All posts by Financial Independence Hub

Manage Fixed Income Uncertainty with Multiple Return Drivers

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By Mark Lindbloom and Travis Carr, Western Asset Management, a Franklin Templeton Specialist Investment Manager

(Sponsor Content)

The new investing year started with renewed uncertainty around the Omicron wave of the COVID-19 pandemic, inflation, central bank policy and the global recovery.

What are Canadians with fixed income investments to do? Our answer is to use diversified strategies in this market to find yield across a broad range of sources.

This is certainly a challenging time for an investment manager to arrive in Canada, but we at Western Asset Management welcome the challenge to help Canadians build fixed income portfolios with substantial yield advantages within their risk tolerance.

Western Asset is a Specialist Investment Manager of Franklin Templeton, with US$492.4 billion in assets under management as of December 31, 2021. Founded in 1971, we specialize in active fixed income investing — it’s our sole focus. All our attention and resources are concentrated on the bond market and active strategies for investors. We are a globally integrated firm with offices and senior investment professionals in North America, South America, Europe, Asia and Australia, which gives us direct knowledge of and expertise in markets around the world.

Investment Approach

Financial markets tend to move from euphoria to depression — sometimes quickly — and this affects the pricing of individual securities, sectors of the fixed income market, and interest rates. As a fundamental value investor, we strive to find opportunities in this mispricing by doing research and analysis of a security or sector. We want to buy when prices are below our assessment of fair value and when prices are likely to increase over time.

As we are an active manager, we work together globally to employ a top-down view of markets, economies and central banks and develop our macro and credit investment outlook. This will drive decisions on duration (a measure of the sensitivity of the price of a bond or other debt instrument to interest rate changes), yield curve, country, currency, sector, and subsector positioning. We also use our deep bottom-up research and analysis to make individual security selections, supported by rigorous risk management.

Four core beliefs describe our investment philosophy and drive how we make investment decisions:

  • Markets often misprice securities: Prices can deviate from fundamental fair value, but over time, they typically adjust to reflect inflation, credit quality fundamentals and liquidity conditions. Consistently investing in undervalued securities may deliver attractive investment returns.
  • We strive to identify mispricing: We try to identify and capitalize on markets and securities that are priced below their fundamental fair value. We do this through deep analysis to compare prices to the fundamental fair values estimated by our macroeconomic and credit research teams around the world.
  • Our portfolios emphasize our highest convictions: The greater the difference between our view of fair value and a market price, the bigger the potential value opportunity. The greater the degree of confidence in our view of fundamentals, the greater the emphasis of the strategies in our portfolios.
  • We seek diversified sources of investment returns: We aim to meet or exceed the performance objectives of our investors, within their risk tolerance. We seek to diversify investments and add value across interest rate duration, yield curve, sector allocation, security selection, countries and currencies. We deploy multiple diversified strategies that benefit in different environments so no one strategy dominates performance, which can dampen volatility. Continue Reading…

2021 returns for retirement ETF portfolios

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

It is a common question from readers. How do I create reliable retirement income with ETFs? It is a simple answer if we consider the last 40 years. A simple mix of Canadian, U.S. and International stocks has provided the necessary growth component. Core bond funds have offered the required risk management. Stocks for offense. Bonds for defense. A typical balanced or balanced growth couch potato portfolio did the trick. Today, we’ll look at the 2021 returns for retirement ETF portfolios.

In early 2019 I posted the simple 7-ETF portfolio for retirees. Please have a read of that post for background on the ETFs, risk, and the retirement scenario.

Seek retirement and investment advice

You can self-direct your investments if you have the knowledge and you understand your risk tolerance level. But I’d suggest that you contact an experienced fee-for-service financial planner who has expertise in the retirement arena. With a fee-for-service advisor you will pay as you go. You can pay by the hour, or perhaps pay a flat fee for the evaluation and plan. You might then set off on your own to build the portfolio with all the right pieces in the right place.

I’d also suggest that you read my review of Retirement Income For Life: Spending More Without Saving More. That’s a wonderful staple read for retirees and retirement planners. The author, Frederick Vettese, was the chief actuary at Morneau Shepell.

Your retirement ETF will be one piece of the retirement funding plan. The following represents a model for consideration and evaluation.

The 7-ETF Portfolio for Canadian retirees

You may choose to go more aggressive or more conservative in your approach. And keep in mind the above is not advice, but ideas for consideration. That said, I do see it as a sensible conservative mix. You may decide to add more inflation protection by way of energy stocks or commodities.

And let’s cut to the retirement funding chase. Here’s the returns for the 7-ETF portfolio for retirees for 2021. Charts and tables are courtesy of portfoliovisualizer.com

Yup, that simple mix delivered a return of 13.8% in 2021. That is a very good return for a conservative mix that has a 45% bond allocation.

For risk and return benchmarks have a look at …

The ultimate asset allocation ETFs page.

Here’s the returns of the individual assets for 2021.

With inflation fears dominating the back half of 2021 the inflation-sensitive assets of the Canadian High Dividend VDY and REITs performed very well. Keep in mind that two of the assets are in U.S. Dollars. You can substitute and use Canadian Dollar holdings. See the original 7-ETF post.

At Questrade you will hold dual currency (U.S. and Canadian dollar) accounts. You can buy ETFs for free.

Vanguard VRIF ETF for retirement

Recently I also looked at Vanguard’s VRIF Retirement ETF. That retirement funding ETF delivered a very nice income increase for 2022.

Here’s the VRIF distribution scorecard

Distributions per share.

  • 2020 0.83
  • 2021 0.87 (4.5% increase)
  • 2022 0.94 (7.6% increase)

The portfolio income

Portfolio visualizer offers that the starting yield (2021) in the 7-ETF portfolio would be in the area of 2.8%. You will sell assets to create additional income.

Creating that retirement income

You may choose to ‘fund as you go’. While you will have portfolio income (from bonds and dividends) that is accumulating, you will likely have to sell assets to create the desired portfolio income. The basic idea of asset harvesting would be to keep the portfolio close to the original asset weighting. You do not have to be exact in this regard.

You may choose to sell assets monthly, quarterly, or you may even move the assets to a cash (ETF) at the beginning of the year to ensure that you have your retirement income for the year safely stored in cash. Of course, consider fees and taxes.

Retirement spend rate

Here’s an example of a 4.8% spend rate. That is to say, each year you would spend 4.8% of the initial total portfolio value. Each $100,000 would create $4,800 of income, before taxes, each year. A $1,000,000 portfolio would deliver $48,000 of annual income, before taxes.

The chart runs from January of 2015 to end of 2021. This is for demonstration purposes. I have not adjusted for inflation.

So the good news for this simple mix of ETFs is that you would have enjoyed a decent spend rate and the portfolio value would have increased by 17.4%. Of course it is favorable to have a buffer to weather the storms such as the great financial crisis that began in 2008, or the dot-com crash of the early 2000’s. An increasing portfolio value will offer that much-welcomed cushion.

The bonds and cash help in that regard as well – to protect against severe market corrections.

Sequence of returns risk

We need to manage the sequence of returns risk in retirement.

And keep in mind that we enter the retirement risk zone about 10 years previous to our retirement start date. We need to de-risk and prepare the portfolio well in advance.

And here is an interesting approach. You can remove sequence of returns risk (entirely) by going very conservative as you begin retirement. You would then increase your stock allocation (and growth potential) in retirement. That is called a retirement equity glidepath.

A portfolio spend rate example

Here’s an example with the 4.8% spend rate from the year 2000. That is a very unfortunate start date as 2000 is the first year of the dot-com crash. U.S. markets were down three years in a row. Canadian markets suffered as well.

We see that the Balanced Portfolio is still chugging along in 2021, while the all-equity global portfolio went to zero in 2017. We have to protect against an unfortunate start date.

Keep in mind that there are many periods when the most optimal option is an all-equity or equity-heavy portfolio that would provide greater retirement income. But with an aggressive portfolio you run the risk of retiring and running head first into a severe market correction. You don’t want to gamble and hope that you get lucky. Most retirement specialists would recommend a Balanced or Balanced Growth model. Continue Reading…

8 Administrative tasks to sort out before Moving Abroad

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Image by Pexels

By John Moran

For the Financial Independence Hub

Moving abroad as an expat is a huge decision and it can be a little daunting. With so many big decisions ahead of you, it can feel tough to stay on top of everything that there is to do.

Here’s a list that you can use as a guideline for some of the most important things you’ll need to plan before you move abroad.

Insurance

Do some research and find out what your options are in terms of travel insurance, as well as health and medical insurance once you’ve moved over. In most cases, IMG Global is a good option for any expatriates since its available to all nationalities and offers worldwide service.

You’ll also need to consider travel insurance for your luggage and any other travel-related emergencies, as well as home or contents insurance once you arrive, life insurance and other necessary policies.

Bank Accounts

Opening an international bank account is a good start, especially if you’re planning on moving money, but there are also specifically designed expat bank accounts.

Do some research and spend time asking questions to those in the know. Fortunately, this isn’t a make-or-break decision, since you can always change over to a different bank at a later stage. However, to avoid unnecessary spending, try to make the right decision early on.

You’ll also want to make sure that this is sorted out before you make the move, which should be manageable since creating a bank account online has become easier than ever.

Transport

 Once you’ve landed in your new home, you’re going to need a way of getting around. Consider the area you’re in, how far you’ll be living from your place of work, what the public transport is like, etc.

If you’re planning on using public transport to get around, make sure to factor that into your budget and your search for a new home. If you’re looking to purchase a vehicle, start doing research on what’s available, what fits into your budget and what documents you’d need to do so as a foreigner.

Accommodation

Where you live is not only important for practical reasons, but this will play a major role in how you and your family adjust and settle down. Moving abroad is a big life change, and feeling unsettled or uncomfortable in your own house is a sure-fire way to feel the effects of homesickness as soon as you arrive.

Choosing a home that everyone in your family likes and feels comfortable in is important for this reason. You’ll also want to make sure that it’s in a good location and fits easily into your budget.

Moving Companies

When you move abroad, you have the option to sell all your possessions and use the money you get to start fresh, from scratch in your new home. Many people find this to be the easiest option and even find great joy in being able to create their dream home from the ground up.

However, many people have established entire homes and don’t want to give up what they own, due to sentimental reasons, financial reasons, or various other factors. Continue Reading…

Now is a good time to decide whether your portfolio is too risky

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By Michael J. Wiener

Special to the Financial Independence Hub

Back in March 2020 after stock markets had crashed, I expressed my disgust with the chorus of voices saying that this was the time to re-evaluate your risk tolerance.  That advice was essentially telling people to sell stocks while they were low, which makes little sense.  After the crash it was too late to re-evaluate your risk tolerance.

I suggested “we should record videos of ourselves saying how we feel after stocks crashed” and watch this video after the stock market recovers.  Well, the stock market has long since recovered.  Now is a great time to recall how you felt back in March 2020.  Did you have any sleepless nights?

Now that markets are near record levels, it’s time to consider whether permanently lowering your allocation to stocks would be best for you in anticipation of future stock market crashes.  Unfortunately, this isn’t how people tend to think.  It’s while stock prices are low that they want to end the pain and sell, and it’s while stock prices are high that they feel most comfortable.

Michael J. Wiener runs the web site Michael James on Money, where he looks for the right answers to personal finance and investing questions. He’s retired from work as a “math guy in high tech” and has been running his website since 2007.  He’s a former mutual fund investor, former stock picker, now index investor. This blog originally appeared on his site on Jan. 19, 2022 and is republished on the Hub with his permission.  

The True Liquidity of an ETF

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By Danielle Neziol, Vice President, BMO ETFs

(Sponsor Content)

One of the most common questions we get from investors is, “If a certain ETF doesn’t trade often, or it has a low ETF trading volume, will I be able to sell the ETF when I need to?” The quick answer is yes you can, and I’ll explain why.

This liquidity concern makes sense when we think about trading stocks. A stock which is thinly traded will be much less liquid than a large cap, blue chip stock. Therefore, the less liquid stock could be difficult to sell if there is not demand for it.

However, ETFs work differently than stocks in this way. The true liquidity of an ETF has three layers. These three layers are something we can’t easily see. In fact, most volume data available to investors online is only showing the tip of the liquidity iceberg.

1.) Natural Liquidity: Buyer/Seller

The first layer that most investors are familiar with is between the natural buyer and the natural seller, who get matched on the exchange. Think of this like going to Facebook Marketplace or Kijjiji to sell your car. These marketplaces will match a buyer with a seller. Both will agree on a predetermined price and the transaction is made. This layer of liquidity is mostly present among the largest and most liquid ETFs in the market (usually those with a billion or more in assets).

2.) Market Makers: Buyer/Market Maker/Seller

The second layer of liquidity uses market makers. Marker makers are dealers or brokers who hold an inventory of ETFs and will either buy ETFs or sell ETFs depending on supply and demand. A market maker is trade agnostic which means they are always willing to buy and sell; they make their money in trading volumes (earning commissions on each trade). This trading strategy would be like going to a car dealership to buy or sell a car. The dealer acts as a market maker, who will buy your car and sell to someone else, and they usually earn a spread on this transaction. Market makers are often who you will “meet” on the other end of your ETF trades and they play a huge part in a healthy and liquid ETF ecosystem!

3.) Creations & Redemptions: ETF Provider/Buyer or Seller/ETF Provider

The third layer of liquidity is called the Creation and Redemption Process. ETFs have this ability because they are open-ended funds. The process occurs when there is an imbalance in supply or demand for a specific ETF. If demand is high, there will be more creations. This means the ETF provider (for example, BMO ETFs) will create more shares of an ETF to match demand. This is simply done by purchasing the stocks that the ETF holds, turning it into an ETF, and then passing it on to the buyer. If supply is high and demand is low, there will be more redemptions. This means that the seller will send their ETF back to the ETF provider, the provider will disassemble it and sell the underlying stocks in the market, sending cash back to the ETF seller. Think of this trading strategy like ordering a car directly from the auto manufacturer; they will go and buy all the parts for the vehicle, build it, and deliver you the car. A redemption would be the opposite where a car would be sold back to the auto plant and disassembled and sold off for parts (this is of course not how things are done in the auto world but a good example to visualize the process!). This last layer of liquidity is important to understand because it demonstrates that an ETF is as liquid as its underlying holdings of stocks or bonds.

Because of these three layers of liquidity, an ETF can sometimes be more liquid than its underlying holdings. We typically see this in less liquid asset classes such as preferred shares and fixed income, where the ETF will be easier to trade than the underlying holdings. Therefore, the increased liquidity of an ETF is just another of the many benefits of using ETFs in your portfolio!

To watch our webinar on ETF Liquidity and Market Makers please visit www.etfmarketinsights.com to register or catch the replay on our YouTube channel www.youtube.com/etfmarketinsights ”

Danielle Neziol has been part of the BMO ETF Team for over five years working in ETF product development, strategy, and most recently in ETF education for direct investors. In the past she has been engaged with with the exchanges, capital markets desks, index providers and portfolio managers to bring ETFs to market and today she is focused mostly on applying her expertise in the ETF business to support and educate investors.