All posts by Financial Independence Hub

What is Quality Investing?

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As consumers we prefer higher quality things, and with stocks it may be no different. Learn why Quality may be important to investors.

Image courtesy BMO ETFs/Getty Images

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

(Sponsor Blog)

Quality is a very familiar concept in society. As we know, an item can’t be judged on price alone. If one shirt costs $10, versus another that costs $30, does this mean the cheaper shirt is better based on price alone?  Most likely not, as what matters is the quality of the shirts, and how it will perform in the future!

In investing, Quality is no different. It starts with a base assumption that all stocks aren’t created equal, some are going to be higher quality than others, and as a result may enjoy better risk-adjusted returns. As consumers we prefer higher-quality things, and with stocks it is no different. Indeed, higher-quality stocks have historically shown benefits to investors, outperforming over time.[1]

What makes a company a quality company?

There are different approaches to identifying Quality, with associated pros and cons. Warren Buffett prefers to look for companies with “competitive moats” and companies that exhibit earnings power in excess of its peers. If a business model is easily replicated, one would expect copycats to soon enter, and drive down profitability.  Companies with competitive moats have advantages that competitors find difficult to touch, and would be considered higher quality. Many fundamental investors have a Quality screen in place and will also often look for high-quality management teams, which are assessed by in-person meetings, and other heuristics.

Quality can also be defined by assessing financial metrics in a consistent and disciplined approach. This is an approach BMO GAM has taken for the ETFs listed below, using the MSCI index which BMO’s Quality ETFs are based. Three metrics are assessed: ROE (Return on Equity), Leverage (Debt to Equity), and Earnings stability (the consistency of earnings through time). Having discipline, and a regular rebalancing schedule to assess and make changes, is of tremendous benefit in investing, to mitigate the role of emotion and behavioural biases, and to ensure the portfolio remains on plan, and true to its intended exposure.

ROE – This is a measure of profitability. Companies with higher profitability are winners in their respective industries. In investing, while things do evolve over time, winners tend to remain winners*1. Higher profitability is a good signal a company has a high-Quality business model.

Low Leverage – High Quality companies tend to be cash rich, from driving solid and consistent business results. Apple is a great example, as it is currently sitting on over US$60 billion of cash and short-term investments2. In short, Quality companies often have less need for debt, so BMO GAM screens for companies with less debt overall.

Earnings Stability – Companies with strong competitive advantages tend to have more consistent earnings streams, as competitors find it difficult to take a “bite out of their lunch.” Quality companies tend to show their merits in earnings consistency through time.

When does Quality tend to perform well, and when may it lag?

Quality companies tend to have a risk level at or slightly below broad markets, and can participate in growth, while maintaining a measure of defensiveness should volatility in markets increase.  Investing in higher-profitability stocks tends to give the quality exposure a growth flavour, while in negative equity markets quality stocks will often be preferred due to their strong overall balance sheet strength, with less debt and more consistent earnings. As well, higher interest rate environments tend not to be as much a concern for quality companies, as their debt levels are lower and they are less exposed to higher interest rate impacts.3

Performance wise, like all factors, Quality is best evaluated versus broad market performance through the entire market cycle, or market cycles. However, as a generalization, Quality stocks tend to do well in growth markets. In very strong bull markets Quality stocks tend to participate well, but higher risk/lower quality stocks may outperform when investors are the most exuberant and take on more risk.  In backdrops with higher market volatility, Quality tends to outperform, as company fundamentals and balance sheet strength matter. These are general historical performance trends, and performance in specific market scenarios may vary.

The chart below illustrates factor performance over the past 10 years which shows quality outperforming in many years.

Other considerations

Implementing a quality exposure in your portfolio leads to sector differences and security differences versus the broad index. For example, in the U.S., Quality tends to overweight Technology companies, as many of these companies fit the bill of high profitability/low debt/consistent earnings, and underweight other sectors such as Consumer Discretionary, where the metrics are not as strong. Continue Reading…

Real Estate Investments for Findependence

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Commercial Real Estate: Image via Pexels: Brett Sayles

By Devin Partida

Special to Financial Independence Hub

Real estate is a powerful investment tool for anyone looking to build wealth and achieve Findependence [Financial Independence], especially in the U.S. and Canada. It offers the potential for passive income, long-term growth and significant tax advantages, making it an attractive option for many investors.

It is crucial to understand the different types of real estate investments — such as residential, commercial and short-term rentals — and how they align with market trends in North America to make the most of this opportunity. Each type comes with risks and rewards, but real estate can be fundamental to a diversified and profitable investment portfolio when approached strategically.

The Role of Real Estate in Diversified Portfolios

Real estate provides a sense of stability that many investors find appealing, especially when compared to the volatility of the stock market and the impact of inflation in the U.S. and Canadian markets. One-third of Americans view real estate as the best long-term investment, even above stocks, gold, savings accounts or bonds.

Balancing properties with traditional investments like stocks and bonds can enhance financial stability and create a more resilient portfolio. However, understanding regional market trends is essential — particularly in high-demand areas like New York, Los Angeles or Toronto — where property values increase steadily. Being informed about these markets allows investors to make practical decisions that support their long-term goals.

Types of Real Estate Investments

Several investment options are available when building wealth through real estate. Here are different types to help investors choose the right path:

Residential Properties

Residential spaces — including single-family homes, duplexes and condos — are popular investment options for those aiming to generate rental income. Investors can also take advantage of property appreciation through this method, especially in fast-growing areas like the suburbs of Toronto, Vancouver or Austin. While the potential for returns is strong, they must consider risks like fluctuating home prices, tenant turnover and maintenance expenses.

One factor to consider is reviewing any restrictive contracts — particularly in spaces with homeowners’ or condominium associations — because these can limit how the space is used. For example, some groups have strict rules about short-term rentals, which can affect an investor’s ability to maximize returns.

Commercial Properties

Commercial properties generally provide investors with the opportunity for longer-term leases and higher rental income than their residential counterparts. Additionally, they can take advantage of tax breaks and deductions — such as depreciating the property over 39 years — which can reduce taxable income. These factors make buying and improving commercial spaces attractive for investors looking to maximize their returns.

However, these investments come with risks, including economic downturns that may affect tenants and the added complexities of managing larger spaces. For those willing to navigate these challenges, commercial real estate can be rewarding to a diversified investment strategy.

Real Estate Investment Trusts (REITs)

REITs provide an accessible way to invest in large-scale commercial properties without needing direct ownership. They’re great options for those seeking regular dividends and diversified exposure.

While REITs offer attractive returns, investors have very little control over individual properties. A recent example of market impact is the decline in the market cap of Canadian REITs, which fell from nearly $59 billion in 2021 to just $38.2 billion in 2023. Despite these risks, they remain popular for those looking to enter commercial real estate quickly.

Expert Tips for Maximizing Returns

Managing a property investment requires careful planning and strategy to maximize returns. Here are tips to help investors stay ahead and ensure long-term success: Continue Reading…

Five ways that Financial Marketing can mislead investors

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Public domain image provided by Justwealth

By Robin Powell, The Evidence-Based Investor*  

Special to Financial Independence Hub

* Republished from the Just Word Blog from Robin Powell, the U.K.-based editor of The Evidence-Based investor and consultant to investors, planners & advisors  

Much as we like to think of ourselves as savvy consumers, we are actually very susceptible to PR and advertising. This is particularly true when it comes to investing.

Big banks like TD, RBC and Scotiabank, asset managers like Sun Life and Manulife, and online trading and investing platforms like Questrade and Wealthsimple, spend vast sums promoting their products and services. The more they spend, the more customers they attract.

Why, then, are people so receptive to financial marketing and so easily persuaded by it? In most cases it’s a lack of understanding. The financial markets are complex, and we’re bombarded with suggestions as to how to invest our money. In a world saturated with information, consumers rely on simple marketing messages to help them make decisions. They also derive comfort and security from large financial brands they’re already familiar with.

Big does not mean Best

The problem for investors is that the firms whose products are most often featured in the media are usually not the best ones to buy. The brands you’re most likely to see sponsoring hockey teams or film festivals, for example, or plastered across billboards in airports or train stations, are often just the sorts of companies you should avoid giving your business to. Why? Because the interests of consumers and big financial brands are often misaligned.

Financial firms are very clever at making it look as though their primary motivation is to help the likes of you and me to achieve better outcomes. But the bottom line is that they’re businesses, and their number one priority is to generate profits. To put it bluntly, these companies want our money. The more money we invest with them, and the more trading we do, the bigger the profits they make.

Financial education is extremely valuable. Educated investors almost invariably enjoy better outcomes. The danger, though, is that, all too often, we think we’re being educated when in fact we’re being sold to.

How Big Brands mislead us

There are all sorts of ways in which big financial brands mislead us. Here are five main ones.

1.) Emotional Appeal

Ideally, investors would act at all times in a calm and rational manner. We would only make decisions after carefully considering the available information and weighing up the options. But human beings are emotional animals, and financial marketers understand this better than anyone. This is why they deliberately appeal to emotions like fear and greed, and the fear of missing out, or FOMO, which, in a sense, is a combination of the two.

2.) Cognitive Biases

As well as their emotions, investors have to contend with a range of cognitive, or behavioural, biases that all of us are prone to. These include confirmation bias (our tendency to seek out information that confirms our pre-existing beliefs), herd behaviour (our instinct to copy what those around us are doing) and recency bias (our tendency to attach more weight than we should to recent events). Financial marketers know just the right buttons to press to exploit these built-in biases.

3.) Expert Endorsements

In his book Influence: The Psychology of Persuasion, the American psychologist Robert Cialdini writes about the importance of what he calls social proof. When we feel uncertain, he explains, we tend to look to others for answers as to how we should think and act. Closely related to this is the principle of authority, or the idea that people follow the lead of credible experts. So, for example, if someone recommends a certain product or strategy in the media, we’re inclined to take notice, even though that person may be heavily biased or not an expert at all.

4.) Scarcity and Urgency

Another way in which financial marketing leads consumers astray is that it generates a false sense of urgency. So, for instance, we might read about a particular investment “opportunity” — perhaps a hot stock or fund — in the weekend newspapers and feel impelled to buy it first thing on Monday morning. This is a very foolish way to invest. Of course, that stock or fund may well rise in value, but its price could just as easily fall. Regardless, investors are much better off taking a long-term view. It is very rarely, if ever, the case that you need to make an investment decision straight away.

5.) Financial Jargon

The final reason why the industry spin machine causes more harm than good is that it often contains financial jargon. At best, jargon confuses investors and over-complicates the investment process; at worst, it can be used to cloud and deliberately mislead. It can exploit people’s lack of financial literacy and give a false impression of trustworthiness and expertise. But the principles underpinning sensible investing are really quite simple, and consumers should place their trust instead in firms that simplify investing and explain how it works in clear, concise language.

Who can be Trusted?

You may be wondering, “If I can’t trust financial companies to tell me what’s best for me as an investor, who can I trust?” Continue Reading…

Navigating the RESP

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Image via Pexels: Ketut Subiyanto

By Megan Sutherland, BMO Private Wealth

Special to Financial Independence Hub

The days are getting shorter, nights a bit cooler and with September now upon us, back to school is on the minds of parents nation-wide.  Since 2007, the average cost of undergraduate tuition fees in Canada has increased 55% and, according to a 2023 poll, 81% of parents believe it’s their responsibility to help pay for post-secondary costs.  Conversations I’m having with clients, friends and family certainly corroborate these numbers, making it timely to talk about the Registered Education Savings Plan (“RESP”).

For decades Canadians have been able to utilize the RESP, a program developed to incentivize savings with grant money (Canada Education Savings Grant, “CESG”), and preferential tax treatment.  Who doesn’t love free money!

Okay, so what’s the deal?

  • What is the maximum amount I can contribute per beneficiary?
    • A lifetime contribution limit of $50,000 per beneficiary.
  • How can I receive the maximum CESG?
    • Contribute up to $2,500 per year to receive 20% in CESG.
  • What if I’ve missed years of contributing?
    • You can catch up one additional year of CESG per year.
  • How much is the CESG grant?
    • Maximum of $7,200.
  • Is there an age limit on receiving CESG?
    • The CESG is available until the calendar year in which the beneficiary turns 17. However, there are specific contribution requirements for beneficiaries aged 16 or 17.
  • What is the tax treatment?
    • Contributions are not deductible but can be withdrawn tax-free.
    • Investment growth and CESG are taxed to the beneficiary when withdrawn for qualifying educational purposes.
  • Do you have to be the beneficiary’s parent to open one?
    • Any adult can open an RESP on behalf of a beneficiary – parents, guardians, grandparents, other relatives or friends – however, contribution across all plans must not exceed the maximum per beneficiary.

If you hope to have an aspiring doctor on your hands, consider harnessing the power of compounding to amp up your savings and open a plan as soon as possible!

Compare:

  1. Contribute a total of $36,000 over 14.4 years and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$80,000
  1. Contribute a $14,000 lump-sum in year one, then $36,000 over 14.4 years, for a total of $50,000, and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$115,000

 

Net benefit from additional $14,000 contribution in year one: approximately $20,000.

Saving to Attract CESG Only vs. Saving to Maximize Growth and Attract CESG 

Just like everything in life, make sure to read the fine print.  Keep in mind the following tips and traps:

  1. Open a Family Plan. Growth can be shared by all beneficiaries and the CESG money may be used by any beneficiary to a maximum of $7,200.
  2. Be prepared if the funds aren’t depleted by school costs. Contributions can be withdrawn by the subscriber without penalty. However, remaining CESG is clawed back. Growth in the RESP can be contributed to your RRSP (up to $50,000 if you have available contribution room), otherwise it is taxed at your marginal tax rate upon withdrawal by the subscriber, and there is an additional penalty tax of 20%.
  3. Choose investments wisely. Taking too much risk could result in losses that may create hard feelings or regret. Make sure to plan for withdrawals, potentially transitioning assets to cash, laddered bonds or GICs to ensure funds are available to pay for education costs.
  4. Put it in your estate plan. If you are married, consider opening the RESP in joint name. If you aren’t married or open the RESP in your name only, name a successor subscriber in your Will.
  5. U.S. citizens beware! The U.S. does not recognize the RESP as an exempt account type. Therefore, any earned income in the account is reportable on your U.S. tax return and can result in double taxation. Continue Reading…

How a Fed Rate Cut could bolster Canada’s largest Covered Call Bond ETFs

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By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog) 

In late August, Federal Reserve chairman Jerome Powell caused a stir among the investing community when he provided the strongest signal yet that the U.S. central bank is gearing up for interest rate cuts starting in September.

At the time of this writing, we are just one day away from that crucial decision. So what will this mean for  the yield curve, the direction of the Fed, how the change in policy is affecting markets, and the implications for Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) in the final third of 2024. Let’s explore!

How does the yield curve function?

The yield curve, which is a representation of different bond yields across various maturities, can take varying shapes and curvatures. However, the most talked about is the shape of the yield curve in particularly one that’s either normal or inverted. A normal yield curve will have short-term bond yields that are lower than long-term bond yields. This encapsulates the time and risk premium associated with investing further into the future. However, in a period wherein central banks are seeking to slow economic growth/inflation, near-term rates will be raised in a manner that leads to higher short-term yields versus long-term yields. This is called an inverted yield curve, a much rarer occurrence.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

In practice, the difference between the 10-year yield versus the 2-year yield of government bonds is the go-to measure or gauge. The yield curve has been inverted for some time and became dis-inverted (Normal) in August 2024. That is a sign that shorter-term rates are coming down. This likely precedes meaningful interest rate cuts.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

What drives the Federal Reserve?

The Federal Reserve (Fed) has a dual mandate: to achieve maximum employment, and to keep prices stable. Despite taking on one of its most aggressive interest rate hiking cycles in history to regain price stability, inflation has failed to return to the target of 2%, albeit subsiding in recent months. The lower levels of inflation come with slowing economic data and weaker-than-expected jobs data, which belies the Fed’s goal of achieving maximum employment. So, what’s next?

With inflation coming down, the Fed members seem ready to cut short-term rates to alleviate the negative impact of higher interest rates on the economy. But before we get excited, it’s worth noting that the Central bank tools traditionally take time to filter through to the economy. Interest rate cuts may not have an immediate impact on the economy and broader markets but will filter over time.

Ultimately, this shift in policy should return the inverted yield curve to a normal yield curve.

Rate expectations: What is already priced in?

The next Fed rate announcement meeting is on September 18, and the market is already pricing in the first rate cut. The size of the cut is still up for debate, but it is likely to be 25 basis points, with a smaller chance that it could be larger at 50 basis points.

Looking further out to the Fed’s remaining two meetings for the rest of the year, the market expects the Fed to cut rates again. That would represent a total of 100 basis points of cuts expected by the end of 2024. Moreover, the market has priced in 10 rate cuts, or 250 basis points, of total interest rate cuts. These are priced in and expected to occur throughout 2025 with the ultimate destination of 3.00% on the overnight rate.

However, interest rates further out the yield curve have also recently moved down quite a bit. This is what’s known in bond-speak as a “bull steepening” — as the curve normalizes yields across maturities shift lower too, and thus bond prices move higher. Indeed, the narrative continues to shift toward the imminent start of this rate cutting cycle.

The 10-year yield was 3.65% at the time of writing. That is already down significantly – 137 basis points – from the peak of interest rates in October 2023.

The implications for the yield curve

What will happen to the yield curve going forward? Portfolio Manager Mike Dragosits, CFA, expects the yield curve to normalize due to several existing factors. The tightening cycle is ending, and the Fed is poised to embark on a rate-cutting cycle. So, this would mean that short-term bond yields may fall faster and stay relatively lower than long-term bond yields. Continue Reading…