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).

The Power of Low-Fee Core Bond ETFs in your Investment Portfolio

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By Alizay Fatema, Associate Portfolio Manager, BMO ETFs

(Sponsor Blog)

The latest economic data unveils a captivating narrative of a strong and resilient economy in both Canada and the U.S. The current inflation stickiness and robust job market numbers make a solid case for the central banks in both countries to keep interest rates higher for longer.

Towards the end of September 2023, markets basked in record-high yields. However, earlier this month, based on the current situation in the Middle East, bond yields fell owing to an increase in demand for safer assets and caused longer-term bond prices to surge.  U.S. consumer prices remained elevated for the month of September and a pullback in demand for a treasury auction pushed longer-term yields higher again, resulting in 10-yr U.S Treasury yields touching their highest point since 2007. On the contrary, the recent CPI printed lower than expectations in Canada, yet the yields remain high as hot economic data continues to build pressure south of the border.

Source: Bloomberg

Given the current two-decade-high interest rates, yields on Aggregate Bond ETFs have surpassed 5%, making them an interesting avenue for fixed-income investors. Before we dive in further, let’s discuss some aggregate bond ETFs in detail along with their benefits.

Aggregate Bond ETFs as the Core of your Investment Strategy

Aggregate bond ETFs are exchange traded funds that aim to track performance of a diversified portfolio of bonds. These ETFs are referred to as core because it reflects their status as a foundational building block of a well-rounded investment portfolio. These ETFs can help investors achieve diversification, steady income & stability within their investment portfolios. BMO currently offers two Aggregate Bond ETFs:

  • BMO Aggregate Bond Index ETF (ZAG) aims to replicate the performance of the FTSE Canada Universe Bond Index. This ETF primarily invests in a Canadian investment-grade fixed income securities consisting of Federal, Provincial and Corporate bonds, with a term to maturity greater than one year.
  • BMO US Aggregate Bond Index ETF (ZUAG) tracks the performance of the Bloomberg US Aggregate Bond Index. It invests in U.S. investment-grade bonds such as U.S. treasury bonds, government-related bonds, corporate bonds, mortgage-backed pass-through securities, and asset backed securities with a term to maturity greater than one year. ZUAG is also offered as hedged to CAD (ZUAG.F) and in USD (ZUAG.U).

Source: BMO Asset Management.

These aggregate bond ETFs have proven to be an extremely viable investment solution owing to their key features:

  • The Symphony of Diversification: Aggregate Bond ETFs provide exposure to a broad spectrum of bond market offering diversification across the curve, various sectors and segments, maturities, issuers, and credit qualities; making them resilient for any market environment.

For example, in the current high-interest rate environment, exposure to short duration bonds might provide some down-side protection. On the other hand, if central banks start cutting rates, then longer duration can provide some upside potential.

Aggregate Bond ETFs can also be considered an equity market hedge. Given the inverse correlation between equities and bonds, they can provide a cushion against market turbulence and can potentially outperform stocks during selloffs.

  • Harnessing Cost Efficiency through Lower Fees: These ETFs are passively managed with the aim to track performance of the aforesaid indices. Their expense ratios are lower as compared to some actively managed funds, thereby reducing overall investment costs and improving net returns for investors. BMO is currently charging a Management Expense Ratio of 0.09% for both ZAG & ZUAG.  
  • Liquidity & Ease of Trading: Like all other ETFs, ZAG & ZUAG are traded on stock exchanges, enabling investors to easily buy and sell shares throughout the trading day, allowing them to see real-time prices. The bid-ask spreads on these products are lower in contrast with the underlying bonds which enhances their liquidity compared to traditional bonds, making them a cost-effective way to attain the exposure to the aggregate bond market.
  • Navigating Risk Management through High Credit Quality: Aggregate Bond ETFs are perceived as a stable and safer investment option as they provide exposure to investment-grade bonds, which are considered to have lower risk as opposed to high-yield or junk bonds. In the current rising interest rate environment, the credit quality & relative stability of the investment grade bonds make them an appealing choice for investors seeking to minimize risk & preserve capital.

Combined with the key features mentioned above, these Aggregate Bond ETFs provide investors with a low-cost core in any investment portfolio. They distribute monthly interest payments, providing a steady stream of income. These ETFs emphasize on preservation of capital and provide transparency and visibility into the funds’ composition and their underlying assets. Continue Reading…

Navigating the Student Loan Dilemma: Unlocking Financial Independence with RESPs

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By Andrew Lo, President & CEO of Embark Student Corp.

(Sponsored Post)

The pursuit of higher education is a cornerstone of personal and professional growth for many young Canadians. However, this pursuit often comes at a hefty price, with student loans being a significant barrier to financial independence. The burden of student debt can haunt graduates for years, affecting their ability to save, invest, and achieve financial stability. But there’s good news: opening a Registered Educations Savings Plan (RESP) can lighten the burden of student loans and help you help your children start their adult life debt-free by encouraging regular and early savings, offering valuable government grants, and harnessing the power of compound interest.

The Student Loan Conundrum

Canada is home to a world-class education system, but the cost of pursuing post-secondary education can be daunting. Tuition fees, books, accommodation, and other expenses can quickly add up, leaving many students with no choice but to turn to the most common method of affording post-secondary:  student loans.

What some students don’t fully understand when they use student loans is that they come with interest rates that accrue after graduation. For many young Canadians, this means they start their careers with substantial debt, and few resources to help them repay their loans.

In a recent poll of Canadian students, 79% admitted that the amount of debt taken on to afford post-secondary can be debilitating. This burden of student debt can have a profound impact on a young graduate’s financial journey, with 57% of students surveyed agreeing that graduating with student debt will make it harder for them to become financially independent from their parents.

Unfortunately, the constant struggle to make loan payments often hampers their ability to save and invest in their futures. Despite this, student loans are still the most normalized way of paying for education in Canada.

There’s a better way pay for post-secondary education

One effective way to combat the student loan conundrum is to start saving for education expenses early. It can be hard to think about university and college when a child is a few years old but by beginning to save as soon as possible, families can significantly reduce their need for student loans. You’re probably thinking, “accumulating savings to cover educational costs while managing the rising cost-of-living is no easy feat.” This is where a Registered Education Savings Plan [RESP] comes into play.

RESPs are powerful tools that Canadians can take advantage of to fit the post-secondary bill. They can be opened by the parents or guardians of a child, other family members, or friends, to save over a total period of 35 years. By contributing regularly to an RESP, families can build substantial savings to cover tuition and related expenses. Starting early allows for smaller, manageable contributions over time, reducing the financial stress associated with higher education. The most valuable part of this savings tool is that it opens your savings up to a world of government grants that you can qualify for.

Unlocking “Free Money” with Grants

One of the most compelling features of RESPs is the opportunity to acquire “free money” in the form of grants. The Canadian government provides a generous grant called the Canada Education Savings Grant (CESG) as a reward for saving, allowing you to collect up to $7200.

This grant matches 20% of your contributions on the first $2,500 saved annually. Over the years, if you contribute $2500 annually to an RESP, this works out to an additional 20% being added to your first $36,000 saved without even considering investment gains. By maximizing these grant opportunities, families can alleviate the financial strain of higher education and better prepare for the future. Continue Reading…

The changing perceptions of Normal

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Image courtesty Outcome/Creative Commons

By Noah Solomon

Special to Financial Independence Hub

In response to rapidly accelerating inflation, central banks began raising rates aggressively at the beginning of 2022. Ever since, wild swings in bond markets have had a tremendous impact on virtually every single asset class.

This month, I examine the recent spike in rates from a historical perspective. Importantly, I will discuss the likely range of interest rates over the foreseeable future and the associated implications for financial markets.

When the Fed and other central banks were confronted with financial disaster in late 2008, they slashed interest rates to zero and deployed additional stimulative measures to ward off what many thought could be another Great Depression. Global rates then remained at levels that were both well below historical averages and the rate of inflation for the next 13 years.

In 2008, the runaway inflation of the 1980s and the painful medicine of record high rates that were required to subdue it were still relatively fresh in people’s minds. At that time, had you asked anyone what would be the most likely result of keeping rates near zero for over a decade, their most likely response would have been runaway inflation. And yet, inflation remained strangely subdued. According to most experts, this unexpected result is largely attributable to a relatively benign geopolitical climate and a related push toward global outsourcing.

This led to the notion of a “new normal” in which inflation was permanently expunged. Over the span of only 13 years, people went from fearing inflation to believing that it was a relic of the past unworthy of serious consideration. This false sense of comfort caused central banks and investors alike to be caught off guard in late 2021 when they realized that inflation had not been permanently vanquished but was merely hibernating.

These sentiments were evident in bond markets. After rates were slashed to zero during the global financial crisis, investors were skeptical that they would remain there for long before stoking inflation. Longer-term rates remained well above their short-term counterparts, with the yield on 10-year U.S. Treasuries retaining an average 1.9% premium above the Fed Funds rate from 2009 – 2020.

However, 13 years of ultra-low rates with no sign of inflation allayed such fears, with the yield spread crossing into negative territory late last year and reaching a low of -1.5% in May of 2023. Even the rapid acceleration in inflation in late 2021 failed to fully disavow investors of the notion that the era of low inflation had come to an end, with current 10-year rates falling below their overnight counterparts.

10 U.S. Treasury Yield Minus Fed Funds Rate (1995 – Present)

 

Equity markets danced to the same tune as their bond counterparts. When central banks cut interest rates to zero during the global financial crisis, investors were dubious that inflation would not soon rear its ugly head. Multiples remained relatively normal, with the P/E ratio of the S&P 500 Index averaging 16.4 for the five years beginning in 2009.

Over the ensuing several years, investors became complacent that the world would never again experience inflation issues, with the S&P 500’s P/E ratio climbing as high as 30 by early 2021. Multiples have since remained somewhat elevated by historical standards, indicating that markets have not fully embraced the fact that inflation may not be as well-behaved as what they are used to.

S&P 500 P/E Ratio (1995 – Present)

 

The Rising Tide of Declining Rates: Not to be Underestimated

According to legendary investor Marty Zweig:

“In the stock market, as with horse racing, money makes the mare go. Monetary conditions exert an enormous influence on stock prices. Indeed, the monetary climate – primarily the trend in interest rates and Federal Reserve policy – is the dominant factor in determining the stock market’s major direction.”

The 2,000-basis point decline in interest rates from 1980 to 2020 not only turbocharged aggregate demand (and by extension corporate revenues), but also dramatically lowered companies’ cost of capital. In tandem, these two developments were nothing short of a miracle for corporate profits and asset prices. Continue Reading…

These three ETFs are responsible for most of my wealth

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AlainGuillot.com

By Alain Guillot

Special to Financial Independence Hub

I was a day trader for almost 10 years.

Oh, I was so smart. I was smarter than the market and all its participants. But I was not, I was delusional. I wasted my time trying to guest the direction of the markets. I had good months in which I felt I was going to be a millionaire, and then in one bad trade I would lose most of my gains.

The one lesson I discovered, and maybe was worth the price of all my losses was that passive investment works.

The strategy create by John Bogle many decades ago is till paying huge dividends. Mr. Bogle was the founder of Vanguard Funds, the inventor of Passive Investing, a strategy created for the masses. Ever since I started passive investing my portfolio has been going up at a staggering rate.

My investments are composed of three main investments:

VFV (Vanguard S&P 500 US Index ETF)
XIU (iShares S&P/TSX 60 Index ETF)
VIU (Vanguard FTSE Developed all caps ex North America)

Plus other individual stocks that mostly lose me money. Continue Reading…

A Wake-up Call for those choosing Mutual Fund fees over Robo-Advisors

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Image courtesy Questrade/iStock

By Scarlett Swain

(Special to Financial Independence Hub)

It’s that time of year. The leaves have started to shift to brilliant shades of crimson, orange, and yellow. The days are getting shorter. And, suddenly, it’s “jacket weather” again. For many Canadian families, the transition into cooler months signals a time to begin the process of reviewing their finances from the past year with the goal of being better prepared in the years ahead.

With the cost of living in Canada incrementally higher than it has been in recent memory, there is a renewed opportunity for families to ask a familiar question: what is a simple, one-step investment strategy that they can use to help stretch the most out of their money, both now and for the long haul?

Well, like the changing seasons, it may be a good time for families to consider changing up a dated investment approach in favour of one that will take their money a little further. That is, using a low-fee, low-touch, robo-advisor in place of costly mutual fund investments … and, here are a few reasons why:

Accessibility

Robo-advisors have ushered in a new era of accessible investing. Designed to be user-friendly from the get-go, they are an excellent choice for both novice and experienced investors. With just a few clicks, investors can select a portfolio that matches their risk tolerance and fund it with little to no hassle.

Diversification

A well-constructed portfolio needs variety. Robo-advisors excel at this by spreading investments across different asset classes, thus reducing risk. Mutual funds, while also diversified, often lack the customizability and personalization offered by low-fee robo-advisors.

Automated Rebalancing

Investing with a robo-advisor provides nimble, automated rebalancing, ensuring that investments stay aligned to goals, even as market conditions shift. Mutual fund investors often need to manually (and worse, reactively) adjust their portfolios, potentially missing out on market opportunities or exposing them to unnecessary risk. Continue Reading…