Building Wealth

For the first 30 or so years of working, saving and investing, you’ll be first in the mode of getting out of the hole (paying down debt), and then building your net worth (that’s wealth accumulation.). But don’t forget, wealth accumulation isn’t the ultimate goal. Decumulation is! (a separate category here at the Hub).

What Investors should know about ADRs and CDRs, and their Fees

Deposit Photos

Recently one of our Inner Circle members asked, “You mentioned recently that TSI recommends a handful of ADRs (American Depositary Receipts) providing exposure to European and Japanese stocks. One question: What are the ADR fees charged to investors by U.S.-listed ADRs?”

An American Depositary Receipt, or ADR, is a proxy for a foreign stock that trades in the U.S. and represents a specified number of shares in the foreign corporation. ADRs are bought and sold on U.S. stock markets, just like regular stocks, and are issued or sponsored in the U.S. by a bank or brokerage firm. If you own an ADR, you have the right to obtain the foreign stock it represents. However, investors usually find it more convenient to continue to hold the ADR.

One ADR certificate may represent one or more shares of the foreign stock. Or, if the stock is expensive, the ADR may represent a fraction of a share; that way the ADR will start out trading at a moderate price or be in the range of similar securities on the exchange where it trades.

The price of an ADR is usually close to the price of the foreign stock in its home market. There are no redemption dates on ADRs.

When an investor owns an ADR, a custodian — CitiBank of New York Mellon, and J.P. Morgan Chase are among the largest — is in charge of holding it. The custodian also maintains the records and collects the dividends paid out by the foreign issuer. It then converts those payments into U.S. dollars and deposits them into stockholders’ accounts. For all these services, the custodian charges an ADR fee.

The custodian may deduct that ADR fee from the dividends, or it may charge the ADR holder separately. If the ADR doesn’t pay a dividend, the custodian will charge the ADR fee directly to the brokerage, which in turn will charge it to a client’s account.

We feel you can find all the foreign investment variety and exposure you need by confining your purchases to U.S. and Canadian stocks, plus low-fee ETFs (exchange traded funds). However, if you want to invest in a particular foreign stock, it’s generally more convenient and economic to hold ADRs of foreign stocks, rather than the foreign stocks themselves.

Bonus: What are CDRs?

CIBC

While I’m on the topic, some investors confuse ADRs, with CDRs. Canadian Imperial Bank of Commerce (CIBC)’s Canadian Depository Receipts (CDRs) give investors the opportunity to buy shares and/or fractions of shares in any of a number of U.S. or other foreign companies, in bundles that start out trading at a price of about $20 Cdn. each. CDRs come with a built-in hedging feature that reduces exchange-rate fluctuations. This feature costs you 0.60% of your investment yearly.

CDRs let you invest small sums in U.S. or other foreign stocks, some of which have exceptionally high per-share prices. (For instance, Nvidia currently trades for $610 a share.) Note, though, that with highly liquid stocks like Nvidia, or the other shares underlying CIBC’s CDRs, investors can easily buy, say, just one or two shares if they want. Continue Reading…

Five ways that Financial Marketing can mislead investors

Public domain image provided by Justwealth

By Robin Powell, The Evidence-Based Investor*  

Special to Financial Independence Hub

* Republished from the Just Word Blog from Robin Powell, the U.K.-based editor of The Evidence-Based investor and consultant to investors, planners & advisors  

Much as we like to think of ourselves as savvy consumers, we are actually very susceptible to PR and advertising. This is particularly true when it comes to investing.

Big banks like TD, RBC and Scotiabank, asset managers like Sun Life and Manulife, and online trading and investing platforms like Questrade and Wealthsimple, spend vast sums promoting their products and services. The more they spend, the more customers they attract.

Why, then, are people so receptive to financial marketing and so easily persuaded by it? In most cases it’s a lack of understanding. The financial markets are complex, and we’re bombarded with suggestions as to how to invest our money. In a world saturated with information, consumers rely on simple marketing messages to help them make decisions. They also derive comfort and security from large financial brands they’re already familiar with.

Big does not mean Best

The problem for investors is that the firms whose products are most often featured in the media are usually not the best ones to buy. The brands you’re most likely to see sponsoring hockey teams or film festivals, for example, or plastered across billboards in airports or train stations, are often just the sorts of companies you should avoid giving your business to. Why? Because the interests of consumers and big financial brands are often misaligned.

Financial firms are very clever at making it look as though their primary motivation is to help the likes of you and me to achieve better outcomes. But the bottom line is that they’re businesses, and their number one priority is to generate profits. To put it bluntly, these companies want our money. The more money we invest with them, and the more trading we do, the bigger the profits they make.

Financial education is extremely valuable. Educated investors almost invariably enjoy better outcomes. The danger, though, is that, all too often, we think we’re being educated when in fact we’re being sold to.

How Big Brands mislead us

There are all sorts of ways in which big financial brands mislead us. Here are five main ones.

1.) Emotional Appeal

Ideally, investors would act at all times in a calm and rational manner. We would only make decisions after carefully considering the available information and weighing up the options. But human beings are emotional animals, and financial marketers understand this better than anyone. This is why they deliberately appeal to emotions like fear and greed, and the fear of missing out, or FOMO, which, in a sense, is a combination of the two.

2.) Cognitive Biases

As well as their emotions, investors have to contend with a range of cognitive, or behavioural, biases that all of us are prone to. These include confirmation bias (our tendency to seek out information that confirms our pre-existing beliefs), herd behaviour (our instinct to copy what those around us are doing) and recency bias (our tendency to attach more weight than we should to recent events). Financial marketers know just the right buttons to press to exploit these built-in biases.

3.) Expert Endorsements

In his book Influence: The Psychology of Persuasion, the American psychologist Robert Cialdini writes about the importance of what he calls social proof. When we feel uncertain, he explains, we tend to look to others for answers as to how we should think and act. Closely related to this is the principle of authority, or the idea that people follow the lead of credible experts. So, for example, if someone recommends a certain product or strategy in the media, we’re inclined to take notice, even though that person may be heavily biased or not an expert at all.

4.) Scarcity and Urgency

Another way in which financial marketing leads consumers astray is that it generates a false sense of urgency. So, for instance, we might read about a particular investment “opportunity” — perhaps a hot stock or fund — in the weekend newspapers and feel impelled to buy it first thing on Monday morning. This is a very foolish way to invest. Of course, that stock or fund may well rise in value, but its price could just as easily fall. Regardless, investors are much better off taking a long-term view. It is very rarely, if ever, the case that you need to make an investment decision straight away.

5.) Financial Jargon

The final reason why the industry spin machine causes more harm than good is that it often contains financial jargon. At best, jargon confuses investors and over-complicates the investment process; at worst, it can be used to cloud and deliberately mislead. It can exploit people’s lack of financial literacy and give a false impression of trustworthiness and expertise. But the principles underpinning sensible investing are really quite simple, and consumers should place their trust instead in firms that simplify investing and explain how it works in clear, concise language.

Who can be Trusted?

You may be wondering, “If I can’t trust financial companies to tell me what’s best for me as an investor, who can I trust?” Continue Reading…

Navigating the RESP

Image via Pexels: Ketut Subiyanto

By Megan Sutherland, BMO Private Wealth

Special to Financial Independence Hub

The days are getting shorter, nights a bit cooler and with September now upon us, back to school is on the minds of parents nation-wide.  Since 2007, the average cost of undergraduate tuition fees in Canada has increased 55% and, according to a 2023 poll, 81% of parents believe it’s their responsibility to help pay for post-secondary costs.  Conversations I’m having with clients, friends and family certainly corroborate these numbers, making it timely to talk about the Registered Education Savings Plan (“RESP”).

For decades Canadians have been able to utilize the RESP, a program developed to incentivize savings with grant money (Canada Education Savings Grant, “CESG”), and preferential tax treatment.  Who doesn’t love free money!

Okay, so what’s the deal?

  • What is the maximum amount I can contribute per beneficiary?
    • A lifetime contribution limit of $50,000 per beneficiary.
  • How can I receive the maximum CESG?
    • Contribute up to $2,500 per year to receive 20% in CESG.
  • What if I’ve missed years of contributing?
    • You can catch up one additional year of CESG per year.
  • How much is the CESG grant?
    • Maximum of $7,200.
  • Is there an age limit on receiving CESG?
    • The CESG is available until the calendar year in which the beneficiary turns 17. However, there are specific contribution requirements for beneficiaries aged 16 or 17.
  • What is the tax treatment?
    • Contributions are not deductible but can be withdrawn tax-free.
    • Investment growth and CESG are taxed to the beneficiary when withdrawn for qualifying educational purposes.
  • Do you have to be the beneficiary’s parent to open one?
    • Any adult can open an RESP on behalf of a beneficiary – parents, guardians, grandparents, other relatives or friends – however, contribution across all plans must not exceed the maximum per beneficiary.

If you hope to have an aspiring doctor on your hands, consider harnessing the power of compounding to amp up your savings and open a plan as soon as possible!

Compare:

  1. Contribute a total of $36,000 over 14.4 years and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$80,000
  1. Contribute a $14,000 lump-sum in year one, then $36,000 over 14.4 years, for a total of $50,000, and receive the maximum CESG
    • Annualized return: 5%
    • Value at age 18: ~$115,000

 

Net benefit from additional $14,000 contribution in year one: approximately $20,000.

Saving to Attract CESG Only vs. Saving to Maximize Growth and Attract CESG 

Just like everything in life, make sure to read the fine print.  Keep in mind the following tips and traps:

  1. Open a Family Plan. Growth can be shared by all beneficiaries and the CESG money may be used by any beneficiary to a maximum of $7,200.
  2. Be prepared if the funds aren’t depleted by school costs. Contributions can be withdrawn by the subscriber without penalty. However, remaining CESG is clawed back. Growth in the RESP can be contributed to your RRSP (up to $50,000 if you have available contribution room), otherwise it is taxed at your marginal tax rate upon withdrawal by the subscriber, and there is an additional penalty tax of 20%.
  3. Choose investments wisely. Taking too much risk could result in losses that may create hard feelings or regret. Make sure to plan for withdrawals, potentially transitioning assets to cash, laddered bonds or GICs to ensure funds are available to pay for education costs.
  4. Put it in your estate plan. If you are married, consider opening the RESP in joint name. If you aren’t married or open the RESP in your name only, name a successor subscriber in your Will.
  5. U.S. citizens beware! The U.S. does not recognize the RESP as an exempt account type. Therefore, any earned income in the account is reportable on your U.S. tax return and can result in double taxation. Continue Reading…

How a Fed Rate Cut could bolster Canada’s largest Covered Call Bond ETFs

 

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog) 

In late August, Federal Reserve chairman Jerome Powell caused a stir among the investing community when he provided the strongest signal yet that the U.S. central bank is gearing up for interest rate cuts starting in September.

At the time of this writing, we are just one day away from that crucial decision. So what will this mean for  the yield curve, the direction of the Fed, how the change in policy is affecting markets, and the implications for Harvest Premium Yield Treasury ETF (HPYT:TSX) and the Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) in the final third of 2024. Let’s explore!

How does the yield curve function?

The yield curve, which is a representation of different bond yields across various maturities, can take varying shapes and curvatures. However, the most talked about is the shape of the yield curve in particularly one that’s either normal or inverted. A normal yield curve will have short-term bond yields that are lower than long-term bond yields. This encapsulates the time and risk premium associated with investing further into the future. However, in a period wherein central banks are seeking to slow economic growth/inflation, near-term rates will be raised in a manner that leads to higher short-term yields versus long-term yields. This is called an inverted yield curve, a much rarer occurrence.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

In practice, the difference between the 10-year yield versus the 2-year yield of government bonds is the go-to measure or gauge. The yield curve has been inverted for some time and became dis-inverted (Normal) in August 2024. That is a sign that shorter-term rates are coming down. This likely precedes meaningful interest rate cuts.

Source:  Bloomberg, Harvest Portfolios Group Inc., September 12, 2024

What drives the Federal Reserve?

The Federal Reserve (Fed) has a dual mandate: to achieve maximum employment, and to keep prices stable. Despite taking on one of its most aggressive interest rate hiking cycles in history to regain price stability, inflation has failed to return to the target of 2%, albeit subsiding in recent months. The lower levels of inflation come with slowing economic data and weaker-than-expected jobs data, which belies the Fed’s goal of achieving maximum employment. So, what’s next?

With inflation coming down, the Fed members seem ready to cut short-term rates to alleviate the negative impact of higher interest rates on the economy. But before we get excited, it’s worth noting that the Central bank tools traditionally take time to filter through to the economy. Interest rate cuts may not have an immediate impact on the economy and broader markets but will filter over time.

Ultimately, this shift in policy should return the inverted yield curve to a normal yield curve.

Rate expectations: What is already priced in?

The next Fed rate announcement meeting is on September 18, and the market is already pricing in the first rate cut. The size of the cut is still up for debate, but it is likely to be 25 basis points, with a smaller chance that it could be larger at 50 basis points.

Looking further out to the Fed’s remaining two meetings for the rest of the year, the market expects the Fed to cut rates again. That would represent a total of 100 basis points of cuts expected by the end of 2024. Moreover, the market has priced in 10 rate cuts, or 250 basis points, of total interest rate cuts. These are priced in and expected to occur throughout 2025 with the ultimate destination of 3.00% on the overnight rate.

However, interest rates further out the yield curve have also recently moved down quite a bit. This is what’s known in bond-speak as a “bull steepening” — as the curve normalizes yields across maturities shift lower too, and thus bond prices move higher. Indeed, the narrative continues to shift toward the imminent start of this rate cutting cycle.

The 10-year yield was 3.65% at the time of writing. That is already down significantly – 137 basis points – from the peak of interest rates in October 2023.

The implications for the yield curve

What will happen to the yield curve going forward? Portfolio Manager Mike Dragosits, CFA, expects the yield curve to normalize due to several existing factors. The tightening cycle is ending, and the Fed is poised to embark on a rate-cutting cycle. So, this would mean that short-term bond yields may fall faster and stay relatively lower than long-term bond yields. Continue Reading…

Why it’s never too late to Invest your Money

Worried you’re behind the “Magic 8 Ball” when it comes to investing in retirement savings? If your retirement fund is a bit anemic (or nonexistent), there’s no time like the present to get started! It’s never too late to invest your money but do you know where to start? Will explore active, passive, and wise investment options in this quick guide to your financial freedom.

Adobe image courtesy Logical Position

By Dan Coconate

Special to Financial Independence Hub

Investing is often seen as a young person’s game. But the truth is, it’s never too late to start investing your money.

This is especially relevant for retirement planners and seniors. Whether you’re planning ahead or looking to make your savings work harder, investing can play a crucial role in your financial future. Below, we take a closer look at why you should start investing, what to look for when you invest, and how to prepare your family for the future with this wise financial decision.

Is it really never too late to Invest?

Many people think investing is only for the young. But countless success stories prove otherwise. Take Colonel Sanders, for example. He started Kentucky Fried Chicken (KFC) at the age of 65. Another prime example is Ray Kroc, who expanded McDonald’s in his 50s. These stories highlight that it’s possible to achieve financial success later in life, including when you think it’s time to retire.

Certain investments work for different age groups, which makes it easier for seniors to start investing. For instance, dividend-paying stocks offer a steady income. Bonds provide low-risk options suitable for conservative investors. Even real estate is a lucrative investment at any age.

Starting later can be just as rewarding as investing early. The key is finding the right opportunities. By doing so, you can make your money work for you, irrespective of your age and stage in life.

Active vs. Passive Investments

Active investments require regular attention. Examples include actively managed mutual funds and day trading. These investments aim to outperform the market. They need more effort but can offer higher returns.

Passive investments, on the other hand, are more hands off. Index funds and ETFs are good examples. These options track market indexes and require less management. They are ideal for those who prefer a simple approach.

Understanding the differences between active and passive investments is important. By knowing your options, you can choose the one that suits your lifestyle and risk tolerance. Whether you prefer to be hands-on or hands-off, there’s an investment strategy for you.

Benefits of Investing at a Later Stage

Investing later in life offers long-term financial security. It helps grow your money and secures enough funds for retirement. A well-planned investment can provide a steady income stream and offer peace of mind. Continue Reading…