All posts by Jonathan Chevreau

MoneySense Retired Money: CDRs reduce currency risk of US stocks for Canadian investors

Posted By |
https://www.neo.inc/

My latest MoneySense Retired Money column looks at the newish CDRs, or Canadian Depositary Receipts. You can find the full column by clicking on the highlighted text: CDRs versus U.S. Blue-chip stocks: which makes more sense for Canadian investors?

CDRs resemble the much more established American Depositary Receipts (ADRs), which I’d wager most seasoned investors have used. See also this article on CDRs republished on the Hub early in 2022: Should you invest in CDRs? 

ADRs were launched by J.P. Morgan in 1927 for the British retailer Selfridges and are a way to gain easy access to global stocks in US dollars trading on US stock exchanges. According to Seeking Alpha, among the ten most actively traded ADRs are China’s Baidu [Bidu/Nasdaq], the UK’s BP [BP/NYSE], Brazil’s Vale [Vale/NYSE], and Switzerland’s Novartis. Here’s Wikipedia’s entry on ADRs.

Dividends paid by ADRs are in US dollars. Canadians are of course free to buy ADRs just as they buy US stocks or US ETFs trading on American stock exchanges. But they will have to convert their C$ to US$ to do so, and ultimately if they plan to retire here, they will have to pay again to repatriate that money.

By contrast, CDRs give Canadian investors a way to buy popular US stocks (particularly the FAANG stocks) in Canadian dollars and trading on the Canadian NEO exchange. As you can see in the above image, there are also such popular stocks as Pfizer, Berkshire Hathaway, IBM and MasterCard. You can find more information at CIBC, which developed CDRs. As you might expect, CIBC puts a positive spin on CDRs, saying they provide the “same stocks, lower risks,” with a “built-in currency hedge,” while also offering “fractional ownership, easier diversification.”

They even went so far as to trademark the slogan “Own the company, not the currency.” A video found here says that while Canadian stocks only account for 3.1% of the world’s stock market capitalization, most Canadians have 59% of their investments in Canadian stocks. To the extent foreign [and especially American] stocks have generated stronger returns, arguably Canadians are missing out. It suggests that one reason for this is Foreign Exchange.

CDRs may be of particular advantage to younger investors with limited wealth, since they are a way of accessing high-priced stocks that may have prohibitive minimum investments. For example, Amazon (AMZN) currently costs a whopping US $3,200 for a single share. Compare that to the CDR version, AMZN.NE, which costs just C$20 a share. Generally, the CDR version has the same ticker as the underlying US stock, so be careful when you are buying to specify which version you wish to acquire.

If the US company pays a dividend, then so will the CDR. The two main advantages then are that you don’t get dinged on currency conversions between the US and Canadian dollar, and those with modest amounts to invest have the equivalent of buying fractional shares in some of their favorite stocks. Since most retirees will spend their golden years in Canada, you can diversify beyond Canada’s resource and financial-concentrated market, but still have your assets and dividends in Canadian dollars.

CDRs still count as Foreign Content

When I first heard about CDRs, I had a faint hope that perhaps they would not be considered foreign content by the Canada Revenue Agency. However, that is not the case. So investors with large foreign taxable portfolios will be disappointed to learn that even though they trade in Toronto, CDRs are still considered foreign content, so must be included in the CRA’s requirement that portfolios with more than C$100,000 (book value) must complete its T1135 Foreign Income Verification Statement.  The MoneySense column goes into this aspect in more depth.

Life imitates art big time with Zelenksyy’s Servant of the People re-airing on Netflix

Posted By |
The accidental politician: ex-comedian and now Ukraine president Vlodomyr Zelenskyy.

Netflix is again showing the popular Ukraine TV show,  Servant of the People, which of course stars Ukraine president Volodmyr Zelenskyy.

Here’s Wikipedia’s summary of the show, which it categorizes as political satire. [I’m using its spelling of his surname, which seems to vary by media outlet]

Airing first in the Ukraine in 2015, Netflix originally ran the show’s four seasons between 2017 and 2021 [with English subtitles]. Evidently interest has been rekindled by Zelenskyy’s Churchillian fight against Russia’s mad dictator, Vladimir Putin.

Last week, Netflix announced Season 1 of the series  was back. There are 23 episodes in the opening season, most of them about 25 minutes, although the pilot episode is twice that length.

I had missed it when it first came out but was keen to watch in light of the profile the war has generated for Zelenskyy. I’d be surprised if millions of Netflix viewers don’t think similarly and propel the show to the top of its rankings.

Based on the first nine episodes I’ve seen, it’s fascinating to see a modern democracy and actual shots of Kiev and other parts of a beautiful Ukraine as it was a few years before the February 2022 invasion: the highways and late-model cars, young people embracing social media, smart phones, Skype and Zoom calls and even crowdfunding for the teacher’s political campaign: talk about life imitating art! At one point, after a kiss, one character declares “I have to tweet this!” There are plenty of shots of TV news standup reports so familiar to North American viewers of CNN or Fox 24/7 cable news.

All of which makes a stark contrast with Russia’s current post-invasion Iron Curtain on independent media and social media, where the only sources of information are state-sanctioned television believed only by older Russians who aren’t technology literate. See a recent New York Times piece on the thousands of tech-savvy young Russians fleeing the country for Armenia and other parts of western Europe, where they gather in cafes with their Apple laptops and Smartphones.

“Shockingly prescient”

With the benefit of hindsight, it’s heart-wrenching to see so much foreshadowing of the calamity to come in the show’s occasional references to Russia and even to Putin himself in the opening episodes. At one point, the TV president says “Putin has been deposed,” quickly adding “I was kidding.”

Then, in episode 7, one character portrays the Zelenskyy character’s options as “to flee or to stay.”

Little wonder that in its review of the series last week, the Daily Beast describes it as “shockingly prescient.”

For those who are new to the series, here’s one website’s brief plot description:

“After a Ukrainian high school teacher’s tirade against government corruption goes viral, he soon finds himself sitting the president’s seat.”

Zelenskyy played a history teacher named Vasily Petrovych Goloborodko.  But life began to imitate art in earnest early in 2018, when a political party named after the television series was registered with the Ministry of Justice. In real life, Zelenskyy was elected President of Ukraine in April 2019, with more than 70 per cent of the second-round vote. Continue Reading…

Ukraine invasion underlines investors’ need for super diversification

Posted By |

It’s scary times for everyone, investors included. As this site focuses on Financial Independence, I’ll try in this blog to direct readers to some useful sources of financial advice.

We’ll start with MoneySense, since in my role as Investing Editor at Large, I’m on top of much of the investing content there.

First, I’d point to Allan Small’s article that appeared over the weekend: The Meaning of market swings and why you should care. Allan recaps current trends in rising inflation and rising interest rates, noting that geopolitical uncertainties can create buying opportunities on certain stocks:

“The key is to make sure your portfolio is diversified. It’s the best — and cheapest — strategy to protect your portfolio in any environment. Balance it with different sectors of the economy.”

Second, Dale Robert’s weekly market wrap for MoneySense always has plenty of good insights into up-to-the-minute market action. His February 27th instalment of Making Sense of the Markets is particularly instructive. Hub readers will be familiar with Dale’s own site, Cutthecrapinvesting, as we regularly republish Dale’s blogs here on the Hub (with his kind permission, of course!).

Here’s Dale’s recent blog on the Ukraine situation. Here’s an excerpt:

“Even a few weeks ago it was easy to predict what would help investors make their portfolios more battle-hardened. Gold and energy certainly rose to the unfortunate occasion.”

Ever since Covid hit, Dale has been furnishing sound investment ideas, often ahead of the rest of the financial blogosphere. For example, he was one of the earliest to sound the alarm that Covid would be a serious problem for investors. He was also early in recommending energy plays like Eric Nuttall’s Nine Point Energy Fund (NNRG) and inflation-fighting recommendations like the Purpose Real Assets ETF (PRA.) That’s one reason why we included Dale as a panelist in MoneySense’s yearly ETF All-Stars feature: the 2022 edition will be out this spring, albeit under the direction of a new writer, Bryan Borzykowski.

No one ever made a dime panicking

How am I responding to the financial aspect of this crisis? Well, as Mad Money’s Jim Cramer often reminds readers in such times, “No one ever made a dime panicking.” Just yesterday, The Successful Investor publisher Patrick McKeough reminded Hub readers that short-term investment decisions all too often sabotage long term returns.

Patrick has been hugely consistent over the years with the following three-fold guidelines, which are as relevant during this Ukraine crisis as in they are in sunnier times:

1.) Invest mainly in well-established, dividend-paying companies;

2.) Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);

3.) Downplay or avoid stocks in the broker/media limelight.

In his Inner Circle Advice bulletin issued after Tuesday’s market rout, McKeough titled one section “Putin goes for broke” while urging investors to stay the course if they adhere to the three points above:”In the past third of a century, Russia has gone from dictatorship to fledgling democracy and back to dictatorship. If his Ukraine venture goes awry, it could be the end of the Putin era and the start of a new try at western-style government for Russia.

“Meanwhile, we advise sticking with your portfolio if your investments are in tune with our Successful Investor directives. Now, though, is a good time to re-emphasize that recent IPOs tend to be a poor investment choice, on average. But that’s especially so in a market situation like this one, in which volatility is likely to be above average for some time.”

Some other newsletters to which I subscribe recapped historical market action in advance and during prior outbreaks of war and invasions; generally they found that investors who “bought the invasion” eventually did well.

On the other hand, in an article in the Globe & Mail this Monday, veteran commentator Gordon Pape suggested it wouldn’t hurt to raise cash where you have significant capital gains: while they’re still gains. You can find the article, albeit paywalled, by clicking on this highlighted headline: Investors should take these steps to protect their portfolios from  the Russia-Ukraine conflict.  Pape also warned, as have many pundits, that if Russia does get away with its Ukraine invasion, it may embolden China to make a similar move on Taiwan.  Continue Reading…

Retired Money: Do Inflation-linked Bonds make sense in an era of rising interest rates?

Posted By |

My latest MoneySense Retired Money column, which has just been published, can be found by clicking on the highlighted headline here: Do inflation-linked bonds make sense in an era of rising interest rates?

The topic is one that until mid 2021 received relatively scant attention: Inflation-linked Bonds and/or ETFs that own them. In Canada, these are called Real Return Bonds (RRBs) while their equivalent in the United States are called Treasury Inflation Protected Securities (TIPS). There are ETFs trading both in Canada and the US that let users own baskets of these securities.

Of course, inflation didn’t seem to be a huge issue for investors until around the summer of 2021 and then the fall, when suddenly the headlines were full of ominous new levels of inflation not seen in years or decades.

These days, traditional non-inflation bonds, or “nominal” bonds famously pay very little in interest, and net returns net of high inflation can easily end up being negative. The idea with RRBs or TIPS is that If inflation ticks above certain levels, such bonds or ETFs holding them  tack on extra interest payments roughly commensurate with the rise in the official inflation rate.

Inflation plus Rising Interest Rates

But the column addresses the question of what if the longer-term bonds held in these funds inflict capital losses when interest rates spike at the same time? That’s the problem with some Canadian RRB ETFs that hold too much in long- or mid-term bonds, and most of them do. 2021 was not a good year for funds like the iShares Canadian Real Return Bond Index ETF (XRB) or the BMO Real Return Bond Index ETF (ZRR), which lost almost 5% in the first nine months of 2021, but ended the year slightly positive.

This is less of a problem if you hold RRBs directly: Real Return Bonds issued by Ottawa have long maturities, ranging from five years out to 30 and even 40 years out. I use to own some of these directly, listed as Government of Canada Real Return Bonds, maturing in December 2021 .When I tried to find a new series at RBC Direct Investing, none seemed to be available online. I discovered you can buy newer issues by calling the discount brokerage’s bond desk. The column describes one maturing in 2026 [which I ultimately purchased, although it is now slightly under water] and a second in 2031.

US TIPS ETFs hedged to Canadian dollar

But if you want to diversify through funds, minimize interest rate risk and get exposure to both RRBs and TIPs, there’s a lot more choice with US-traded TIPS ETFs like the Vanguard Short-term TIPS ETF [VTIP], which hold mostly short-term bond maturing in under five years. Continue Reading…

New Harvest Monthly Income ETF aims to beat inflation by combining 5 different “Best Ideas”

Posted By |

Canadian retirees and would-be retirees who feel starved of high monthly income and are pressed by surging inflation may find relief in a unique new “Best Ideas” fund-of-funds Income ETF that began trading on Feb. 16th.

Harvest Portfolios Group Inc. announced on Wednesday the completion of the initial offering of Class A Units of the Harvest Diversified Monthly Income ETF, which is now trading under the ticker symbol HDIF [TSX.]

In a press release, Harvest president and CEO Michael Kovacs said the new ETF targets a high initial annual yield of 8.5% by accessing “five proven Harvest Equity Income ETFs efficiently in one single ETF.”  In a backgrounder  on its website, Harvest noted the inflation-busting 8.5% compares to a 4.5% Canadian inflation rate that ended 2021, and to the TSX’s 2.6% annual yield and S&P500’s 1.5%.

As outlined in a prospectus filed Feb. 4th with all provincial securities regulatory authorities in all Canadian provinces and territories, the innovative new ETF brings together five different Harvest “Best Ideas” in generating income, and is designed to provide Canadian investors access to a core diversified monthly income solution.

The portfolio is comprised of more than 90 large global companies diversified across these 5 equally weighted sectors: Healthcare, Technology, Global Brands, Utilities, and US Banks. The five underlying ETFs are illustrated below: There is no additional management fee apart from the MERs of the underlying Harvest ETFs. Because it’s a new fund and because of the leverage component, there is not yet an estimate of what the final MER might be. But it should be  in the ballpark of some blend of the MERs of the underlying funds: Referring to the tickers below, here are the Management Fees and MERs of the component Harvest ETFs, as of June 30, 2021:

HHL 0.85%/0.99%

HTA 0.85%/0.99%

HBF 0.75%/0.96%

HUBL 0.75%/0.99%

HUTL 0.50%/0.79%

 

The net result is a collection of global stocks that are allocated in the following sectors (a comparable geographical breakout is not yet available):


In addition to high monthly cash distributions the fund provides the opportunity for capital appreciation by investing, on a levered basis, in a portfolio of ETFs that engage in covered call strategies.  Harvest says the maximum aggregate exposure of the ETF to cash borrowing will not generally exceed approximately 33% of the ETF’s net asset value.

For additional information, visit www.harvestportfolios.com