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).

These two Canadian equity ETFs hold most of Canada’s best stocks

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Today, we look at two Canadian ETFs that hold many of the Canadian stocks we recommend for 2019. iShares S&P/TSX 60 Index ETF and iShares Canada Select Dividend Index ETF mirror, respectively, sub-indexes holding the 60 most-heavily trades stocks and 30 of the highest-yielding dividend stocks on the Toronto exchange. Each of the Canadian ETFs represents a low-fee way of holding many of the country’s best stocks

Exchange traded funds (ETFs) are set up to mirror the performance of a stock market index or subindex. They hold a more or less fixed selection of securities that represent the holdings that go into calculating the index or sub-index.

ETFs, including Canadian ETFs, trade on stock exchanges, just like stocks. That’s different from mutual funds, which you can only buy at the end of the day at a price that reflects the fund’s value at the close of trading.

Prices of Canadian ETFs are quoted in newspaper stock tables and online. You pay brokerage commissions to buy and sell them, but their low management fees give them a cost advantage over most mutual funds.

As well, shares are only added or removed when the underlying index changes. As a result of this low turnover, you won’t incur the regular capital gains taxes generated by the yearly distributions most conventional mutual funds pay out to unit holders.

Note that the best Canadian ETFs generally practice “passive” fund management, in contrast to the “active” management that conventional mutual funds provide at much higher costs. Traditionally, Canadian ETFs stick with this passive management: they follow the lead of the sponsor of the index (for example, Standard & Poors). Sponsors of stock indexes do from time to time change the stocks that make up the index, but generally only when the market weighting of stocks change. They don’t attempt to pick and choose which stocks they think have the best prospects.

This traditional, passive style also keeps turnover very low, and that in turn keeps trading costs for your ETF investment down.

In contrast, there are a lot of Canadian ETFs that have been created to tap into popular, but risky, themes and fads. So, you need to be very selective with your ETF holdings.

Theme investing has a natural appeal. It simplifies things. Investors like it because they feel it can put their investment returns into overdrive. Some also feel it adds fringe benefits to their investing, by letting them support social or environmental objectives. Brokers also like it because it gives them a rationale to recommend a variety of stocks.

When you focus on theme investing, however, it’s easy to overlook the fundamentals.

Below we update our advice on two Canadian ETFs — both of which we like — and both of which follow the traditional, passive style we recommend.

HARES S&P/TSX 60 INDEX ETF $24.99 (Toronto symbol XIU; buy or sell through brokers; ca.ishares.com) is a good low-fee way to buy the top companies listed on the TSX. Specifically, the fund’s holdings represent the S&P/TSX 60 Index. It focuses on the 60 largest, most heavily traded stocks on the exchange.

The ETF began trading on September 28, 1999. Its MER is just 0.18%; it yields 2.9%.

The S&P/TSX 60 Index mostly consists of high-quality companies. However, it must ensure that all sectors are represented, so it holds a few companies we would not include.

The fund’s top holdings are Royal Bank, 8.3%; TD Bank,
7.8%; Enbridge, 5.3%; Bank of Nova Scotia, 4.9%; CN Rail, 4.9%; Suncor Energy, 3.6%; Bank of Montreal, 3.5%; TC Energy (formerly TransCanada Corp.), 3.3%; Brookfield Asset Management, 3.1%; and BCE, 3.0%.

iShares S&P/TSX 60 Index ETF is a buy.

ISHARES CANADIAN SELECT DIVIDEND INDEX ETF $24.97 (Toronto symbol XDV; buy or sell through brokers; ca.ishares.com) holds 30 of the highest-yield Canadian stocks. The ETF also considers dividend growth and payout ratios to make its selections. The weight of any one stock holding is limited to 10% of the fund’s assets. Its MER is 0.55%, and the ETF, which began trading on September 28, 1999, yields a high 4.5%.

Most market indexes are set up so that the stocks in the index are those with the highest market capitalization and are also the most widely traded. However, the iShares Canadian Select Dividend Index ETF focuses on the 30 stocks that it sees as having the highest dividend yields; it also considers their prospects for dividend growth and sustainability. That means this ETF is more actively managed than, say, the iShares S&P/TSX 60 Index ETF. As a result, its MER is higher.

The fund’s top holdings are CIBC, 8.0%; Royal Bank, 6.5%; Bank of Montreal, 6.0%; Bank of Nova Scotia, 5.4%; BCE, 5.1%; TC Energy, 5.1%; TD Bank, 4.8%; Laurentian Bank, 4.6%; Emera, 4.2%, National Bank, 4.1%; and IGM Financial, 3.9%.

iShares Canadian Select Dividend is a buy.

For a recent article on two foreign ETFs that can benefit Canadians, read Two international ETFs offer timely diversification for Canadian investors.

Do you think ETFs are a better investment than mutual funds?

Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was published on July 15, 2019 and is republished on the Hub with permission. This article was originally published in 2016 and is regularly updated.

Age 60, retirement on a lower income – can I do it?

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By Mark Seed

Special to the Financial Independence Hub

Retirement plans come in all shapes and sizes but retirement on a lower income is possible.

Not every Canadian has a house in Toronto or Vancouver they can cash-in on.

Gold-plated pension plans are dwindling.

There are people living in multi-family dwellings striving to make retirement ends meet.

Not every person is in a relationship.

Retirement on a lower income is (and is going to be) a reality for many Canadians. 

Here is a case study to find out if this reader might have enough to retire on a lower income.

(Note: information below has been adapted for this post; assumptions below made for illustrative purposes.)

Hi Mark,

I enjoy reading your path to financial independence and it has inspired me to invest better.  I’ve ditched my high cost mutual funds and I’m now invested in lower costs ETFs inside my RRSP.  I think that should help my retirement plan. 

So, do you think I’m ready to retire at 60?

Here is a bit about me:

  • Single, live in Nova Scotia. No children.
  • Own my home, no debt. I paid off my house by myself about 10 years ago.  No plans to move.  It might be worth $300,000 or so.
  • 1 car is paid for, a 2014 Hyundai SUV. Not sure what that is worth but I don’t plan on buying a new car anytime soon.
  • I have close to $50,000 saved inside my TFSA, all cash, I use that as my emergency fund.
  • I have about $250,000 saved inside my RRSP, invested in 3-4 ETFs now.
  • I have some pension-like income coming to me thanks to my time with a former employer. A LIRA is worth about $140,000 now.  I keep all of that invested in low-cost ETF VCN – one of the low-cost funds in your list here (so thanks for your help!)

I’m thinking of stopping work later this summer, taking Canada Pension Plan (CPP) soon and I will start Old Age Security (OAS) as soon as I can at age 65.

I plan to spend about $3,000 to $4,000 per month (after tax) including travel to Florida, maybe once or twice per year to stay with friends who have a condo there for a week or so at a time.

So …. do you think I’m ready to retire at 60?  Any insights are appreciated.  Thanks for your time.

Steven G.

Thanks for your email Steven G.  It seems like you’ve done well with the emergency fund, killing debt, and investing in lower-cost products to help build your wealth.

Whether you can retire soon (I think you can with some adjustments by the way … see below) will require a host of assumptions to be made in addition to your details above.  This is because all plans, including any for retirement, are looking to make decisions about our future that is always unknown.

To help me make some educated decisions if you can retire on your own with a lower income, I enlisted the help of Owen Winkelmolen, a fee-for-service financial planner (FPSC Level 1) and founder of PlanEasy.ca.

Owen has provided some professional insight to other My Own Advisor readers in these posts here:

What is a LIRA, how should you invest in a LIRA?

My mother is in her early 90s, she just sold her home, now what to do with the money?

This couple wants to spend $50,000 per year in retirement, did they save enough?

Can we join the early retirement FIRE club now, at age 52?

Owen, thoughts?

Owen Winkelmolen analysis

Mark, I echo what you wrote above.  When it comes to retirement planning there are a few important considerations that we always want to review.  You’ll see those assumptions for Steven below.  There are also tax considerations.  Taxes will be one of the largest expenses for many retirees and Steven’s case is no different. In fact, living in Nova Scotia unfortunately means that Steven will be paying the highest tax rate in the country for his income level.  Let’s look at some assumptions first so we can run some math:

  • Assume income (today) of $60,000 per year (pre-tax).
  • OAS: Assume full OAS at age 65 $7,217/year.
  • CPP: Assume 35 years of full CPP contributions (ages 25-60) and a few years with partial contributions
    • CPP at age 60 = $8,580/year.
    • CPP at age 65 = $13,967/year (assumes future contributions in line with $60,000 income and includes new enhanced CPP benefits as of 2019).
  • Assume ETF portfolio with average fees 0.16%. Good job on VCN Steven!
  • Assume $85,000 in available RRSP contribution room.
  • Assume $13,500 in available TFSA contribution room.
  • Assume birthdate Aug 1, 1959.
  • Assume assertive risk investor profile.

Based on Steven’s current employment income, I’ve gone ahead and estimated that he will be paying around $14,000 in income tax each year (give or take depending on tax credits, etc.) At this income level Steven is paying the highest tax rate out of any province in Canada. Ouch … but reality. Continue Reading…

Most asset classes should have positive returns in 2020 but investors should lower expectations

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‘Tis the season for the annual investment outlook, with a new year and some might argue a new decade ahead of us. While some pundits hold fire on their prognostications until January, a few big-name investment firms have just come out with their 2020 prognostications.

Among the early entrants was Franklin Templeton, which provided its predictions last week in Montreal and again yesterday (Dec. 10th) in Toronto. Also yesterday, Vanguard put out a release headlined Economic and Market Outlook 2020: Lower Growth Expectations in the New Age of Uncertainty.

Franklin Templeton is a well-known manager of actively managed mutual funds, and has now been in Canada for 65 years, going back to Sir John Templeton’s famous Templeton Growth Fund.  Vanguard is best known for its “passive” or indexing approach to investing, both through index mutual funds and ETFs, although it is also an active manager. But their respective outlooks for the next year and decade are not too different, with investment returns projected to stay positive, albeit with cautions to investors not to expect quite as strong returns as they have received in the last decade.

Vanguard said global growth is set to slow in 2020, driven by US and China trade concerns and continued political uncertainty leading to depressed global economic activity.

Vanguard senior investment strategist Todd Schlanger

Todd Schlanger, senior investment strategist at Vanguard Canada, said: “Investors should prepare for a lower-return environment over the next decade, with periods of market volatility in the near-term. We expect uncertainty stemming from geopolitics, policymaking, and trade tensions to undermine global growth over the coming year … For Canada, the picture is slightly rosier, with a resilient labour market and robust wage growth leading to growth levels stronger than most developed economies in 2020, with a slight improvement over 2019.”

Vanguard’s main bullet points were these:

  • It forecasts continued slowdown in global growth but Canada will be a bright spot among developed economies: Canadian growth is forecast at 1.6%, U.S. growth forecast at 1.0%, Eurozone, 1.0%, China at 5.8%
  • Canadian equity market returns are forecast to be  3.5%-5.5%, annualized over the next ten years
  • Canadian fixed income returns are likely to be 1.5%-2.5%, annualized over the next ten years.

Vanguard says global central banks have moved from expected policy tightening heading into 2019 to additional policy stimulus amid weakening growth outlooks and inflation shortfalls this year. It expects the US federal reserve to cut the federal funds rate by 25 to 20 basis points before the end of 2020. However, it expects the Bank of Canada to keep interest rates at current levels throughout 2020. While Canadian growth is stable, rising household debt levels and high exposure to global economic uncertainty “skew the balance of risks to the downside.” Schlanger advises Canadian investors to prepare for volatility over lack of trade clarity and slowing economic growth in the U.S. by maintaining diversified portfolios, keeping investment costs low and focusing on the long term while tuning out the daily noise.

Global stocks still have more performance potential than global bonds

Meanwhile, Franklin Templeton believes global stocks have “greater performance potential than global bonds, supported by continued global growth.” Over the next seven years it forecasts strong return potential for both bonds and equities in Emerging Markets. And with short-term interest rates below historical averages, “we see a lower performance potential for government bonds.”

William Yun, Franklin Templeton Multi-asset Solutions

Franklin Templeton recommends a multi-asset approach to deal with an environment of desyncronized global growth and moderate inflation worldwide.

Bill Yun, executive vice president and investment strategist for Franklin Templeton Multi-Asset Solutions (pictured left) said the firm’s 7-year outlook for Canadian bonds the next 7 years is about 1.8% a year, versus 4.8% the past 20 years. Equity return expectations are all positive but reduced from the performance of the prior 20 years: 6% going forward for Canadian equities, versus a historical 7.2%; 6.1% for US equities compared to 6.2% the previous two decades; International equities are projected to return 5.9% versus an historic 4.1%; Emerging Markets 7.1 versus 9% historic, and hedge funds 5.75 compared to 6.4% in the past.

Global central banks have little ammo left

One positive for Canada is that the Bank of Canada has more room to cut rates to cope with an economic slowdown than most central banks in the rest of the world. Canada and the US both have room to cut but Europe does not, Yun said. Some rates are negative in parts of Europe. Continue Reading…

Should you roll the dice with your retirement savings?

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By Dale Roberts, Cutthecrapinvesting

Special to the Financial Independence Hub

You’ve worked for decades to build your retirement nest egg. You have invested smartly. The investment portfolio is required to fund a significant portion of your retirement years. In fact, you need those monies to last for many decades. Should you invest in an all-stock portfolio? That approach might deliver greater income than the traditional stock and bond portfolio.

Yup. More stocks might deliver more growth. No one can deny that stocks are the growth engine of a portfolio. When we own stocks we become business owners and we share in the success (or failure) of those companies. In the past, owning a big basket of market-leading companies has worked out more than well.

When stocks earn 8% we can spend 8%?

Retirement funding is tricky business. It’s much more complicated than the accumulation stage. The sequence of returns does not matter that much at all when we are building our portfolios, and we have decades until that retirement start date. We might see several good years that are followed by two or three bad years. Those bad years will not affect your retirement readiness when you have decades to recover. A savvy investor will even enjoy those bad years as the stocks go ‘on sale’.

But in retirement the order of stock market and portfolio returns do matter. That’s called sequence-of-returns risk. A bad year or a few bad years early in retirement can permanently impair your portfolio and your retirement. Even before that retirement start date we are already in the retirement risk zone.

But stocks beat the crap out of bonds

Most retirees and most financial planners will add some bonds to the portfolios of retirees. Those bonds work like shock absorbers. While there is no guarantee, good bonds have a habit of going up in price when stocks get hit hard. This is typical retirement planning ‘thinking’. And yes, there are other weapons besides bonds.

On Twitter we had a very robust discussion on retirement funding and risk. Financial Planner Ed Rempel defended the all-stock portfolio for retirees. And he provided some support with this chart:

According to Mr. Rempel, the success rate for an all equity portfolio is 97% for a period that spans over 100 years. Success is defined as the retiree being able to spend at 4% of the portfolio value, every year, with an adjustment equal to inflation. Of course that’s called the 4% rule. That’s a retirement planning benchmark that is useful, but is then usually disposed of for dozens of reasons. For Boomer and Echo I had asked if there was a new normal for Canadian retirees . Continue Reading…

Sixth Sense or Nonsense? Removing intuition from the investment process

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By Noah Solomon

Special to the Financial Independence Hub

In a recent newspaper article, a Canadian investment executive described why he chose not to incorporate artificial intelligence (AI) into his firm’s portfolio management process. His reasoning was based on the distinctively human ability to “read a room” and gauge the sincerity of corporate management teams, which cannot be replicated by a machine or algorithm.

Even if you believe that investment professionals possess this “sixth sense,” the simple fact is that it has not enabled them to produce superior results. According to the latest SPIVA (S&P Index vs. Active) Canada report card, over the past 10 years:

  • 91% of Canadian equity funds underperformed the TSX Composite Index
  • 97% of U.S. equity funds underperformed the S&P 500 Index
  • 100% of Canadian dividend-focused funds underperformed the TSX Dividend Aristocrats Index

Aside from the alleged ability to gauge the truthfulness of a person’s statements, there is another human characteristic that AI lacks. Unlike their human counterparts, AI algorithms do not have emotions or cognitive biases, which often lead to poor investment decisions.

We have met the enemy – and the Enemy is Us

The field of behavioural economics studies the effects of psychological, cognitive and emotional factors on the economic decisions of individuals and institutions. This field has produced countless studies that have conclusively demonstrated that when it comes to investment decisions, people harbour subconscious biases that result in suboptimal results. Moreover, these biases are not restricted to individual investors, but also permeate the decisions of professional managers and institutions. Continue Reading…