door-to-door and raising capital to drill.

Darren Coleman

Passenger mines, that kind of thing? Continue Reading…

Invest Overseas, with Ease: The Power of Canadian Depositary Receipts (CDRs)

Posted By |
Getty Images courtesy BMO ETFs.

By Zayla Saunders, BMO ETFs

(Sponsor Blog)

Diversifying your portfolio is a cornerstone of smart investing, reducing risk and potentially enhancing returns. While the Canadian market offers diversification by sector, it represents only about 3% of the world’s capital market. 1

This means that Canadian investors are missing out on a staggering 97% of global investment opportunities. However, the hurdles of currency conversion, foreign exchange costs and currency risk often deter Canadian investors from going global. Enter CDRs, a revolutionary tool that bridges this gap.

What exactly are CDRs?

Canadian Depositary Receipts (CDRs) are financial instruments that represent beneficial ownership in shares of foreign companies but are traded in Canadian dollars on Cboe, a Canadian stock exchange. This innovation simplifies global investing for Canadians, eliminating the need to navigate foreign exchanges and manage currency fluctuations.

Comparing CDRs to traditional Stocks and American Depositary Receipts (ADRs)

While traditional stocks directly represent ownership in companies, CDRs offer a streamlined approach to investing in international firms. Unlike ADRs that trade in U.S. dollars, CDRs cater specifically to Canadians, providing similar exposure to global markets without the complexities of trading at foreign exchanges and in foreign currencies.

A quick look at CDR History

The concept of depositary receipts traces back nearly a century, with ADRs emerging in the 1920s. By 2023, major banks listed over 2400 ADRs in the U.S. market. Canada joined the depositary receipt market in 2021 with offerings focused on U.S.-based companies. In 2025, Bank of Montreal (BMO) introduced its own CDR program, expanding access to global giants from Japan, Germany, Switzerland, Denmark, and the Netherlands.

 Benefits of CDRs Explained

  • Global Access: CDRs open doors to international investment opportunities, broadening investment horizons for Canadian investors.
  • Currency Risk Management: CDRs mitigate the impact of foreign currency fluctuations on returns through a notional currency hedge.
  • Fractional Shares: With a starting price of around CAD $10, investors can afford fractional exposure to shares of otherwise expensive global companies.
  • Diversification: CDRs enable effortless geographic diversification, reducing reliance on any single market.

 Understanding CDR Features

  • Currency Efficiency: CDRs allow Canadians to get exposure to global stocks in Canadian dollars, eliminating currency conversion costs.
  • Currency Hedge: CDRs minimize the impact of currency fluctuations while reflecting the performance of the underlying foreign company.
  • Fractional Exposure: Affordable entry-point to high-priced stocks as CDRs are generally issued at a price lower than the underlying share effectively providing Canadians with fractional exposure to listed stocks of large global companies.
  • Dividends: Investors will be entitled to any distributions paid on the underlying shares in Canadian dollars proportional to the number of underlying shares to which they are entitled. Taxes on distributions may be withheld by the CDR underlying company’s local or national tax authority. Whether distributions, such as dividends, are subject to foreign withholding tax in the same manner as if the underlying share were directly held by the investor will vary by jurisdiction Since the dividends are paid in Canadian dollars, investors do not have to subsequently go through the process of any currency conversion.
  • Market Accessibility: CDRs trade seamlessly on a Canadian exchange, ensuring ease of buying and selling.

 How do CDRs work in practice?

Each series of CDRs provides economic exposure corresponding to a number of underlying shares. The specific number of shares that each series of CDRs represents is called the CDR ratio. For example, if the CDR ratio for a particular series is 0.50, this means that such series of CDR represent 0.50, or half, of a company share, so an investor would need to purchase 2 CDRs of the series to obtain the economic exposure corresponding to 1 underlying share. The CDR ratio for each series of CDRs is adjusted daily to provide the notional currency hedge as the foreign currency increases/decreases in value to the Canadian dollar. Continue Reading…

Offence vs Defence

Posted By |
  • Ch-ch-ch-ch-changes
  • Turn and face the strange
  • Ch-ch-changes
  • Don’t want to be a richer man
  • Ch-ch-ch-ch-changes
  • Turn and face the strange
  • Ch-ch-changes
  • There’s gonna have to be a different man
  • Time may change me
  • But I can’t trace time — Changes, by David Bowie
Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

There is a basic principle that most people follow when it comes to their spending decisions. In essence, people generally try to either

(1) Get the most they can for the least amount of money, or

(2) Spend the least amount of money on the things they want (i.e. get the best deal)

In other words, rational utility maximizers try to be as efficient as possible when parting with their hard-earned dollars.

Strangely, many investors abandon this principle when it comes to their portfolios. With investing, what you get is return (hopefully more than less), and what you pay (other than fees) is risk. People often focus on return without any regard for the amount of risk they are taking. Alternately, many make the mistake of reducing risk at any cost, regardless of the magnitude of potential returns they leave on the table.

The foundation of successful investing necessitates achieving an optimal balance between return and risk. Different types of assets (volatile speculative stocks, stable dividend paying stocks, bonds, etc.) have very different risk and return characteristics. Relatedly, a portfolio’s level of exposure to different asset classes is the primary determinant of its risk and return profile, including how efficient the balance is between the two.

Offense, Defense, & Bobby Knight

Robert Montgomery “Bobby” Knight was an American men’s college basketball coach. Nicknamed “the General,”h e won 902 NCAA Division I men’s basketball games, a record at the time of his retirement. He is quoted as saying:

“As coaches we talk about two things: offense and defense. There is a third phase we neglect, which is more important. It’s conversion from offense to defense and defense to offense.”

Nobody can escape the fact that you can’t have your cake and eat it too. You can’t increase potential returns without taking greater risk. Similarly, you can’t reduce the possibility of losses without reducing the potential for returns.

Picking up Pennies in Front of a Steamroller vs. Shooting Fish in a Barrel

Notwithstanding this unfortunate tradeoff, there are times when investors should focus heavily on return on capital (i.e. being more aggressive), times when they should be more concerned with return of capital (i.e. being more defensive), and all points in between.

Sometimes, there is significantly more downside than upside from taking risk. Although it is still possible to reap decent returns in such environments, the odds aren’t in your favour. Reaching further out on the risk curve in such regimes is akin to picking up pennies in front of a steamroller:  the potential rewards are small relative to the possible consequences. At the other end of the spectrum, there are environments in which the probability of gains dwarfs the probability of losses. Although there is a relatively small chance that you could lose money in such circumstances, the wind is clearly at your back. At these junctures, dialing up your risk exposure is akin to shooting fish in a barrel – the likelihood of success is high while the risk of an adverse event is small.

John F. Kennedy & the Chameleonic Nature of Markets

Former President John F. Kennedy asserted that “The one unchangeable certainty is that nothing is certain or unchangeable.” With regard to markets, the risk and return profiles of different asset classes are not stagnant. Rather, they change over time depending on a variety of factors, including interest rates, economic growth, inflation, valuations, etc.

Given this dynamic, it follows that determining your optimal asset mix is not a “one and done” treatise, but rather a dynamic process that takes into account changing conditions. Yesterday’s optimal portfolio may not look like today’s, which in turn may be significantly different than the one of the future.

It’s not just the risk vs. return profile of any given asset class that should inform its weight with portfolios, but also how it compares with those for other asset classes. As such, investors should use changing risk/return profiles among asset classes to “tilt” their portfolios, increasing the weights of certain types of investments while decreasing others.

In “normal” times, the expected return from stocks exceeds the yields offered by cash and high-grade bonds by roughly 3% per annum. However, this difference can expand or contract depending on economic conditions and relative valuations among asset classes.

In the decade plus era following the global financial crisis, not only did rates remain at historically low levels, but the prospective returns on equities were abnormally high given the positive impact that low rates have on spending, earnings growth, and multiples. Against this backdrop, the prospective returns from stocks far exceeded yields on safe harbour investments. Under these conditions, it is no surprise that investors who had outsized exposure to stocks vs. bonds were handsomely rewarded.

Expected Return on Stocks vs. Yield on High Grade Bonds: Post GFC Era

As things currently stand, the picture is markedly different. Following the most significant rate-hiking cycle in decades, bonds are once again “back in the game.” Moreover, lofty equity market valuations (at least in the U.S.) suggest that the S&P 500 Index will deliver below-average returns over the next several years. Continue Reading…