Cash Alternatives: Bond ETFs and other Vehicles

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By Alizay Fatema, CFA 

(Sponsor Content)

Central banks across the globe are likely to continue with their attempts to tame inflation by hiking interest rates, crushing the hope that markets will return to normality any time soon.

With the unemployment rate at a historically low level, inflation remains a top concern for the Bank of Canada (BoC) and the Federal Reserve (Fed), who are also dealing with looming risk of a recession and uncertainty regarding the impacts of the recent bank turbulence. The BoC and the Fed appear to be ahead of global peers in their attempt to slowdown inflation – raising the question around whether we have seen the peak in rates in North America.

The rapid tightening cycles by policy makers are reinforcing the appeal of owning high-
quality ultra-short bond, and money market ETFs. A series of recent rate hikes by the Bank of Canada and the Federal Reserve gave a boost to yields for these products, making the saying “cash is king” true to a certain extent, as investors who are worried about higher inflation and slowing growth prefer investing in these cash alternatives to ride out the market volatility. In today’s market, you can earn an attractive yield while taking less risk – earning while you wait for volatility to subside.

Yield curve[1], are we in love with the shape of you?

Normally, the yield curve is upward sloping, meaning longer-term bonds yield more than shorter-term bonds as investors often demand higher yields for locking their money up for a longer period. However, at present, the shape of the yield curve is inverted, which means shorter-term securities are yielding more than longer-term ones. This inversion is largely owing to the Central Bank’s quest to reduce inflation by hiking the interest rates.

Due to historically low interest rates in the last few years, investors were compelled to take more duration[2] risk by adding exposure to longer-term bonds and higher credit risk[3] by investing in lower credit quality segments such as high-yield or emerging markets bonds. However, due to the current yield curve inversion, the tables have turned now, offering a unique opportunity for fixed-income investors looking to earn higher yields.

Source: Bloomberg USYC3M10 Index (Sell 3 Month US T-bill & Buy 10 Year US Bond Yield Spread) Sep 1992 to April 2023

Why stash cash in money market & ultra-short-term bond ETFs?

The front-end of the yield curve (0-1yr) offers an attractive asymmetry and opportunity to capture yield between 4-5% + with limited duration and credit risk. This allows investors to earn the highest yields we’ve seen in more than a decade on fixed income and build a more stable high-quality fixed-income portfolio by adding exposure to ultra-short investment grade bonds and money market securities. Based on the current interest-rate volatility, hugging the front-end of the curve seems a more prudent and consistent way to preserve capital in a fixed-income allocation. BMO ETFs offers solutions such as BMO Money Market Fund ETF Series (ZMMK), BMO Ultra Short-Term Bond ETF (ZST) and BMO Ultra Short-Term US Bond ETF (ZUS), which are a great way to get exposure to the front end of the curve.

These money market & ultra short-term bond ETFs invest in high credit-quality instruments that provide a great degree of safety and capital preservation. Firstly, by investing in securities that mature in less than one year, the duration risk is minimal, which results in lower interest rate sensitivity in your portfolio. Secondly, these ETFs offer high liquidity[4] due to the nature of their underlying securities, which means they can be bought and sold easily with minimal market impact. Continue Reading…

Inverted Yield Curves & Recession: How smart are Markets?

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By Noah Solomon

Special to Financial Independence Hub

Today’s Special: An Inverted Yield Curve with a Side Order of (Possible) Recession

In our discussions with clients over the past several months, the two frequent topics of conversation have been:

  1. The inversion of the U.S. Treasury curve, and
  2. The possibility of a recession occurring within the next few quarters.

In the following missive, I use a data-based, historical approach to explore the possible investment implications of these concerns.

How Smart is the Yield Curve?

The U.S. Treasury market has an impressive track record in terms of forecasting recessions. Going back to the late 1980s, every time the yield on 10-year U.S. Treasury bonds has remained below that of its two-year counterpart for at least six months, a recession has followed. Such was the case with the recession of the early 1990s, of the early 2000s, and of the global financial crisis.

When it comes to investing (as with many things), timing is critical. Given that yield curves do occasionally invert and that recessions do happen from time to time, it follows that every recession has been preceded by an inverted curve, and vice-versa. What makes the historical prescience of inverted yield curves so impressive is that the recessions which followed them did so within a relatively short period.

United States – Months from Yield Curve Inversion to Onset of Recession: 1989-Present

The table above covers the past three U.S. recessions, excluding the Covid-induced contraction of 2020, which I have omitted since it had nothing to do with macroeconomic factors, monetary policy, etc. As the table demonstrates, the time lag between yield curve inversions and economic contractions has ranged between 12 and 18 months, with an average of 15 months.

However, the yield curve’s impeccable record of predicting recessions has not been matched by its market timing abilities. As summarized in the following table, the S&P 500 Index has produced mixed results following past inversions in the Treasury curve.

S&P 500 Performance Following Yield Curve Inversions: 1989-Present

When the Treasury curve inverted at the beginning of 1989, stocks proceeded to perform well, returning 24.1% over the following two years. Conversely, when the curve became inverted in March 2000, the S&P 500 fared poorly, losing 21.5% over the same timeframe. The index suffered a similarly undesirable fate following the Treasury curve inversion in September 2006, when stocks suffered a two-year decline of 9.1%.

How Smart is the Stock Market?

In the past, the economy and equity markets have not been correlated. Stock prices are forward looking. Historically, equities have started to decline prior to peaks in economic growth and have tended to rebound in advance of economic recoveries.

The trillion-dollar question is not whether the market is smart, but whether it is smart enough. Do prices bake in a sufficient amount of bad news ahead of time so that they avoid further losses following the onset of recessions? Or do they lack sufficient pessimism to avoid this fate? Frustratingly, the answer depends on the recession!

S&P 500 Performance Following Start of Recessions: 1990-Present

Stocks managed to skate through the recession of the early 1990s unscathed. Following the peak of the economy in mid-1990, the S&P 500 Index went on to produce a total return of 27.2% over the next two years. Unfortunately, investors were not so lucky during the recession of the early 2000s, with stocks losing 24.6% in the two years after the recession began. Similarly, the recession of 2008 was no walk in the park for markets, with the S&P 500 falling 20.3% after the economy began contracting at the end of 2007. Continue Reading…

Franklin Bissett overweights defensive stocks over traditional Canadian sectors like Energy & Financials


Despite a looming recession acknowledged by most of the financial industry, Franklin Templeton Canada is relatively upbeat about the prospects for both Canadian stocks and fixed income over the short- to medium-term. In a Toronto event on Wednesday aimed at financial advisors and the press, Garey J. Aitken, MBA, CFA — Calgary-based Chief Investment Officer for Franklin Bissett Investment Management — described how he has been positioning his Franklin Bissett Canadian Equity Fund somewhat defensively. (There was also a webinar version of the event.)

As you can see from the above breakdown of the fund, Aitken is way overweight defensive sectors like Consumer Staples relative to the index: the S&P/TSX composite. In Canada, consumer staples amounts to the major grocery stores like Loblaw and Metro: there’s little along the lines of such American staples giants as Proctor & Gamble or Colgate Palmolive. Aitken said his fund has owned Saputo Inc. since its IPO in the late 90s, and has long owned Alimentation Couche-Tard Inc.

The fund has been overweight consumer staples for more than a year: as the chart shows, he was overweight this defensive sector by a whopping 730 basis points a year ago and this year is even more overweight by 770 bps. He is also overweight the other big defensive sector, Utilities, by 210 bps, compared to overweight by 110 bps a year ago. The third major defensive sector globally is Health Care, but the Canadian stock market has only minimal exposure to that sector.

Aitken has moved from a small underweight position in industrials a year ago to a modest overweight in 2023 of 170 bps. And he is slightly overweight Information Technology by 140 bps, compared to a small underweight of 20 bps a year ago.

Underweight Energy, Financials & Materials

On the flip side, the fund has been and continues to be underweight in the three big sectors for which the Canadian stock market is famous: Energy, Financials & Materials. Financials (chiefly the big Canadian banks) were underweight 330 bps a year ago and Aitken has moved that to an even bigger 730 bps underweight this year. In Materials he has stayed largely pat, with a 530 underweighting today compared to a 550 bps underweighting a year ago.

The chart below shows the fund’s holding in Canadian financials. You can see that among the big Canadian banks, the fund is over the index weighting only for the Bank of Nova Scotia, and is slightly overweight Brookfield Corp. and Brookfield Asset Management:


However, Aitken has moved Energy (Canadian oil & gas stocks, pipelines etc.) from a small 20 bps overweight position last year to a 370 bps underweighting in 2023. The chart below shows the major Energy holdings relative to the index, with overweights in certain less well-known names: 


Aitken remains slightly underweight Consumer Discretionary stocks, moving from a 100 bps underweight last year to 150 bps underweight currently. Real estate is almost flat: from a slight 10 bps underweighting a year ago to a small 70 bps underweight today.  Continue Reading…

Book Review: Bullshift

By Michael J. Wiener

Special to the Findependence Hub

In his book Bullshift: How Optimism Bias Threatens Your Finances, Certified Financial Planner and portfolio manager John De Goey makes a strong case that investors and their advisors have a bias for optimistic return expectations that leads them to take on too much risk.  However, his conviction that we are headed into a prolonged bear market shows similar overconfidence in the other direction.  Readers would do well to recognize that actual results could be anywhere between these extremes and plan accordingly.


Problems in the financial advice industry

The following examples of De Goey’s criticism of the financial advice industry are spot-on.

“Investors often accept the advice of their advisers not because the logic put forward is so compelling but because it is based on a viewpoint that everyone seems to prefer. People simply want happy explanations to be true and are more likely to act if they buy into the happy ending being promised.”  We prefer to work with those who tell us what we want to hear.

Almost all advisers believe that “staying invested is good for investors — and it usually is. What is less obvious is that it’s generally good for the advisory firms, too.”  “In greater fool markets, people overextend themselves using margin and home equity lines of credit to buy more, paying virtually any price for fear of missing out (FOMO).”  When advisers encourage their clients to stay invested, it can be hard to tell if they are promoting the clients’ interests or their own.  However, when they encourage their clients to leverage into expensive markets, they are serving their own interests.

“There are likely to be plenty of smiling faces and favourable long-term outlooks when you meet with financial professionals.”  “In most businesses, the phrase ‘under-promise and over-deliver’ is championed. When it comes to financial advice, however, many people choose to work with whoever can set the highest expectation while still seeming plausible.”  Investors shape the way the financial advice industry operates by seeking out optimistic projections.

“A significant portion of traditional financial advice is designed to manage liabilities for the advice-givers, not manage risk for the recipient.”

“Many advisers chase past performance, run concentrated portfolios, and pay little or no attention to product cost,” and they “often pursue these strategies with their own portfolios, even after they had retired from the business. They were not giving poor advice because they were conflicted, immoral, or improperly incentivized. They were doing so because they firmly believed it was good advice. They literally did not know any better.”

De Goey also does a good job explaining the problems with embedded commissions, why disclosure of conflicts of interest doesn’t work, and why we need a carbon tax.

Staying invested

On the subject of market timing, De Goey writes “there must surely be times when selling makes sense.”  Whether selling makes sense depends on the observer.  Consider a simplified investing game.  We draw a card from a deck.  If it is a heart, your portfolio drops 1%, and if not it goes up 1%.  It’s not hard to make a case here that investors would do well to always remain invested in this game.

It seems that the assertion “there must surely be times when selling makes sense” is incorrect in this case.  What would it take for it to make sense to “sell” in this game?  One answer is that a close observer of the card shuffling might see that the odds of the next card being a heart exceeds 50%.  While most players would not have this information, it is those who know more (or think they know more) who might choose not to gamble on the next card.

Another reason to not play this game is if the investor is only allowed to draw a few more cards but has already reached a desired portfolio level and doesn’t want to take a chance that the last few cards will be hearts.  Outside of these possibilities, the advice to always be invested seems good.

Returning to the real world, staying invested is the default best choice because being invested usually beats sitting in cash.  One exception is the investor who has no more need to take risks.  Another exception is when we believe we have sufficient insight into the market’s future that we can see that being invested likely won’t outperform cash.

Deciding to sell out of the market temporarily is an expression of confidence in our read of the market’s near-term future.  When others choose not to sell, they don’t have this confidence that markets will perform poorly.  Sellers either have superior reading skills, or they are overconfident and likely wrong.  It’s hard to tell which.  Whether markets decline or not, it’s still hard to tell whether selling was a good decision based on the information available at the time.

Elevated stock markets

Before December 2021, my DIY financial plan was to remain invested through all markets.  As stock markets became increasingly expensive, I thought more about this plan.  I realized that it was based on the expectation that markets would stay in a “reasonable range.”  What would I do if stock prices kept rising to ever crazier levels?

In the end I formed a plan that had me tapering stock ownership as the blended CAPE of world stocks exceeded 25.  So, during “normal” times I would stay invested, and during crazy times, I would slowly shift out of stocks in proportion to how high prices became.  I was a market timer.  My target stock allocation was 80%, but at the CAPE’s highest point after making this change, my chosen formula had dropped my stock allocation to 73%.  That’s not much of a shift, but it did reduce my 2022 investment losses by 1.3 percentage points.

So, I agree with De Goey that selling sometimes makes sense.  Although I prefer a formulaic smooth taper rather than a sudden sell-off of some fraction of a portfolio.  I didn’t share De Goey’s conviction that a market drop was definitely coming.  I had benefited from the run-up in stock prices, believed that the odds of a significant drop were elevated, and was happy to protect some of my gains in cash.  I had no idea how high stocks would go and took a middle-of-the-road approach where I was happy to give up some upside to reduce the possible downside.  “Sound financial planning should involve thinking ahead and taking into account positive and negative scenarios.”  “Options should be weighed on a balance of probabilities basis where there are a range of possible outcomes.”

As of early 2022, “the United States had the following: 5 percent of global population, 15 percent of global public companies, 25 percent of global GDP, 60 percent of global market cap, 80 percent of average U.S. investor allocation, the world’s most expensive stock markets.”  These indicators “point to a high likelihood that a bubble had formed.”  I see these indicators as a sign that risk was elevated, but I didn’t believe that a crash was certain.

When markets start to decline

“If no one can reliably know for sure what will happen, why does the industry almost always offer the same counsel when the downward trend begins?”

Implicit in this question is the belief that we can tell whether we’re in a period when near future prices are rising or falling.  Markets routinely zig-zag.  During bull markets, there are days, weeks, and even months of declines, but when we look back over a strong year, we forget about these short declines.  But the truth is that we never know whether recent trends will continue or reverse.

De Goey’s question above assumes that we know markets are declining and it’s just a question of how low they will go.  I can see the logic of shifting away from stocks as their prices rise to great heights because average returns over the following decade could be dismal, but I can’t predict short-term market moves.

Conviction that the market will crash

‘In the post-Covid-19 world, there was considerable evidence that the market run-up of 2020 and 2021 would not end well.  Some advisers did little to manage risk in anticipation of a major drop.”

I’ve never looked at economic conditions and felt certain that markets would drop.  My assessment of the probabilities may change over time, but I’m never certain.  I have managed the risk in my portfolio by choosing an asset allocation.  If I shared De Goey’s conviction about a major drop, I might have acted, but I didn’t share this conviction. Continue Reading…

Fraudsters more active than ever but less than half of us take protective measures


Yes, it’s March, also dubbed Fraud Prevention Month. To mark it, a TD survey has been released that finds fraudsters are getting more persistent as the cost of living keeps soaring.

While 62% of Canadians agree they are being targeted now more than ever, a whopping 46% haven’t taken any measures to educate themselves or take protective measures in the past year.

Among the findings:

  • 47% believe the rising cost of living and other financial hardships will expose them to more scams
  • 78% don’t have much confidence in their ability to identify fraud or scams
  • 54% feel stressed or anxious about financial fraud
  • 31% are too embarrassed to tell anyone if they were the victim of a fraud or scam
  • 66% of Gen Z and 44% of Millennials admit they wouldn’t tell someone if they were swindled

The full press release is here.

“As Canadians report being targeted by a record number of financial fraud attempts, many can benefit from using the tools and resources available to protect themselves and their loved ones,” says Mohamed Manji, Vice President of Canadian Fraud Management at TD in the release, “It’s very important to exercise caution, especially at a time when fraudsters may take advantage of the economic challenges many Canadians are currently facing. In addition to the robust security measures TD has in place for its customers, the best defence against financial fraud is being aware and knowing how to spot it.”

Both TD and the Canadian Anti-Fraud Centre offer a comprehensive library of articles discussing the latest trends in scams and measures Canadians can take to enhance their awareness and avoid falling victim to fraudsters.

Targeting mostly via e-mail or telephone 

The survey found 72% of Canadians reported being targeted by email/text message fraud, up 14 percentage points from last year, while 66% were targeted over the phone. Oddly, the poll finds Fraudsters seem to be pivoting away from social media, with only 26% targeted this way, 10 percentage points less than 2022.

Those polled were most concerned about identity theft (52%), title fraud (23%) and fake emergencies (20%).

Factors likely to increase vulnerability to fraud include age (43%),  loneliness or isolation (35%), moving recently to Canada (34%) and financial hardship or job loss (32%).

“We’re seeing more fraudsters preying on customers through the ‘grandparent’ or ’emergency’ scam,” adds Manji. “This cruel crime is often successful because it exploits someone’s desire to care for their loved ones. If you get a call from somebody claiming to be a family member or friend in immediate need of funds, hang up the phone and call them back using a number you have for them.”

TD says that with 31% saying they’d be too embarrassed to tell anyone if they were a fraud or scam victim, it’s clear there’s some stigma in talking about this type of crime. If someone believes they’ve fallen victim to a scam, they should immediately report it to their financial institution, local police department, credit bureaus (Equifax and TransUnion) and the Canadian Anti-Fraud Centre.

How can Canadians protect themselves?

TD recommends the following tips and advice: Continue Reading…