Tag Archives: ETFs

Why a focus on ‘leaders’ works in Call Option ETFs

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By Paul MacDonald, CFA

(Sponsor Content)

Harvest ETFs Chief Investment Officer explains why the independent ETF firm focuses on 20-30 ‘leaders’ in its call option ETFs.

Harvest’s call options ETFs are built through a structured process. Portfolio managers begin by identifying an industry, sector or theme with long-term growth prospects such as healthcare, technology, or utilities. They then identify and select between 20 and 30 leaders: large-cap companies with significant financial reserves and market share. The portfolio managers then apply Harvest ETFs’ active & flexible call option strategy to the ETF holdings to generate consistent monthly income for unitholders.

But why do they only select between 20 and 30 companies for their call option ETFs? Diversity is a key to any investment strategy, so shouldn’t Harvest ETFs focus on the widest variety of holdings as possible?

In our experience, the focused approach taken in many Harvest ETFs is tied directly to the execution of Harvest’s active and flexible Covered Call Option strategy.

20-30 stocks is not a random number. When we select the stocks we want an ETF to hold, our goal is to create concentrated portfolios, but with large enough capitalization and a wide enough diversity of business styles and operations that we can give investors broadly diversified exposure to a single sector or industry.

We like diversity, and in a one-stop solution for market exposure, having a huge array of companies can make a lot of sense. But for a targeted strategy like a call option ETF, focusing on the leaders of a particular industry or sector means the managers making decisions have a deep familiarity with the companies they hold.

Why familiarity matters in Call Option ETFs?

Call Option trading in an actively managed ETF requires constant engagement with options premiums available on specific stocks. One of the key value adds of an active call option strategy is the flexibility portfolio managers can have, both to generate their consistent monthly distribution and capture higher options premiums when available to expose more of the portfolio to potential market upside.

Continue Reading…

The seven money myths that stand in the way of a good financial plan

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Financial Literacy Month is natural moment for a reality check-up

By Jennifer Cook, EPD, PFA, PFA™, QAFP™

For the Financial Independence Hub

On the path to financial security, there are natural peaks and valleys that can be navigated via the help of a good advisor.  It’s the map in the form of a personal plan that can help guide an individual toward their goals, whether it is saving for a house, planning for retirement or protecting against unforeseen events.  But more than any other hazard along the journey, is when road signs are misread or misunderstood.

Financial literacy is key to unlocking an individual’s ability to realize their dreams, and that is why Financial Literacy Month in November is so important to us at Co-operators.  It’s a moment for all of us to fill in some of the gaps in our knowledge about planning.

Many of us have developed habits or rely on inherited ideas about finances, so I look at financial literacy as an opportunity to put to rest some of the myths that can affect good financial planning.

As Canadians face year-end decisions on investments, taxes, and RRSPs, we at Co-operators have identified common gaps in financial preparedness stemming from the spread of money myths. There are many myths that can derail planning, but I’d like to talk about the top seven and offer a remedy in the form of a reality.

Myth 1: Saving is safe. Investing is risky.

Reality: As Canadians feel the impact of raising interest rates and inflation, it’s tempting to embrace the idea of “safe” or “lower-risk” investment options. But this strategy comes with a risk of considerable lost earning power. Investing in a diversified portfolio that matches individual needs with the help of a Financial Advisor can build long-term returns, while managing risk.

Myth 2: Single, young people don’t need insurance.

Reality: No one is free from the risk of loss or liability. When budgets are tight, tenant or renters’ insurance can provide critical coverage for unforeseen events like theft, fire, or water damage. Young people can also take advantage of lower insurance rates that provide continuing benefits as their lives develop and their needs grow.

Myth 3: RRSP season starts in mid-February.

Reality: Though the typical RRSP frenzy may suggest otherwise, there is no rule that says lump sum payments must be made to RRSPs before the annual March 1 deadline. Canadians can contribute to their RRSPs (up to individual contribution maximums) at any time of the year. The March 1 date is used to determine how tax benefits will apply to the previous year’s income. Depending on a person’s situation, a Financial Advisor may recommend contributing smaller amounts to an RRSP on a weekly, bi-weekly, or monthly basis.

Myth 4: Those who invest in mutual funds have sufficiently diversified portfolios.

Reality: Today’s spectrum of mutual funds is widespread. It’s not easy to gauge whether an individual investor is appropriately diversified. And that can leave some people vulnerable to losses from sectors. Leveraging the expertise of a Financial Advisor can help investors make nuanced adjustments to ensure their portfolio has the right balance of diversification aligned with their risk tolerance. Continue Reading…

Retired Money: Are Balanced Funds really dead or destined to rise again?

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Is the classic 60/40 balanced fund destined to rise again, like the phoenix?

My latest MoneySense Retired Money column addresses the unique phenomenon investors have faced in 2022: for the first times in decades, both the Stock and Bond sides of the classic balanced fund or ETF are down.

Click on the highlighted headline to access the full column: The 60/40 portfolio: A phoenix or a dud for retirees? 

While the column focuses on the Classic 60/40 Balanced Fund or ETF, the insights apply equally to more aggressive mixes of 80% stocks to 20% bonds, or more conservative mixes of 40% bonds to 60% stocks or even 80% bonds to 20% stocks. Most of the major makers of Asset Allocation ETFs provide all these alternatives. Younger investors may gravitate to the 100% stocks option: indeed with most US stocks down 20% or more year to date, it’s an opportune time to load up on equities if you have a long time horizon.

However, we retirees may find the notion of 100% equity ETFs to be far too stressful in environments like these, even if the Bonds complement has thus far let down the tea. As Vanguard says in a backgrounder referenced in the column, the classic 60/40 may yet rise phoenix-like from the ashes of the 2022 doldrums.

“We’ve been here before.”

On July 7th, indexing giant Vanguard released a paper bearing the reassuring headline “Like the phoenix, the 60/40 portfolio will rise again.”  “We’ve been here before,” the paper asserts, “Based on history, balanced portfolios are apt to prove the naysayers wrong, again.” It goes on to say that “brief, simultaneous declines in stocks and bonds are not unusual … Viewed monthly since early 1976, the nominal total returns of both U.S. stocks and investment-grade bonds have been negative nearly 15% of the time. That’s a month of joint declines every seven months or so, on average. Extend the time horizon, however, and joint declines have struck less frequently. Over the last 46 years, investors never encountered a three-year span of losses in both asset classes.”

Vanguard also urges investors to remember that the goal of the 60/40 portfolio is to achieve long-term returns of roughly 7%. “This is meant to be achieved over time and on average, not each and every year. The annualized return of 60% U.S. stock and 40% U.S. bond portfolio from January 1, 1926, through December 31, 2021, was 8.8%. Going forward, the Vanguard Capital Markets Model (VCMM) projects the long-term average return to be around 7% for the 60/40 portfolio.”

It also points out that similar principles apply to balanced funds with different mixes of stocks and bonds: its own VRIF, for example, is a 50/50 mix and its Asset Allocation ETFs vary from 100% stocks to just 20%, with the rest in bonds.

Tweaking the Classic 60/40 portfolio

While very patient investors may choose to wait for the classic 60/40 Fund to rise again, others may choose to tweak around the edges. The column mentions how TriDelta Financial’s Matthew Ardrey started to shift many client bond allocations to shorter-term bonds, thereby lessening the damage inflicted to portfolios by bond funds heavily concentrated in longer-duration bonds. Continue Reading…

Nasdaq 100: Exposure to the Modern Economy

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Image via Pixels/Anna Nekrashevich

By Sa’ad Rana, Senior Associate – ETF Online Distribution, BMO ETFs 

(Sponsor Content)

Indexed investing, when done properly can be an efficient and low-cost way of gaining exposure to various markets. Investment vehicles such as exchange-traded funds (ETFs), make it possible for individuals to invest in these indexes, i.e., the Nasdaq-100 index.

Nasdaq-100 & Exposures

Launched in 1985, the Nasdaq-100 is one of the world’s most well-known large-cap growth indexes. The companies in the Nasdaq-100 include over 100 of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization. It is mainly comprised of technology, consumer, and health companies – with a slight exposure to industrials and telecom.

When looking at what is powering economic growth in the 21st century, we look to those new economy sectors that are highly digital. These are disproportionately tech or consumer companies like Amazon, Microsoft, and Google. This index gives you exposure to the biggest Nasdaq-listed names, along with others that follow closely behind these leaders in technology.

Nasdaq-100 vs S&P 500 Volatility & Performance

When looking at volatility, one may think of the Nasdaq as being a more growth-oriented index, and if looking at returns alone, these have certainly shown to be significant over the years. Investors may assume that the indexes’ higher performance leads to higher volatility compared to other leading indexes. However, if we take a look at the chart below, which is more of a longer-term picture, you are getting a pretty significant consistent volatility range. Of course, if you look at this year in comparison inflation has been at the forefront of headlines, growth-oriented companies have been taking a harder hit than more cash-up-front companies: you see more volatility in the Nasdaq this year vs the S&P 500.

Both the Nasdaq-100 and the S&P 500 have had very similar volatility over last 15+ years

Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

The big story for everyone is the performance of the Nasdaq-100 vs. the S&P 500. The long-term performance of the Nasdaq-100 shows an upward trend. If we look at post-2008, generally monetary policy had been very supportive of market growth, and companies had been able to invest in research, helping them grow over time. You see this reflected in the Nasdaq-100, where thanks to the underlying companies in this index, there is outperformance. The chart below showcases this quite well. It tells us that the Nasdaq-100 is a valuable holding in a portfolio based on performance.

Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

Market Considerations: Performance vs Interest Rates

The chart below shows what happened the last time rates went up by a similar amount. You can see a gradual stairway up from almost 0% to about 2.5%. You can see the dip in the NDX price (grey line), which looks like a blip, almost not noticeable (but it was 23%). This isn’t very far from the drawdown this year to date. Albeit the Fed is raising rates much faster.

Based on experience, the Fed may keep rates high until inflation gets under control into that sort of two to three per cent range. The question for investors is, what happens to stocks if rates get to 3%, 4% or maybe 5% and perhaps stay at that level for a few years? This is where it is imperative to look at the amount of debt these companies have on their balance sheet, how much the interest costs will go up and what their earnings power looks like. Will they be able to remain competitive with the price of everything rising? Will consumers continue to pay for these products vs. downsizing or even substituting for cheaper alternatives? Continue Reading…

5 factors for millennials considering their retirement

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By David Kitai, Harvest ETFs

(Sponsor Content)

Millennials — the generation born between 1981 and 1997 — are beginning to enter their 40s. With the passing of that milestone comes a new consideration: retirement.

Canadians are living longer and longer, retirement at or around age 65 may need to last 30+ years. Millennials in their 30s and early 40s are ideally placed to plan for their eventual retirement. In those typically peak working years, millennials can take major strides towards a stable financial future and the achievement of their retirement goals. Preparing for retirement, though, is more than just putting a magic number away in a bank account. There are myriad factors a millennial should consider as they begin to plan for retirement. Below are five of those factors.

 1.) Understanding RRSPs and RRIFs

Registered Retirement Savings Plan (RRSP) accounts are a key tool Canadians can use to save for retirement. Their mechanism is simple: contributions to these accounts within the annual limit are tax-deductible. Income earned by investments held in the RRSP is also tax exempt, provided that income stays in the account. RRSPs give you an annual tax incentive to save for your retirement.

When RRSP holders turn 71, however, those RRSPs turn into Registered Retirement Income Funds (RRIFs). These accounts are subject to a government-mandated minimum withdrawal, on which some of the deferred tax from these contributions is paid. You can learn more about the problems with RRIF withdrawals, and how to navigate them here.

Millennials considering their retirement should look at how RRSPs can give them a tax benefit for saving now, while also planning for how the eventual transition to RRIFs will change their financial realities.

 2.) How the Canada Pension Plan factors into retirement

Canadians between the ages of 60 and 70 who worked in Canada and contributed to the Canada Pension Plan (CPP) can elect to activate their CPP benefits. Those benefits will be paid as monthly income based on how much you earned and contributed during your working years, as well as the age you chose to begin receiving benefits.

The longer you wait before turning 70, the higher your CPP benefits will be, though that appreciation doesn’t go beyond age 70. Millennials planning for retirement at any age could consider how they’ll finance their lifestyles while maximizing their CPP benefits at age 70. It’s notable that even the highest levels of CPP benefits pay less than $2,000 per month in 2022. That won’t be enough for many Canadians to live on, and millennials considering retirement may want to think about other sources of income.

3.) Equity Income ETFs

One of the issues that retirees have struggled with over the past decade has been the extremely low yields of traditional fixed income products like bonds. In 2022 those rates rose somewhat, but only following record inflation eating away at the ‘real yields’ of an income investment.

Many equity income ETFs pay annualized yields higher than most fixed income and higher than the rate of inflation. These ETFs hold portfolios of equities — stocks — but pay distributions generated through a combination of dividends and other strategies. Harvest equity income ETFs use an active and flexible covered call option writing strategy to help generate their monthly cash distributions.

These ETFs still participate in some of the market growth opportunity a portfolio of stocks would, while also delivering consistent monthly cash flow for unitholders. The income they pay can help retirees finance their lifestyle goals and help millennials as they prepare themselves to retire.

4.) Tax efficiency of retirement income

Tax is a crucial consideration for any younger person thinking about retirement. Aside from the tax issues surrounding RRSPs and RRIFs, any income-paying investments held in non-registered accounts, or any income withdrawn from a registered account, will be subject to tax. Dividend payments and interest payments from fixed-income investments are taxed as income. Continue Reading…