All posts by Jonathan Chevreau

Retired Money: Has Purpose uncorked the next Retirement income game changer?

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Purpose Investments: www.retirewithlongevity.com/

My latest MoneySense Retired Money column has just been published: you can find the full version by clicking on this highlighted text: Is the Longevity Pension Fund a cure for Retirement Income Worries? 

The topic is last Tuesday’s announcement by Purpose Investments of its new Longevity Pension Fund (LPF). In the column retired actuary Malcolm Hamilton describes LPF as “partly variable annuity, part tontine and part Mutual Fund.”

We described tontines in this MoneySense piece three years ago. Milevsky wasn’t available for comment but his colleague Alexandra Macqueen does offer her insights in the column.

The initial publicity splash as far as I know came early last week with this column from the Globe & Mail’s Rob Carrick, and fellow MoneySense columnist Dale Roberts in his Cutthecrapinvesting blog: Canadian retirees get a massive raise thanks to the Purpose Longevity Fund. Dale kindly granted permission for that to be republished soon after on the Hub. There Roberts described the LPF as a game changer, a moniker the Canadian personal finance blogger community last used to describe Vanguard’s Asset Allocation ETFs. Also at the G&M, Ian McGugan filed Money for life: The pros and cons of the Purpose Longevity Pension Fund, which may be restricted to Globe subscribers.

A mix of variable annuity, tontine, mutual fund and ETFs

So what exactly is this mysterious vehicle? While technically a mutual fund, the underlying investments are in a mix of Purpose ETFs, and the overall mix is not unlike some of the more aggressive Asset Allocation ETFs or indeed Vanguard’s subsequent VRIF: Vanguard Retirement Income Portfolio. The latter “targets” (but like Purpose, does not guarantee) a 4% annual return.

The asset mix is a fairly aggressive 47% stocks, 38% fixed income and 15% alternative investments that include gold and a real assets fund, according to the Purpose brochure. The geographic mix is 25% Canada, 60% United States, 9% international and 6% Emerging Markets.

There are two main classes of fund: an Accumulation Class for those under 65 who are  still saving for retirement; and a Decumulation class for those 65 and older. There is a tax-free rollover from Accumulation to Decumulation class.

There are four Decumulation cohorts in three-year spans for those born 1945 to 1947, 1948 to 1950, 1951 to 1953 and 1954 to 1956. Depending on the class of fund (A or F),  management fees are either 1.1% or 0.6%. [Advisors may receive trailer commissions.] There will also be a D series for self-directed investors.

Initial distribution rates for purchases made in 2021 range from 5.65% to 6.15% for the youngest cohort, rising to 6.4 to 6.5% for the second youngest, 6.4% to 6.9% for the second oldest, and 6.9% to 7.4% for the oldest cohort.

Note that in the MoneySense column, Malcolm Hamilton provides the following caution about how to interpret those seemingly tantalizing 6% (or so) returns: “The 6.15% target distribution should not be confused with a 6.15% rate of return … The targeted return is approximately 3.5% net of fees. Consequently approximately 50% of the distribution is expected to be return of capital. People should not imagine that they are earning 6.15%; a 3.5% net return is quite attractive in this environment. Of course, there is no guarantee that you will earn the 3.5%.”

Full details of the LPF can be found in the MoneySense column and at the Purpose website.

Invesco Canada launches two new Thematic Technology ETFs focused on Nasdaq

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After the huge success of Cathie Woods and the ARK ETFs in 2020, rival investment managers have been quick to characterize technology funds as “Innovation” or “Disruption” products.

Such was the case on Thursday,  as Invesco Canada Ltd.  announced the launch of two new exchange-traded funds (ETFs) offering Canadian investors exposure to several relevant technology themes. This follows the February announcement from Franklin Templeton of the Franklin Innovation Fund (FINO), which appeared on the Hub under the headline Invest in Innovation, a Driver of Wealth Creation.

Both the words “Innovative” and “Disruptive” appear in the top of the press release for the debut of the Invesco NASDAQ Next Gen 100 Index ETF (QQJR and QQJR.F) and the Invesco NASDAQ 100 Equal Weight Index ETF (QQEQ and QQEQ.F. As the release says, these funds “build on the innovative solutions offered by Invesco and Nasdaq, allowing clients several distinctive entry points to own the disruptive companies listed on The Nasdaq Stock Market.”

Invesco also announced the launch of CAD Units of Invesco NASDAQ 100 Index ETF (QQC).

The Invesco innovation suite was launched in October 2020 and is just now expanding to Canada, with  the following TSX-listed ETFs that started trading on the TSX today (Thursday, May 27). Of the three below, I find the equal weight Nasdaq 100 offering the most interesting:

  • Invesco NASDAQ Next Gen 100 Index ETF (QQJR and QQJR.F)
  • Invesco NASDAQ 100 Equal Weight Index ETF (QQEQ and QQEQ.F).
  • Invesco NASDAQ 100 Index ETF (QQC and QQC.F)
Pat Chiefalo

The innovation play was also highlighted in the following quote attributed to Pat Chiefalo, Head of Canada, Invesco ETFs & Indexed Strategies: “The launch of two new Invesco Nasdaq ETFs reaffirms the commitment of Invesco’s Canadian ETF business to providing our clients with products that access the themes and companies at the forefront of innovation … Now Canadian investors can choose several unique ways to gain exposure to the category-defining companies listed on The Nasdaq Stock Market.”

There are of course several existing rival plays on the top 100 Nasdaq companies apart from Invesco’s famous QQQs. Incidentally, Invesco says it recently changed the name of the Invesco QQQ Index ETF to the Invesco NASDAQ 100 Index ETF, dropping the management fee to 0.20% of NAV to “make it the most cost-effective ETF in Canada tracking the Nasdaq 100 Index.”

By contrast, the new QQJR and QQJR.F are relatively unique: it tracks the Nasdaq Next Generation 100 Index, which includes the “next 100” non-financial companies listed on The Nasdaq Stock Market, outside of the Nasdaq 100 Index, in a mid-cap ETF. Continue Reading…

Retired Money: How Bond ETF investors can minimize risk of rising rates

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My latest MoneySense Retired Money column has just been published: click on the highlighted text to retrieve the full column: Should investors even bother with Bonds any more?

In a nutshell, once again pundits are fretting that interest rates have been so low for so long, that they inevitably must soon begin to rise. And if and when they do, because of the inverse relationship between bond prices and interest rates, any rise in rates may result in  capital losses in the value of the underlying bonds.

In practice, this means choosing (or switching) to bond ETFs with shorter maturities: the risk rises with funds with a lot of bonds maturing five years or more into the future, although of course as long as rates stay as they are or fall, that can be a good thing.

As the column shows, typical aggregate bond ETFs (like ETF All-Star VAB) and equivalents from iShares have suffered losses in the first quarter of 2021. Shorter-term bond ETFs that hold mostly bonds maturing in under five years have been hit less hard. This is one reason why in the US Vanguard Group just unveiled a new Ultra Short Bond ETF that focuses on bonds maturing mostly in two years or less.

The short-term actively managed bond ETF is called the Vanguard Ultra Short Bond ETF. It sports the ticker symbol VUSB, and invests primarily in bonds maturing in zero to two years. It’s considered low-risk, with an MER of 0.10%.

Of course, if you do that (and bear the currency risk involved, at least until Vanguard Canada unveils a C$ version), you may find it less stressful to keep your short-term cash reserves in actual cash, or daily interest savings account, or 1-year or 2-year GICs. None of these pay much but at least they don’t generate red ink, at least in nominal terms. Continue Reading…

MoneySense Retired Money: How safe are REITs and REIT ETFs during the Covid recovery period?

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MoneySense.ca: Photo by energepic.com from Pexels

My latest MoneySense Retired Money column has just been published: it looks at how much real estate should make up of an investment portfolio, either through direct ownership in physical real estate, or through more diversified REITs or REIT ETFs. Click on the highlighted headline for the full column: How much real estate should you have in a balanced portfolio? 

How much should real estate comprise in a balanced portfolio? While a principal residence certainly will be a big part of most people’s net worth, personally I don’t “count” it as part of my investment portfolio, even though it can ultimately serve as a retirement asset of last resort, via Home Equity Line of Credits (HELOCs), reverse mortgages or simply an outright sale when it’s time to enter a retirement or nursing home.

If you take that approach, and many of my advisor sources do, then the question becomes how much real estate should you have in your investment portfolio, above and beyond the roof over your head?

Certainly, if you are happy being a landlord and handy about home maintenance, direct ownership of rental apartments, duplexes or triplexes and the like is a time-honored route to building wealth. That’s the focus of organizations like the Real Estate Investment Network (REIN).

However, if you don’t want the hassle of being a landlord, you may want to try Real Estate Investment Trusts (REITs), which are far more diversified both geographically and by housing type. Some REITs focus on baskets in particular real estate sectors, such as residential apartments or retirement homes.

A still more diversified approach is to buy ETFs providing exposure to multiple major REIT categories, whether Canadian, US or international.

Adrian Mastracci, portfolio manager with Vancouver-based Lycos Wealth Management, says the REIT idea “makes sense” but suggests they should not make up more than 5 or 10% of an investor’s total wealth or not more than 7% of an equity portfolio. “I consider it part of the equity bucket. Publicly traded REITS trade more like equities than real estate.” He advises buying top-quality REITs (or ETFs holding them), diversified across Canada but avoids foreign ETFs because “you want the dividends taxed as Canadian dividends.”

Most of the major ETF suppliers with a Canadian presence have broad-based passively managed REITs although there is at least one actively managed one.

Major passive and active Canadian REIT ETFs

The Vanguard FTSE Canadian Capped REIT Index ETF (ticker VRE/TSX) was launched in 2012 and has a modest MER of 0.39%.  As the name implies, any one holding is capped at 25% of the total portfolio [typically this is RioCan.] Its mix is 22% retail REITs, 19.8% office REITs, 18.5% real estate services, 18.5% residential REITs, 8.5% industrial REITs, 8.1% diversified REITs and 4.6% real estate holding and development.

An alternative is XRE, the iShares S&P/TSX Capped REIT Index ETF, trading on the launched in 2020, which holds roughly 16 Canadian REITs, with weightings almost identical to VRE. The iShares product (from BlackRock Canada) has a slightly higher MER of 0.61%. Continue Reading…

Gold still trusted over Bitcoin, but gap is closing

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A report by LendEDU finds Bitcoin is making a lot of headway with investors over Gold. 56% said Bitcoin is a better investment to maximize profits, versus just 33% for gold. However, they still see gold as a better store of value against inflation, with 50% answering gold  (including 67% over the age of 54), and 39% saying bitcoin.

On behalf of New Jersey-based LendEDU, research firm Pollfish surveyed 1,000 Americans on April 21st to see how they would deploy an initial US$50,000 to build a retirement nest egg, and found gold only had a slight edge: 45% versus 42% for bitcoin. However, if the goal of the $50,000 investment is strictly to maximize profits, 49% specified bitcoin, versus just 37% for gold.

LendEDU Director of Communications Mike Brown says Bitcoin is up roughly 68,189,500% since its start in 2009, while gold is up 105% over the same period.

“Gold is proven as a reliable investment and safe haven against market volatility and inflation, which is especially relevant in 2021. Bitcoin is becoming a competitor for just the same thing, although its wild price fluctuations are not for the faint-hearted and attract a younger, more aggressive investor … We found gold is still trusted for more cautious investing, especially amongst older Americans, but bitcoin is closing that gap and is preferred for speculative investing, especially with the younger crowd.”

LendEDU’s Mike Brown

Brown says the survey results were “none too surprising; bitcoin has periods of monumental gain that make it a salivating buy for aggressive investors trying to make a profit. But it also has periods of monumental loss and faces constant regulatory and institutional scrutiny that make it a questionable buy if your first investment priority is protecting the money you already have.”

Gold, on the other hand, doesn’t have eye-popping surges like bitcoin but is safe and has historically delivered steady profits to the patient investor looking for a financial safe haven.

The survey reveals a younger bias towards bitcoin and an older population favoring gold. Thus, 56% of those between the ages of 18 and 24 thought bitcoin was the better speculative asset, while 29% thought gold was. The percentages were 29% and 55%, respectively, for poll participants over 54.

Similarly, 42% of the 18 – 24 cohort thought bitcoin was a better store of value to protect against inflation, while 44% said gold. For the over 54 cohort, those percentages were 16% and 67%, respectively.

Brown found the 35-44 age group surprising as they were quite bullish on bitcoin in all four questions and broke with the normal trend that had older respondents favoring gold and younger ones opting for bitcoin. “This could be due to this demographic getting in on bitcoin in the extremely early stages, around 2010 when they were in their mid-twenties or early-thirties.”

When asked if they have invested in bitcoin or gold recently amid concerns about inflation, 15% had invested in gold, 31% in bitcoin, 15% in both, and 36% in neither.

For retirement investing, gold still holds a dwindling edge

In another part of the survey, poll participants were given four increasing monetary values and asked if they would rather invest each value in either bitcoin or gold to build a retirement nest egg that they couldn’t touch until retirement. In nearly every scenario, gold was the preferred retirement investment choice over bitcoin. Only when $1,000 was the starting amount did more respondents (47%) want to invest in bitcoin over gold (43%).

But as the starting amount went up, so too did the risk, which is likely why respondents switched over to the less-risky, less-volatile gold to start building their retirement nest eggs as the questions progressed. As Brown notes, “Retirement accounts should be stable, and you’ll lose a lot less sleep investing $50,000 in gold instead of $50,000 in bitcoin.”

Even so, no matter the initial investment amount, most age groups preferred building their retirement nest egg through bitcoin rather than gold. For example, 46% of the 45-54 cohort wanted to invest $50,000 in bitcoin compared to 41% who said gold. Continue Reading…