Tag Archives: ETFs

Retired Money: What ETFs are appropriate for retirees?

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Photo by Alena Darmel from Pexels, via MoneySense.ca

My latest MoneySense Retired Money column looks at what ETFs might be appropriate for retirees and near-retirees. You can find the full column by clicking on the headlined text here: The Best ETFs for Retirement Income.

I researched this topic as part of a MoneyShow presentation on the ETF All-Stars, scheduled early in September, to be conducted by myself and MoneySense editor Lisa Hannam. Regular MoneySense and some Hub readers may recall that I was the lead writer for the annual ETF All-Stars package but after almost a decade decided to pass the reigns to new writers: this year’s edition was spearheaded by Michael McCullough.

While the ETF All-stars (which are selected now by a panel of seven Canadian ETF experts) are appropriate for all ages and stages of the financial life cycle, a solid subset of the picks can safely be considered by retirees. A prime example are the Asset Allocation ETFs, many of which have been All-Star picks since Vanguard Canada launched them several years back, and since matched by BMO, iShares, Horizons and others.

Generally speaking, young people can use the 100% growth AA ETFs like VEQT etc., or (which I’d be more comfortable with), the 80% growth/20% fixed income vehicles like VGRO. Near-retirees might go with the traditional 60/40 stocks/bonds mix of classic balanced funds and indeed pension funds: VBAL, XBAL, ZBAL, to name three.

Those fully in Retirement who want less risk but a bit of growth could flip to the 40/60 stocks/bonds mix of VCNS, XCON (check) and ZCON (check.).

In theory all you need is a single asset allocation ETFs, no matter where you are in the financial life cycle. After all, all these ETFs are single-ticket highly diversified global plays on the stock market and bond market, covering all or most geographies and asset classes. And their MERs are more than reasonable: 0.2% or so.

A single Asset Allocation ETF can suffice, but consider adding some tactical layers

In practice, most investors (whether retired or not) will want to do a bit more tinkering than this. For one, the asset allocation ETFs tend to have minimal exposure to alternative asset classes outside the stocks and bonds realm. They will include gold stocks and some real estate stocks or REITs, but little or no pure exposure to precious metals, commodities or indeed cryptocurrencies. (Maybe that’s a good thing!).

The MoneySense article bounces my ideas for adding tactical layers to an AA ETF. For example, you might use the 40/60 VCNS instead of 60/40 VBAL, for 80% of your investments, reserving the other 20% for more tactical mostly equity specialized ETFs. You’d aim for a net 50/50 asset mix after blending the AA ETF and these tactical ETFs. Continue Reading…

An answer to “Can you help me with my investments?”

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By Michael J. Wiener

Special to Financial Independence Hub

Occasionally, a friend or family member asks for help with their investments.  Whether or not I can help depends on many factors, and this article is my attempt to gather my thoughts for the common case where the person asking is dissatisfied with their bank or other seller of expensive mutual funds or segregated funds.  I’ve written this as though I’m speaking directly to someone who wants help, and I’ve added some details to an otherwise general discussion for concreteness.

Assessing the situation

I’ve taken a look at your portfolio.  You’ve got $600,000 invested, 60% in stocks, and 40% in bonds.  You pay $12,000 per year ($1000/month) in fees that were technically disclosed to you in some deliberately confusing documents, but you didn’t know that before I told you.  These fees are roughly half for the poor financial advice you’re getting, and half for running the poor mutual funds you own.

It’s pretty easy for a financial advisor to put your savings into some mutual funds, so the $500 per month you’re paying for financial advice should include some advice on life goals, taxes, insurance, and other financial areas, all specific to your particular circumstances.  Instead, when you talk to your advisor, he or she focuses on trying to get you to invest more money or tries to talk you out of withdrawing from your investments.

The mutual funds you own are called closet index funds.  An index is a list of all stocks or bonds in a given market.  An index fund is a fund that owns all the stocks or bonds in that index.  The advantage of index funds is that they don’t require any expensive professional management to choose stocks or bonds, so they can charge low fees.  Vanguard Canada has index funds that would cost you only $120 per month.  Your mutual funds are just pretending to be different from an index fund, but they charge you $500 per month to manage them on top of the other $500 per month for the poor financial advice you’re getting.

Other approaches

Before looking at whether I can help you with your investments, it’s worth looking at other options.  There are organizations that take their duty to their clients more seriously than the mutual fund sales team you have now. Continue Reading…

The great migration to Cash: Money Market and Short-Term Fixed Income

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Image from Pixabay: Alexander Lesnitsky

By Matt Montemurro, CFA, MBA, BMO ETFs

(Sponsor Content)

One of the biggest trends in the market, thus far in 2023, has been the flurry of inflows ($AUM) into money market and short-term fixed income. We have seen a “great migration to cash” as investors are literally being paid, handsomely, to park cash on the sidelines. We are now 6 months through the year and flows into the short end do not seem to be slowing down. Thus far YTD, we have seen $5.7bln flow into money market and ultra short-term fixed income ETFs, accounting for over 50% of all flows into fixed income ETFs in 2023 (Source: NBCFM ETF).

Money Market and Ultra Short-Term Fixed Income:  after years of being a forgotten segment of the market, how and why are they the leading asset gatherer?

With the accelerated path of rising rates, we have seen in the short end of the yield curve; (the overnight rate) the yield curve inverted. An inversion of the yield curve is caused when shorter-term rates rise faster than longer-term rates. Generally, this is something that occurs but reverses quite quickly.

Not this time. We are currently in a period of a prolonged yield curve inversion, which could be a leading indicator of economic weakness to come. This inversion is exactly what these money market and ultra short-term fixed income investors are looking to cash in on. Lock in higher shorter-term rates and take advantage of the inverted yield curve.

For too long, investors were forced to move outside of investment grade bonds and further out the yield curve to achieve their yield and return expectations. The market has shifted that paradigm on its head and allowed investors to truly get paid to wait on the sidelines in cash.

 Current Canadian Yield Curve

Source: Bloomberg, June 30, 2023

The short end appears to be the sweet spot for many investors, in terms of risk and reward.

Risk: by targeting the short end of the curve, investors will be minimizing their interest rate sensitivity (Duration exposure) and will generally be buying bonds that will be maturing in less than 1 year. Buying investment grade bonds, issued by high quality issuers, this close to maturity provides investors with downside protection as all these bonds will mature at par.[1]

Reward: Achieve a higher yield to maturity than further out the curve. Allowing investors to earn higher yields for lower interest rate sensitivity risk. The current market isn’t paying investors to lend money for longer periods. The front end provides an extremely attractive proposition for investors.

Today’s market is uniquely positioned and many market participants expect volatility to be on the horizon and as higher interest rates make their way through the economy, potentially causing growth to slowdown. Money market and short-term fixed income are well positioned for this environment, as investors can weather the potential volatility in the market while still meeting income and return needs. Continue Reading…

Looking to invest in AI? Consider a large-cap tech ETF

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Canadians asking how to invest in AI may want to consider an ETF holding large-cap tech stocks with diversified exposure to the rise of artificial intelligence

Deposit Photos

By David Wysocki

(Sponsor Content)

The rise of AI has sparked a huge wave of investor interest. Generative AI tools like Chat GPT have many Canadians asking how they can invest in AI, or wondering if they’ve missed the wave of excitement around this new technology.

We believe that this latest wave of excitement around AI is only the first stage of investor interest in what could become a technological mainstay for years or even decades to come. There could be hiccups and corrections in this area of the market in the short-term, but in the long-term we believe in the investment prospects of AI technology.

The question remains, though, where can Canadian investors go to find AI exposure for their investment portfolios? We believe that Canadians looking to invest in AI could consider the prospects of a large-cap technology ETF.

What is AI and how do companies make money from it?

AI stands for Artificial Intelligence and AI technologies are essentially machines that can perform cognitive functions we normally associate with a human mind. These are functions like critical analysis, prediction, and the creation of original works. AI tools are all around us and have been integrated into technologies for almost three decades, whether in gaming, online shopping, or social media.

In 2023 much of the focus around AI has been on one specific subset: generative AI. Generative AI is a form of AI focused on the creation of original works. Generative AI tools can write text or code, create images, even generate audio and video.

The business applications of AI in general, and generative AI in particular, are wide. First and foremost, generative AI can help businesses operate more efficiently. Many repetitive process tasks such as writing technical guides, analyzing legal text, conducting background research or even generating graphics can be done with an AI tool.

AI, however, cannot replace human workers entirely. In their current state AI technologies can add efficiency and scale to certain tasks, but they are not replacing human workers — especially highly skilled workers — en masse.

Companies in the tech sector developing AI software, as well as hardware tools that support AI, are seeing immediate business impacts as their AI tools are now in demand from a wide range of industries. So far, large-cap tech companies have been leaders in this AI race.

Why large-cap tech companies are AI leaders

The rallying value of technology stocks in 2023 so far has been driven largely by large-cap tech companies. In a still-uncertain macro environment, investors have flocked to large-cap tech for the combination of market share, business fundamentals, and exposure to innovation that these companies bring.

One of the innovation trends that has peaked investors’ interest is the rise of AI, specifically generative AI: tools like Chat GPT or Dall-E that can generate an original image or piece of text. What has made this AI investment trend interesting, however, is that it has largely focused on large-cap companies.

Historically, when a new technology comes into investors’ focus, large-cap companies capture some positive growth trends, but the biggest gainers in the short-term are usually smaller-cap tech companies tied directly to the new tech. In the case of generative AI, there has been a paradigm shift. Large-cap companies like Google, Meta, and Microsoft have been so quick to roll out and announce new AI tools that they’ve been some of the primary beneficiaries.

Put simply, large-cap companies have established leadership in the AI space. But, there’s another key reason why large-cap companies, especially combined in an ETF package, can be attractive for Canadians looking to invest in AI: diversification.

How diversified exposure can benefit an AI investor

It takes more than software to build a market-leading AI. The end output of a generative AI tool is built on incredibly complex algorithms, software platforms, cloud infrastructure, and — crucially — hardware like semiconductors.

Semiconductors are the fuel behind the rise of AI, as investors recently experienced through Nvidia’s stock boom. That spike followed forecasts from Nvidia of demand for its semiconductors from other large-cap tech companies building AI tools and platforms.

The rise of AI has had similar impacts on a range of different tech subsectors. It has impacted areas like tech devices, software, and hardware in different ways. Investors seeking exposure to AI can gain breadth of exposure through an ETF holding large-cap stocks from many tech subsectors.

The Harvest Tech Achievers Growth & Income ETF (HTA:TSX) works on the underlying investment thesis of investing in large-cap companies across the tech sector to gain diversification. HTA is designed to capture a range of growth opportunities in the technology sector, and the rise of generative AI has been a test case for the ETF’s long-term objective. Its varied exposure to large-cap companies in semiconductors, software, social media, and even IT services has allowed it to capture a wide range of positivity from investor interest in AI. Continue Reading…

Using ETFs for International Investing

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Image from Pexels/Anton Uniqueton

By Erin Allen, VP, Online Distribution, BMO ETFs

(Sponsor Content)

As an investor, diversification is crucial to reducing risk and achieving long-term growth. International investing is a great way to diversify your portfolio, but it can be challenging for Canadians to navigate the complex world of foreign stocks and currencies. One solution is to use exchange-traded funds (ETFs) for international investing.

Benefits

There are many advantages to using ETFs for international investing. First, they provide exposure to a broad range of international markets, including developed and emerging markets. This diversification can help reduce risk (when one market zigs and another zags) and increase returns over the long term.

Second, ETFs are typically more cost-effective than other forms of international investing. They have lower fees than traditional mutual funds, and you can invest in them for no commission at many online brokerages in Canada.

Third, ETFs provide transparency and ease of access. You can easily track the performance of your international ETFs and adjust your portfolio as needed. Additionally, most ETFs are denominated in Canadian dollars, so you don’t have to worry about currency conversion fees or fluctuations.

Considerations

  • Currency: Currency returns are an important factor impacting investors purchasing a non-Canadian asset. Foreign currency fluctuations can affect the total return of assets bought in that currency when compared to the Canadian dollar. ETF providers offer both hedged and unhedged options, giving Canadian investors more tools to efficiently execute their investment strategies. The objective of currency hedging is to remove the effects of foreign exchange movements, giving Canadian investors a return that approximates the return of the local market. Continue Reading…