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Instead of helping investors ravaged by fees, Ottawa plays gotcha on total returns for the “rich”

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HorizonsETFs.com

 

By Dale Roberts, CuttheCrapInvesting

Special to the Financial Independence Hub

The week just completed was budget week in Canada. And government finances certainly get most of the attention and most of the ink. But there were some investment issues that made it into Budget 2019. Not the larger societal issue of Canadians paying the highest mutual fund fees in the developed world combined with the standard and unscrupulous and unethical practices of the typical financial ‘advisor’ in Canada.

Nope, this made it into the budget. From a post on holypotato.net and John Robertson the author of The Value of Simple:

The derivative transaction mention means they will target total return ETFs such as Horizons’ TSX 60 Total Return (TRI) index ETF. Here’s the link to HXT, which replicates the TSX 60 by way of swaps. These funds are derivative based and they can be incredibly tax efficient. They remove the funds’ income. From Dan Bortolotti in this MoneySense article…

There are several advantages to building an ETF with a swap rather than holding the stocks or bonds directly. The first is tax-efficiency. The most important advantage of swap-based ETFs is their potential to defer or reduce taxes. As we’ve noted, these ETFs do not pay dividends or interest, which means you won’t be taxed on any income as long as you hold your units. All of the gains in the fund are considered capital gains, which are not taxable until you eventually sell the holding. And even then, capital gains are taxed at only half the rate of regular interest income and foreign dividends. (Canadian dividends enjoy favourable tax treatment too, but for high-income earners, capital gains are still taxed at a lower rate.)

And this ETF allows Canadians to invest at an incredibly low MER of just .03% with rebate. Horizons offers a suite of total return funds that includes US and International stock indices plus Canadian and US bonds. One could build a tax-efficient portfolio. [Editor’s Note: The chart shown at the top of the Hub version of this blog shows a Horizon bond ETF that operates along similar principles.]

Eat the rich investors

There is almost $1.9 billion in the HXT. There is well over $1.6 trillion in Canadian mutual funds. Now certainly not all of those funds are crap, but most of ’em are quite poor due to average fees in the area of 2.2% annual. Of course couch potato investors will know that passive low fee index investing drastically outperforms high fee actively managed funds over longer periods.

So instead of going after the 2.2% fee junk, they go after the .03% offering.

I’d estimate that the amount that Canadians pay and lose needlessly to high fees is in the range of $20,000,000,000 or more annually. Yes that’s $20 billion. That’s massive. It’s so massive it’s the size of our annual deficit projections. Ha. I’m not sure that picking up some tax scraps to the tune of tens of millions of dollars from swap based funds is going to close the deficit gap. Continue Reading…

Insurance and Marijuana: recent changes make Insurers scratch their heads

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By Lorne Marr, CFP

Special to the Financial Independence Hub

When marijuana laws changed in Canada last year, it had a ripple effect through several industries, including life insurance underwriting. Insurers had to come up with a solution for how to cover customers who are marijuana users.

To achieve this solution, insurers researched the following:

  • Are all marijuana users the same?
  • How much risk does marijuana represent from the insurer’s perspective when compared to traditional smoking?
  • Should joints (smoking) and edibles be treated differently?
  • What does the long-term data show about the risks, if any, between marijuana use and health?
  • Is marijuana habit-forming and if so, should it be considered an addiction risk?
  • Does the amount per use and frequency per week matter?
  • What are the differentiators between medical and recreational use?

We dug deeper into these topics to understand the details of offering insurance to people who use marijuana either for medication or recreational purposes. We also requested replies from several insurance companies, asking them how they view marijuana/cannabis consumption cases and how term life insurance, whole life insurance and other insurance products are provided for marijuana users.

Also, please feel free to review our detailed life insurance guide for marijuana users.

Not all Insurers treat Joints and Edibles equally

Interestingly, not all insurers treat joints and edibles as the same product! This is where you should pay close attention as a customer because this fact will strongly impact your premiums and ability to qualify for less expensive policies.

Here are the two approaches insurers choose:

  1. Joints and edibles are the same
    This means, if you consumer marijuana in any from more frequently than a pre-defined threshold, the insurer will consider you an increased risk, similar to smokers.
  1. Consumption of edibles is not considered smoking
    In this case a customer will be deemed a non-smoker even if he/she uses marijuana daily. That relates not only to edibles, but also to other non-smoking marijuana intakes such as oils. An example of a company that treats their customers in this way is Canada Protection Plan (CPP).

How much Marijuana is too much for Insurers?

There is a clear difference between being an occasional marijuana user lightning up a joint once a month versus a daily user. In the past, insurance companies defined a risk threshold by two joints/marijuana intakes per week. Meanwhile, some insurers are more relaxed and accept four intakes per week. Again, that is different from insurer to insurer and working with an experienced insurance broker will help to find the best policy for your situation.

What happens if you are a more “active” marijuana consumer? Well, in this case be prepared to pay extra for your insurance plan as your insurer would see you being as risky as a smoker.

Which companies are offering Insurance products to Cannabis users?

In the past there were just two insurers that were treating cannabis users as non-smokers: Sun Life and BMO Insurance. Meanwhile the situation has changed and now virtually every insurer treats infrequent marijuana users as non-smokers, allowing them to benefit from lower rates. Continue Reading…

Investing in the Cannabis Market

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Five months into the legalized marijuana market, it’s a good time to remind ourselves of basic investment principles. Get good advice you trust.

 

By Kevin Greaves, MyResolver.ca

Special to the Financial Independence Hub

Perhaps not since the dot com boom of the 1990s have we seen the kind of investor interest in a sector that we’re now seeing in the marijuana market.  Seasoned investors and newcomers alike are excited by the prospects of this nascent market and risk is rampant.  In the months leading up to, and the four months following legalization in Canada, there has been huge volatility in stock prices for some of the major players and the valuations of many of these companies is often characterized as ‘out of whack’.   For instance, market leader Tilray (TSX:TLRY) was valued greater than American Airlines Group in September 2018.  That is high! (Pun intended)

So, if you’re looking to add marijuana stocks to your portfolio, there’s a lot to take in at the moment.  It’s not easy to keep on top of the news of mergers, partnerships, earnings reports and growth forecasts in an emerging sector, and you could find yourself caught up in the hype.  So first and foremost, it’s good to work with a trusted investment advisor.  An advisor can help to put disclosure documents in perspective and assist in choosing an investment that suits your financial goals. Even if you are an experienced investor, accustomed to doing your own research and trades, having an advisor to confirm or correct your strategies, even just initially, could help you avoid some costly mistakes.  There are plenty of articles on the value of an advisor, and how to find one, so that’s not a topic we will cover in depth here.

Investor or Speculator?

Warren Buffett’s mentor, Benjamin Graham believed it was crucial to determine whether you are acting in the market as an investor or a speculator.  The distinction is fairly simple.  As an investor, you buy a stock in a company you believe will be successful and that stock represents ownership in the company.  You have a stake in the future of that company.  As a speculator, your only concern is what someone will pay for that stock down the line.

Some would argue that all investment is a combination of the two but it’s an important differentiation to make when you are working with an emerging market sector.  It allows you to clarify your expectations and often, the timeline for your ROI and the amount of risk you are prepared to take.

It’s important to remember that marijuana is a commodity: plain and simple.  And as a commodity it is subject to the same booms and busts as other commodities.  As an agricultural commodity it holds additional risks.  Think of all the uncertainties of growing any crop:  the introduction of a single pest can wipe out an entire harvest.

Consider ancillary products and players

There are opportunities beyond investing in producers of marijuana and if you’re considering investing in this sector, you may want to look beyond the obvious.  Certainly, Biotech stocks have been around for decades but with more and more information available regarding the medical uses of cannabis, there will be expanded opportunities for companies to develop drugs and treatments for various diseases, conditions and illnesses.  For instance, creams and oils derived from CBD, the non-intoxicating compound of the marijuana and hemp plants, have shown great promise in the treatment of epilepsy and arthritis.
Continue Reading…

Federal Budget 2019: Liberals unveil $22.8 billion in new spending in pre-election budget

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Not surprisingly, the Liberals’ fourth federal budget released Tuesday afternoon is the predicted pre-election spendathon targeting the two big voting blocks of Seniors and Millennials. You may wish to refresh this link from time to time, or check my Twitter feed at @JonChevreau. Also check out FP Live’s “Everything you need to know about Federal Budget 2019.”

One of the first reports out was the CBC: Liberals table a pre-election budget designed to ease Canadians’ anxieties. It said that Morneau’s fourth budget includes $22.8 billion in new spending. The 460-page document is titled Investing in the Middle Class. Not surprisingly, the CBC noted, there is no timeline for erasing the Deficit, projected to be $20 billion next year, then falling to $15 billion two years later, and then to $10 billion in 2023-24.

First-time home buyers can tap RRSPs for $35,000

As predicted, the Budget targets Millennials who are finding it hard to get a foot on the housing ladder. It  boosts the amount of money that can be withdrawn from RRSPs for a first-time home purchase, from the previous $25,000 to $35,000 ($70,000 for couples). Low-income seniors will be able to keep more of the Guaranteed Income Supplement (GIS) if they opt to remain in the workforce and safeguards are being introduced to protect employer pensions in the event of bankruptcies.

Among other spending initiatives is ensuring access to high-speed Internet by 2030 across the country, $1.2 billon over three years to help First Nations children access health and social services, an additional $739 million over five years to repair water systems on First Nations reserves, and a federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with sticker prices below $45,000.

Little wiggle room in a Recession

The Financial Post’s Kevin Carmichael filed a piece headlined “Liberals leave themselves little wiggle room in the event of a recession.” And Andrew Coyne commented that “the federal budget is a testament to the pleasures of endless growth. Forget productivity, tax cuts or investment.” One of his colourful quips was this:

“I’ve said before that these are deficits of choice, rather than necessity. A better way to describe them might be deficits for show.”

The Globe noted that the $23-billion in new spending spans more than a hundred different areas, although the focus is on new home buyers and training programs for workers. Later this year there will be $1.25 billion (over 3 years) “First Time Home Buyer Incentive” managed by the Canada Mortgage and Housing Corporation. The Globe added that “CMHC would put up 10 per cent of the price of a newly constructed home and 5 per cent of an existing home, and share in the homeowner’s equity.” To qualify you must be a first-time home buyer with annual household income below $120,000.

8 ways personal finances will be affected: GIS, CPP & more

G&M personal finance columnist Rob Carrick listed 8 ways the budget will impact ordinary citizens’ finances. He noted that seniors receiving the GIS will be able to earn $5,000 without affecting benefits, up from $3,500, and that there will also be an additional 50% exemption of up to $10,000. Contributors to the Canada Pension Plan who are 70 and older and haven’t applied for benefits will be “proactively enrolled” starting next year. Carrick said Ottawa says about 40,000 people over 70 miss out on CPP benefits averaging $302 a month. He also writes that the tax break on stock options will be limited for employees of larger, mature companies (as opposed to startups), with annual caps of $200,000 on stock options eligible for preferential tax treatment. Continue Reading…

U.S. Economy Watch: Searching for Clues

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By Kevin Flanagan, WisdomTree Investments

Special to the Financial Independence Hub

After at least a month-long delay, fixed income investors have finally been receiving economic data. With a number of government agencies closed due to the recent shutdown, 2019 began with a data vacuum, but now it looks like we are making up for lost time. Unfortunately, these “data delays” render some of the economic information potentially old or stale. Nevertheless, the data still offers insights as to how 2018 ended and can provide clues on any possible springboard effects for the current year.

A perfect case in point is last month’s release of the Q4 2018 real GDP report. Yes, the data is three months old, but the underlying components in this release can offer insights for the future. First, let’s go high level and look at some headline numbers. For Q4, the Bureau of Economic Analysis’ (BEA) initial estimate for growth was pegged at +2.6%. While this was a drop-off from the Q3 pace of +3.4%, it beats consensus forecasts by nearly half a percent. For 2018 as a whole, real GDP came in at +2.9%. This rate of expansion has been reached only two other times since 2005. On a Q4/Q4 basis, growth was pegged at +3.1%, finally eclipsing the elusive 3% threshold.

U.S. Real GDP

US Real GDP q4 2018

While recession fears have been a part of the economic dialogue, the ongoing debate seems to be more centered on what type of slowdown we should expect in 2019. The accompanying graph illustrates that growth has trailed off a bit after reaching its most recent high-water mark of +4.2% in Q2. Some further deceleration is likely. In fact, Q1 2019 real GDP will likely be held down by the aforementioned shutdown, but then snap back in Q2 as those negative effects are reversed. Overall, real GDP in the area of +2¼% is my base case for this year.

Let’s take a look at the GDP engine cylinders:

Personal consumption expenditure (PCE): Household spending rose at a +2.8% annual clip in Q4, which translated to a 1.9 percentage point (pp) contribution to growth. This component should continue to be a positive force for the economy this year. Continue Reading…