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How DIY investors can invest in strategic or tactical opportunities with Sector ETFs

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By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs

(Sponsor Blog)

Sector ETFs provide exposure to a specific industry or market sector and have grown in popularity amongst “Do It Yourself” investors who are looking to add strategic or tactical opportunities to their investment portfolios.

Why ETFs for Sector Exposures?

Sector ETFs have many benefits that ETFs provide in general: diversity, transparency, liquidity, and cost efficiency. Using a sector ETF, investors can tactically add exposure to an entire sector within a single trade. A sector ETF generally holds anywhere from 10 to over 100 different securities providing instant diversification, which minimizes single-stock risk and maximizes exposure to the entire sector. This diversification also helps to lower overall portfolio volatility.

Sector ETFs in Canada

Canada has over 1100 ETFs and 150 of these are categorized as sector ETFs. BMO ETFs has 20 different sector ETFs and was one of the first to list sector ETFs on the TSX in 2009.

 

The Canadian market is very concentrated in several different sectors: Financials, Energy, Industrials and Materials. For investors using a broad-market Canadian ETF they may be underexposed to other areas of the market. For example, the Health Care and Info Tech sectors in Canada are extremely small relative to the global economy.  Therefore, Canadian investors may consider U.S. and global sectors for a more diversified portfolio. This completion trade makes sector ETFs in Canada very popular. Continue Reading…

Building the Energy Dividend portfolio

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By Dale Roberts, cutthecrapinvesting

Special to the Financial Independence Hub

When it comes to sectors, energy is the most useful inflation fighter. In fact it is the only sector that has delivered positive real returns across every inflationary period, looking back some 100 years of stock market history. Energy stocks also delivered incredible returns during the stagflationary period of the 1970s and into the early 1980s. We have entered a stagflationary enviornment and (like the 70’s show) it includes an energy and commodities price shock. While I have enjoyed some very generous total returns from our energy ETFs, I am set to harvest most of those total returns, and will start building the energy dividend portfolio.

From an RBC report …

We peg free cash flow generation (before dividends) across  the Canadian majors — Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil

—at $46.0 billion in 2022 and $48.7 billion in 2023.”

The free cash flow gushers are just ridiculous. The dividends (and investors) are enriched by that free cash flow.

Here’s a Tweet thread from Larry Short that sets the table.

Yes, have a look for my “Don’t drill baby, don’t drill” reply.

You can also have a look at the quarterly update video from iA Private Wealth.

They’ve stopped drilling and now they’re filling – your brokerage account. From that very good video, Larry picks up an interesting chart from our friends at Ninepoint Partners.

You might say this is the money chart, the money shot.

Canadian energy stocks

And here is a post on Cut The Crap Investing that invited readers to consider investing in Canadian energy stocks, from October of 2020. That was about 300% ago. With even more gains available if you invested in the Ninepoint Energy Fund.

I have admitted to being late to eat my own cooking. In our accounts we have gains in the 100% to 150% range. In a TFSA account, I have sold a modest amount of shares in iShares XEG to pay our price at the pump for the next year or two. Being that I am in the semi-retirement stage with my wife being 2-5 years away from retirement, I will make that transition, selling down shares and moving the proceeds to dividend-paying stocks and specialized income-producing energy ETFs. That will take away the price risk for the energy producer sector. But certainly, the financial health of the sector and the companies is still very important. Only healthy companies (and sectors) deliver stable or growing dividends. Continue Reading…

The Rout in Long-Term Bonds

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By Michael J. Wiener

Special to the Financial Independence Hub

 

The total return on Vanguard’s Canadian Long-Term Bond Index ETF (VLB) since 2020 October 27 is a painful loss of 24%.  Why did I choose that particular date to report this loss?  That’s when I wrote the article Owning Today’s Long-Term Bonds is Crazy.

Did I know that the Canadian Long-Term bonds returns would be this bad over the past 18 months?

No, I didn’t.  But I did know that returns were likely to be poor over the full duration of the bonds.  Either interest rates were going to rise and long-term bonds would be clobbered (as they have), or interest rates were going to stay low and give rock-bottom yields for many years.  Either way, starting from a year and a half ago, long-term bond returns were destined to be poor.

Does this mean we should all pile into stocks?

No.  If you own bonds to blunt the volatility of stocks, you can choose short-term bonds or even high-interest savings accounts.  This is what I did back when interest rates became low.

Does that mean everyone should get out of long-term bonds?

It’s too late to avoid the pain long-term bondholders have already experienced.  I’m still choosing to avoid long-term bonds in case interest rates rise more, but the yield to maturity is now high enough that owning long-term bonds isn’t crazy.

Isn’t switching back and forth between long and short bonds just a form of active management?

Perhaps.  But it’s important to understand that bonds and stocks are very different.  Stock returns are wild and impossible to predict accurately.  There is no evidence that anyone can reliably time the stock market.  However, when you hold a (government) bond to maturity, you know exactly what you will get (in nominal terms).  When a long-term bond offers a yield well below any reasonable guess of future inflation, buying it is just locking in a near-certain loss of buying power for a long time. Continue Reading…

Infrastructure: An alternative solution for inflationary times

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By Shane Hurst

Managing Director, Portfolio Manager,

ClearBridge Investments, part of Franklin Templeton

(Sponsor Content)

Inflation has been the major theme dominating the investment world in 2022. Canada’s annual inflation rate reached 6.8% in April, representing a 31-year high. Canada is far from an outlier in this respect, with the U.S., the U.K. and many other western nations also experiencing rapid price growth over the past 12 months. In response, central banks have committed to a series of rate hikes this year, which in turn has raised the prospect of a global recession.

In this uncertain environment, market volatility has been elevated, particularly so in bond markets. Downside protection is front of mind for many investors as a result, but there are options out there to still generate returns for a portfolio without loading on risk.

Infrastructure assets, once the preserve of institutional investors, can now be a useful tool for retail investors and help in limiting risk and providing a stable income stream. Launched in Canada last year, Franklin ClearBridge Sustainable Global Infrastructure Income Fund (available as an ETF through FCII), harnesses the expertise of ClearBridge Investments, one of Franklin Templeton’s specialist investment managers. ClearBridge manages infrastructure income funds in the U.S., U.K., Australia, Europe and Canada, with global AUM of US$4 billion, as of March 31, 2022.

An asset class that makes economies function

Infrastructure as an asset class can be loosely defined as the services and facilities necessary for an economy to function. With the ClearBridge Infrastructure strategy, the portfolio is made up of regulated assets (e.g. electricity infrastructure and sewage pipes) which are characterized by stable cashflows, high income and low GDP exposure, and user-pay assets (e.g. airports, ports, railroads and toll roads) which generally provide lower income but are leveraged to GDP.

The investment team can take on a more defensive posture as circumstances dictate. For example, prior to the extreme sell-off of 2020, the strategy had a higher weighting to lower-risk regulated assets, which served it well during that period when its decline was approximately half that of its benchmark S&P Global Infrastructure Index. Continue Reading…

MoneySense ETF All-Stars 2022

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MoneySense has just published its annual feature, the ETF All-Stars 2022. For the first time in several years, I was not the lead writer on this package although I was involved in my role as Investing Editor at Large. We passed the writing reins to veteran financial freelance writer Bryan Borzykowski, who has previously written MoneySense’s annual Robo-advisor feature and is currently writing a new book to be titled ETFs for Canadians for Dummies.

As I point out in another MoneySense column, there is another ETF book published in 2021 that makes a good complement to the All-Stars package.  Reboot Your Portfolio is written by Dan Bortolotti of PWL Capital. Dan was the lead writer of the first edition of the ETF All-stars and served as a panelist for several subsequent years, along with his PWL colleague Justin Bender. In recent years, PWL advisors Ben Felix and Cameron Passmore have served as some of the panelists responsible for selecting the All-stars. The team of 8 panelists is unchanged from last year.

You can find the new edition of the All-stars by clicking here: Best ETFs in Canada for 2022.

As Bryan points out in his overview, by design, the panel didn’t make that many changes from previous years. The idea all along has been to provide a bunch of core low-cost, broadly diversified ETFs that don’t need to be changed every year. Certainly, the panel has never felt obliged to recommend brand new “theme” ETFs just for the sake of change.

Here’s my summary of the main changes:

Canadian Equities

No changes to last year’s lineup.

US Equities

The panel dropped the list of US equity ETFs from ten last year to seven this year.

International Equities

Last year’s picks return, plus the panel added three Emerging Markets ETFs: XEC, ZEM and EMXC.

Fixed Income

While Fixed Income has been a languishing asset class in recent months, the panel didn’t view this as alarming. Its previous lineup of Bond ETFs returns largely intact, with just one casualty: the panel decided to remove the Vanguard Global Bond ETF (VGAB.) For those who are nervous about more losses from rising interest rates, it continues to emphasize short-term bond ETFs like VSB and XSB

Note that in my recent MoneySense Retired Money column on the alleged Death of Bonds, I quote panelist Ben Felix, who still sees a role for fixed income in diversified portfolios. My column suggests those worried by rising rates can either park in treasury bills and wait for further interest rate hikes later this year, or ladder 1- and 2-year GICs every few months. Several 1-year GICs now pay close to 3%. That may be below the rate of inflation of late but at least  its beats losses of near 10% sustained by aggregate bond ETFs. Continue Reading…