Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

Utilities: A Long-term holding that’s Breaking out

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Aerial drone view of a wind farm on the Atlantic coast. Image courtesy BMO ETFs/Getty Images

By Andrew Vachon, BMO Global Asset Management

The Bank of Canada (BoC) cut rates on June 5th for the first time after one of the most aggressive hiking cycles in Canadian history.

Market expectations from the BoC indicate that we may see 2 to 3 more cuts before the end of the year with the second cut potentially as early as July and the remaining later in the year.

South of the border, inflation has remained “stickier” however; the market expects the U.S. Federal Reserve (the Fed) to cut rates twice before the end of the year with the first beginning in September. Moreover, forecasters are predicting the BoC could potentially cut the overnight rate from the current rate of 4.75% all the way down to 3.5% by this time next year, presenting more opportunity for the Utilities sector. 1

With the anticipation of further rate cuts from the BoC and the Fed we may see the Utilities sector shine. Government bond yields tend to have an inverse relationship with utilities (when interest rates drop, utility stock prices typically increase, and vice versa). This is mainly due to the costs involved with these companies. The cost of construction for power plants, and the maintenance of infrastructure required to deliver gas, water, or electricity can make utilities expensive when the cost of borrowing is high.

From a technical perspective, the BMO Equal Weight Utilities Index ETF (Ticker: ZUT) just broke out of a massive “double bottom” reversal pattern this week. A double bottom pattern is a classic technical analysis charting formation showing a major change in trend from a prior down move. The recent close above resistance at $20.60 completed the pattern, shifted the long-term trend to bullish, and opened an initial upside target that measures to $23.40.

One of the key drivers for the turnaround in utility stocks as of late is a sharp decline in long-term interest rates. There is now a possibility of yields testing the lows of 2023, which could be a persistent tailwind for interest rate sensitive sectors of all stripes and perhaps push this Utility ETF above the initial upside target of $23.40 at some point in the next 6-12 months. 2

Yielding the Benefits

For the long-term investor, Utilities offer investors stable and consistent dividends over time along with lower volatility. The long-term growth potential to deliver safe and reliable returns, make the sector an attractive investment to consider adding to your portfolio. Utilities overall have remained fundamentally strong as they provide basic services such as gas, water, electricity and telecommunications that will always be in demand regardless of where we are in the economic cycle.

There are long-term benefits for Canadian investors, especially those who might consider the current environment as an opportunity to capture growth. Continue Reading…

Vanguard finds Canadians’ 50% allocation to home market higher than the recommended 30%

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A just-released study from Vanguard Canada on Home Country Bias shows that Canadians have about 50% of their portfolios allocated to Canadian equities: well beyond what is recommended for a country that makes up less than 3% of the global stock market.

As the chart below shows, Vanguard recommends just 30% in Canadian stocks but notes that the domestic overweight is slowly decreasing as investors move to global and U.S. equities.

Vanguard says home country bias is not unique to Canada: Americans behave similarly with respect to the U.S. stock market. But as you can see from the chart below, because the U.S. makes up more than half of the global stock market by market capitalization, the gap between its relative overweighting is far less dramatic than in Canada. Canada’s home country bias is almost as pronounced as in Australia (a similar market to Canada in terms of resources and financial stocks), and Japan is not far behind.

However,Vanguard adds, “overall, Canadians and investors in other developed countries are trending towards a greater appetite for diversification through global equities.”

 

Too much Canada can be volatile

So what’s wrong with having too much Canadian content (both stocks and bonds)? Vanguard says portfolios overweight Canadian equity can be volatile because the domestic market is too concentrated in just a few economic sectors. “Relative to the global market, Canada’s market is concentrated within a few large names. It is also significantly overweight in the energy, financials and materials sectors, and significantly underweight in others.” Continue Reading…

June Checkup: Healthcare & Technology

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Image courtesy Harvest ETFs

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

The United States stock markets have delivered positive returns through much of 2024, continuing the positive momentum that was established in the previous year.

However, that performance has increasingly been powered by a smaller segment of large-cap companies. Indeed, readers have undoubtedly heard about the outsized performance of the “Magnificent 7” in the tech space over the past year. If we strip out the “big six” of Amazon, Meta, Nvidia, Microsoft, Apple, and Alphabet from the S&P 500, we have experienced three calendar quarters of negative earnings growth across the rest of the market.

Investors took profits in the month of April. Demand resumed in the month of May, but with a broader range of equities. Nvidia continued to show its dominance, but there were other sectors and stocks that were able to catch up with the leaders to close out the first half of 2024.

The summer season is historically slow in the markets. Harvest’s portfolio management team expects volatility to persist for both bonds and equities. Moreover, the team emphasizes that this summer is a key moment to stay active, attentive, and invested. A prudent strategy in this environment involves looking under the surface for opportunities while generating cash flow from call options to support total returns.

June Healthcare check up

The healthcare sector pulled back slightly in the month of May 2024. Negative moves in the healthcare sector over the course of May 2024 were driven by stock specific events. Macroeconomic data sets impacted the healthcare sector in line with others. Within healthcare, the managed care subsectors experienced volatility earlier in 2024 and changes to reimbursement structures impacted valuations in the near term. The Tools & Diagnostics sub-sector has also proven volatile due largely to a slower-than-expected recovery in China.

Regardless, there are still very promising opportunities in the GLP-1 drug category space for diabetes and obesity. The uptake of these drugs in the U.S. has been significant at a still-early stage in their lifespan. A recent study from Manulife Canada found that drug claims for anti-obesity medications in Canada rose more than 42% from 2022 to 2023.

Harvest Healthcare Leaders Income ETF (HHL:TSX) offers exposure to the innovative leaders in this vital sector. This equally weighted portfolio of 20 large-cap global Healthcare companies aims to select stocks for their potential to provide attractive monthly income as well as long-term growth. HHL is the largest active healthcare ETF in Canada and boasts a high monthly cash distribution of $0.0583.

Harvest Healthcare Leaders Enhanced Income ETF (HHLE:TSX) is built to provide higher income every month by applying modest leverage to HHL. It last paid out a monthly cash distribution of $0.0913 per unit. That represents a current yield of 10.44% as at June 14, 2024.

Where does the technology sector stand right now?

Investors poured back into technology stocks in May 2024 after taking profits in the month of April. However, they were more discriminating than in previous months and showed a preference for hardware stocks, specifically semiconductors.

Nvidia maintained its leadership position. It has soared past a $3 trillion market capitalization in the first half of June 2024. However, other AI-related tech stocks encountered turbulence which may give some investors pause around the broader bullish case for AI. Continue Reading…

Big tax tips for small business owners

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Image by Pexels: N. Voitkevich

By Aurèle Courcelles, CFP, CPA

Special to Financial Independence Hub

Small businesses play a sizeable role in shaping Canada’s economy, contributing significantly to national employment numbers and our country’s gross domestic product (GDP).

According to Statistics Canada, in 2022 businesses with 1 to 99 employees made up 98 per cent of all employer businesses in this country. But today’s economic environment has triggered new financial challenges for this cohort. Canadian entrepreneurs can help offset the cost of rising inflation, rising cost of inputs, and rising interest rates, and keep more money in their pockets, by adopting some or all of these key tax strategies.

Consider employing your immediate family

Income splitting, whereby the higher-earner transfers part of their income to a lower-earning family member, can reduce the tax owed by your household. Consider paying a reasonable salary to your spouse and/or children for the services they provide for your business to reduce your tax obligations.

Incorporate your business

If your business generates more profit than you need to live on, incorporation is a highly effective tax strategy. It could lead to a significant tax deferral by qualifying for the lower small business tax rate for active income – the longer the profits are left in the company, the larger the tax deferral. If shares of the business are ultimately sold and are eligible for the lifetime capital gains exemption, the tax deferral gained through incorporation can create a permanent tax saving.

Other potential advantages of incorporation include having family members own shares (so as to have access to multiple capital gains exemptions) and possibly paying out dividends to actively participating family members who are taxed at a lower rate.

Maximize tax breaks with registered plans

Consider your RRSP contribution room when setting and reporting remuneration for services provided by yourself and family members who also work in the business. Employment income creates RRSP contribution room for the following year which, for 2024, can represent up to $31,560 of room. RRSP contributions are tax deductible, provide tax deferral and allow for business owners to diversify their future retirement income.  Contributing to a tax-free savings account (TFSA) can also work in your favor by allowing you to withdraw funds if needed without penalty. Continue Reading…

Exploring Early Retirement Strategies: My Journey towards Financial Independence

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Image by Pexels.com: Cotton-Bro Studio

By Abid Salahi

Special to Financial Independence Hub

If you had told me in my early twenties that I’d be already planning for retirement before my first major job promotion, I might have laughed it off.

Like many young professionals, I was more concerned with navigating the beginnings of my adult life and my first ‘real’ job than retirement, far in the future.

However, a deep dive into the financial world revealed the concept of ‘Financial Independence’ or ‘Findependence,’ a state where you have sufficient personal wealth to live without having to work actively for basic necessities. Essentially, what it means is that you can retire way earlier than what society considers ‘retirement age’ and enjoy your retirement while you’re still relatively young.

Today, as I share my experiences and the strategies that I’ve learned along the way, I hope to inspire you to start thinking about retirement sooner rather than later. After all, achieving financial independence is not just a goal; it’s a journey that offers profound peace of mind.

Start Early and Embrace the Power of Compound Interest

Let’s talk about the first and most important strategy I adopted; harnessing the power of compound interest.

Compound interest is like a snowball rolling downhill; as it rolls, it picks up more snow, growing bigger and faster. When you save money, compound interest works by earning interest on both your initial amount and the interest already earned.

This means your money grows faster over time. For example, investing just $200 a month starting at age 25 could grow to more than $500,000 by age 65, assuming an average annual return of 7%.

Diversify your Investment Portfolio

Diversification is key to managing risk and maximizing returns over the long term.

I’m going to say it again … DO NOT invest all of your money in one single asset!

My approach has been to spread investments across a variety of asset classes including stocks, bonds, real estate, and even some alternative investments like cryptocurrencies.

But again, if you spread your investments into too many different assets, the profit you might obtain from each investment could become very small and not that significant. So, not too many but also not too few.

Take advantage of Tax-Efficient Accounts

In both Canada and the U.S., you can take full advantage of tax-advantaged retirement accounts. How? Let me elaborate.

In Canada, utilizing the RRSP (Registered Retirement Savings Plan) and the TFSA (Tax-Free Savings Account) can significantly enhance your savings growth by deferring taxes or allowing tax-free gains.

In the U.S., similar benefits are offered through IRAs (Individual Retirement Accounts) and 401(k)s.

The amazing thing about these accounts is that they not only reduce your tax liability but also allow your investments to grow unhindered by taxes, which can make a substantial difference over the decades.

Consider Real Estate Investments

When talking about investments, it’s impossible to leave out investing in Real Estate.

Real estate can be an excellent addition to any retirement strategy, offering both capital appreciation and potential rental income. Continue Reading…