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.

Index Investing and the S&P 500

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Image BMO ETFs/Getty Images

By Chris McHaney, CFA

(Sponsor Blog)

Index investing, a strategy adopted by cost-conscious investors and passive investing aficionados, is continuing to gain in popularity across individual investors, advisors and institutions alike.

The S&P 500 Index is widely regarded as a gauge of the overall large-cap U.S. equities market. The index, which dates back to the 1920s, includes 500 leading companies and covers approximately 80% of available market capitalization.1  Other popular indices for U.S. equities include the Dow Jones Industrial Average (covering a smaller number of companies: ~30), and the Nasdaq 100 Index (tracking the largest 100 companies listed on the Nasdaq Stock Market).

ETFs make index investing more efficient, helping investors save time and money relative to holding all the constituents of their favorite market index. Take the S&P 500, for example. Not only would you need to buy 500 companies, you would need to make sure they maintain the appropriate weight in the portfolio over time: requiring a lot of time, and money in trading those securities.

ETF units are primarily bought and sold between different investors. This means there are typically fewer realizations of capital gains and losses with ETFs than with other investment products. Similarly, as passive ETFs track the performance of a specific benchmark, they tend to have lower overall portfolio turnover. Fewer transactions within the ETF again means fewer realizations of capital gains and losses that may flow through to ETF holders.

Investing in the S&P 500 Index has been made simple with ZSP2 – BMO S&P 500 Index ETF.  Also available in hedged and USD (ZUE/ZSP.U)2, these ETFs give you exposure to this broad market index at a low cost of 0.09% 6(MER – Management Expense Ratio) and can be used as a core in your portfolio.  Index based ETFs like ZSP provide broad market exposure and diversification across various sectors and asset classes according to their underlying index. It’s not about timing the market with index-based ETFs, it’s about time in the market and these solutions provide a long-term strategy for investors.

What does the research show?

Another reason index-based investing is becoming a staple in investors’ portfolios is the increase in available research showing passive outperforming active over the long term. The best known of this research, the SPIVA report, which coming from S&P Dow Jones Indexes research division has been looking at this phenomenon for 20 years, measuring actively managed funds, against their index benchmarks worldwide.

Looking at the data as of Dec 31st 2023, and focusing on Canadian Equity Funds, 96.63% of active fund managers underperform the S&P/TSX Composite over 10 years.  Put another way just 3.37% of funds outperformed the S&P/TSX composite over that time period.3 This research holds across time periods and geographies, with the numbers changing year to year but the story remaining compellingly in favor of passive. While there are active managers that out-perform their benchmark, this can be challenging to do consistently over time, even for the professionals.

Innovation in Index Investing

“Losses loom larger than gains.” – Daniel Kahneman & Amos Tversk4

Famed researchers in behavioural finance, Daniel Kahneman and Amos Tversky, once hypothesized the psychological pain of loss is about twice as powerful as the pleasure of gaining. After strong performances from U.S. stocks over the past two quarters, some may find themselves dusting off the pair’s work and asking, is now the time to lock in gains and take some downside insurance?

We have seen a remarkable run from stocks such as Nvidia, lifting the S&P 500 Index to all-time highs. This may cause some valuation concerns among investors. The S&P 500 is currently trading at a price-to-earnings ratio9(P/E) of about 25 times, which from a historical perspective can be considered rich relative to the average of 17.5 Continue Reading…

How the FIRE Movement can help folks live out their Cruise Ship Retirement Dreams

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Image from Unsplash

By Evan Kaur

(Special to Financial Independence Hub)

Imagine waking up to new horizons each day, with the promise of adventure and luxury at your fingertips. For many, retiring and spending their golden years exploring the world from the comfort of a cruise ship is the ultimate dream, and some are turning it into a reality.

Citing data from the Cruise Lines International Association, MoneyDigest highlights that 50% of the 20.4 million people who took a cruise in 2022 were over the age of 50, while 32% were over 60. However, it’s also important to note that this lifestyle is not attainable for everybody.

A poll conducted by the National Institute on Retirement Security finds that more than half of Americans (55%) are concerned that they cannot achieve financial security in retirement, much less afford to live on a cruise ship. That’s where the FIRE (Financial Independence, Retire Early) movement comes into play. In this article, we’ll explore why so many are drawn to retiring at sea and how the FIRE strategy can help folks achieve enough financial security to live out their cruise ship retirement dreams.

The Appeal of Cruise Ship Retirement

Image by Pexels

Retiring on a cruise ship is an attractive option for those who seek adventure, comfort, and a unique globetrotting lifestyle, but its biggest draw is that it can be more affordable than retired life on land.

According to an article from CNBC, the average annual cost to retire comfortably in the U.S. can be anywhere between US$55,074 and $121,228, depending on which state you choose to live in. These numbers factor in living costs, including groceries, healthcare, housing, utilities, and transportation.

Meanwhile, the 2021 national average for a private room in a nursing home was estimated to cost $108,405 per year. By contrast, Business Insider reports that cruise ship companies looking to capitalize on the retirees-at-sea trend now offer fully furnished homes aboard their ships for roughly US$43 a day or less. Continue Reading…

Retired Money: The LIRA-to-LIF deadline and more on the RRSP-to-RRIF deadline

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My latest MoneySense Retired Money column is the second part of an in-depth-look at the deadline those with RRSPs don’t want to miss once they turn 71. Part 1 appeared in March and can be found here.

The full new column can be found by clicking on the highlighted headline here: RRSP to RRIF, and LIRA to LIF: How it all gets done.

For convenience, here are some highlights:

The first column looked at the necessity of winding up RRSPs by the end of the year you  turn 71: a topic that becomes increasingly compelling as the deadline approaches. This followup column looks at two related topics: the similar deadline of LIRA-to-LIF conversions and the alternative of full or partial annuitization.

LIRAs are Locked-in Retirement Accounts and analogous to RRSPs, albeit with different rules. They usually originate from some employer pension to which you once contributed in a former job. To protect you from yourself you can’t extract funds in your younger years unless you qualify for a few needs-based exceptions. LIFs are Life Income Funds, in effect the annuities LIRAs are obliged to become, also at the end of your 71st year.

The full MoneySense column looks at our personal experience in converting my wife’s LIRA to a LIF, aided by Rona Birenbaum, founder of Caring for Clients. Note that the timing of the conversion is NOT affected by having a younger spouse: that only affects the annual minimum withdrawal calculus.

In my case, having turned 71 early this April, I have until the end of this year (2024) to convert my RRSP to a RRIF. The first required minimum withdrawal must occur in 2025: by the end of 2025 I must have withdrawn the annual minimum.

You can choose RRIF payment frequencies: usually monthly, quarterly, semi annually or once a year: you just have to specify which date. I imagine we’ll go monthly.

Currently, our retirement accounts are held at the discount brokerage unit of a Canadian bank, although we use a second discount broker for some non-registered holdings. While the LIRA will be the basis of an annuity provided by an insurer selected by Caring for Clients, most of our RRSPs will likely become RRIFs, probably by November of this year.  Our hope is that we will keep largely the same investments as are being held now and administer them ourselves, with an eye to maintaining enough cash to meet our monthly withdrawal targets.

Self-directed RRIFs

The new vehicle will bear a familiar name for those with self-directed RRSPs: it’s a Self-directed RRIF. At our bank, it was a simple matter of entering the RRSP and finding the link to convert it to a self-directed RRIF. Once there, you tick boxes on when you want the money, withdrawal frequency and (optionally) choose a tax withholding rate. You can also specify that your withdrawals will be based on your spouse’s age, assuming they are younger.

You can of course also go through a similar process with any financial institution’s full-service brokerage or investment advisor, ideally with at least one face-to-face meeting.  One thing Birenbaum says retirees often miss is specifying tax withholding, since there is no minimum withholding tax period required on the minimum withdrawal. I imagine we will ask to have 30% tax taken out at the time of each withdrawal: which is what we do with existing pension income. It’s on the high side to make up for the fact we also have taxable investment income (mostly dividends) that is NOT taxed at source.

             “I find the majority of retirees like having that withholding tax held at source so they don’t have to deal with installments and owing the CRA.” You can of course have more than 30% withheld.

            With a LIRA, you need to get the account liquid before the money is sent to the insurance company to annuitize. This means keeping tabs on the maturity dates of GICs or other fixed income.

            The paperwork is minimal: we provided a recent LIRA statement, then had an online meeting with one of Birenbaum’s insurance-licensed advisors to go through the application, then sign a transfer form to move the cash to the insurance company for a deferred annuity. The transfer takes a few weeks, with the actual annuity rate determined when the insurance company actually receives the money: registered transfers are recalculated at the point of purchase. There is a form T2033, which is an RRSP-to-RRIF transfer form that moves the money from the bank to the insurance company.

Having a mix of RRIF and annuities

Semi-retired actuary and author Fred Vettese says he has endorsed retirees buying a life annuity ever since the first edition of his book “Retirement Income for Life” back in 2018. “If you buy one, it should be a joint-and-survivor type, meaning it pays out a benefit to the survivor for life.” Continue Reading…

Healthcare (HHL): Spring 2024 Checkup

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Image courtesy Harvest ETFs

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

The healthcare space entered 2024 with new growth drivers and the COVID-19 pandemic firmly in the rear-view mirror.

Today, we want to explore how the healthcare sector has progressed in the opening quarter of 2024. Moreover, we’ll look at valuations in this sector, drivers for innovation, and the largest healthcare exchange-traded fund (ETF) currently operating in Canada.

How has the healthcare sector performed in the first quarter of 2024?

Healthcare continues to be a vital sector that is in constant demand in the developed and developing world. The permanent and non-cyclical drivers of aging populations, spending in developing nations, and technological innovations, remain constant in the short term and drive the long-term positive outlook for the broader sector. While healthcare has been a consistent sector for growth, just behind high-performing sectors like technology, it has lagged the broader market since the start of 2023.

In the short term, from a macroeconomic perspective, the U.S. economy has shifted from certain interest rate cuts to relatively sticky inflation. That has prompted concerns that interest rates will stay high or even move higher. That has spurred volatility across markets and asset classes since the beginning of March 2024. Ultimately, it serves investors to look more at sector-level drivers in the near term.

How healthcare valuations measure up right now

Healthcare has held out relatively well in the midst of a broad market sell-off that started in early April. Within the sub-sectors there is a wide bifurcation in the very short term.

For example, in the healthcare sector there are big differences in sub-sectors that are working and those that aren’t. The managed care segment – companies that provide insurance and administer healthcare for individual plans and government programs, like UnitedHealth and Humana – is down mid-double digits in 2024. Meanwhile, Tools and Diagnostics is up double digits: Tools and Diagnostics are companies that make the lab and biologic drug equipment and various testing consumables, like Abbott Laboratories.

The bifurcation within healthcare sub-sectors illustrates why diversification is so important within this space.

On the valuations front, positive results are being rewarded. Tools and Diagnostics and Medical Devices have both seen better healthcare utilization. This, in turn, has led to strong corporate results. For example, Bristol Myers unveiled its first quarter (Q1) fiscal 2024 earnings on April 25. Revenues rose 5% year-over-year to US$11.9 billion. Meanwhile, its growth portfolios rose 11% on an adjusted basis to $4.8 billion. Merck bolstered its full-year guidance after posting revenues of US$15.78 billion in Q1 2024 and adjusted earnings per share (EPS) of US$2.07 – both beating expectations.

Drivers for innovation in the healthcare space

There are still many reasons to be excited about growth and innovation in the healthcare sector.

The GLP-1 drug class, frequently referred to as “weight-loss drugs.” continues to be an exciting growth driver as we look ahead. Indeed, this space has expanded from diabetes and weight loss through to sleep apnea trial results that have validated the optimism for this class of drugs. According to Goldman Sachs, the broader market for anti-obesity medications could grow by more than 16 times from $6 billion in early 2024 to $100 billion by 2030.

Eli Lilly has benefited with the weight-loss drug Zepbound gaining considerable momentum in the opening quarter of 2024. Zepbound blew past sales expectations in the March quarter, brining in US$517 million in revenues. That spurred Eli Lilly to bolster its sales outlook for the full year by US$2 billion. Continue Reading…

Mastering the Art of Podcast Production: A Director’s Guide

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Image courtesy Canada’s Podcast/unsplash royalty free

By Philip Bliss

Special to Financial Independence Hub

As a podcast Director, your role is pivotal in ensuring the seamless production of engaging and high-quality content.

With more than 750+ Podcasts Canada’s Podcast delivers Digital Multi-Channel Marketing the new influencer medium.

From planning and recording to editing and promotion, the success of your podcast hinges on a well-executed strategy.

In this comprehensive guide, we break down the essential tasks, timelines, and guest information you need to produce a podcast that captivates your audience.

 

Pre-production Planning

a) Define Your Podcast’s Concept (2 Weeks Before Recording):

Before diving into production, spend time refining your podcast’s concept. Define your target audience, choose a niche, and outline the overall theme of your show. This clarity will guide your content creation and resonate with your audience.

b) Identify Potential Guests (4 Weeks Before Recording):

If your podcast includes guest interviews, start identifying potential guests early. Research individuals who align with your podcast’s theme and have insights to share. Reach out to them, presenting your podcast concept and gauging their interest.

c) Develop Episode Outlines (3 Weeks Before Recording):

Work on detailed episode outlines for the first few episodes. This includes segment breakdowns, key talking points, and potential questions for guests. Share these outlines with your team to ensure everyone is on the same page.

Guest Information and Coordination

a) Guest Invitations and Confirmations (3-4 Weeks Before Recording):

Reach out to potential guests with a formal invitation, explaining your podcast’s concept and the value their participation brings. Once confirmed, share detailed information about the recording process, timeline, and any technical requirements.

b) Coordinate Recording Schedule (2-3 Weeks Before Recording):

Work with guests to coordinate recording dates and times that align with everyone’s schedules. Use scheduling tools like Calendly or Doodle to streamline the process. Ensure guests are aware of any pre-recording preparations, such as technical checks.

c) Provide Information Package (1 Week Before Recording):

Send guests an information package a week before recording. Include details about the podcast, the recording platform you’ll use, technical requirements, and any specific guidelines or expectations. This ensures a smooth recording experience for both you and your guests.

Recording Process

a) Technical Checks (On Recording Day):

Conduct technical checks before each recording session to avoid last-minute hiccups. Ensure microphones, headphones, and recording software are functioning correctly. Confirm that your internet connection is stable, minimizing the risk of disruptions.

b) Set Up Recording Environment (On Recording Day):

Create a comfortable and quiet recording environment. Remind guests to choose a quiet space with minimal background noise. Encourage the use of headphones to enhance audio quality.

c) Conduct Interviews (During Recording):

During the recording, focus on creating a relaxed and conversational atmosphere. Stick to the episode outline but allow for spontaneity. Make guests feel comfortable, prompting them to share insightful and engaging stories.

Post-production Editing

a) Initial Editing Pass (1-2 Days After Recording):

Immediately after recording, perform an initial edit to address any major issues or glitches. This can include removing background noise, adjusting audio levels, and trimming unnecessary segments.

b) Final Editing and Enhancements (3-5 Days After Recording):

Take the time for a thorough final edit. Enhance audio quality, add music or sound effects if desired, and make any necessary adjustments. Ensure the episode flows smoothly and meets your podcast’s standards. Continue Reading…