Tag Archives: ETFs

Creating retirement income from your portfolio

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By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

There is a 4% “rule” that suggests you can spend about 4% of your portfolio value each year, with annual increases adjusted for inflation. And the idea is to create sustainable income that will last 30 years or more. This post looks to a Globe & Mail article (and chart) from Norm Rothery. We’re creating retirement income at various spend rates and looking at the outcomes.

The ‘problem’ with the 4% rule is that it is based on the absolute worst outcomes including retiring just before or during the Depression of 1929. In this post on MoneySense Jonathan Chevreau shows that in most periods (with a US-centric portfolio) a retiree could have comfortably moved that spend rate to the 6% range. If we use the 4% rule there’s a good chance we’ll leave a lot of money on the table. We will lead a lesser retirement compared to what the portfolio was offering. As always, past performance does not guarantee future results.

The 4% rule suggests that each $100,000 will create $4,000 in annual income with an inflation adjustment.

All said, we do need to manage the stock-market risk. Balanced portfolios are used for the 4% Rule evaluations. The portfolios are in the area of a 50% to 60% equities with the remainder in bonds. The studies will use the stock markets and the bond market indices. For example the S&P 500 (IVV) for U.S. equities and the aggregate bond index (AGG) for bonds. Investment and advisory fees will directly lower your spend rate. A 5% spend rate becomes a 3.0% spend rate with advisory and fund fees totalling 2%. Taxes are another consideration.

Creating retirement income

Here’s the wonderful post (sub required) from Norm Rothery.

And here’s the chart that says it all, creating retirement income from 1994 at various spend rates. A global balanced portfolio is used; I will outline that below.

As Norm states, your outcome is all about the start date. Here’s how to read the chart. Each line represents a spend rate and the current portfolio value from each start date. For example, on the far right we see the portfolio value from the 2024 start date. Of course, it’s still near the original $1 million. On the far left we see the current portfolio value (inflation adjusted) with a 1994 retirement start date. If we look at 2010 on the x axis (bottom) we see the current portfolio value from a 2010 start date. At a 5% spend rate, the portfolio value is near the original $1 million.

The portfolios have a 60/40 split between stocks and bonds, and more specifically put 40 per cent in the S&P Canada Aggregate Bond Index (Canadian bonds), 20 per cent in the S&P/TSX Composite Index (Canadian stocks), 20 per cent in the S&P 500 index (U.S. stocks), and 20 per cent in the MSCI EAFE Index (international stocks).

1994 was a wonderful retirement start date. In and around the year 2000 and just before 2008 provided unfortunate start dates. We see the 2000 start date with 5% and 6% spend rates go to zero.

Some retirees get lucky; some don’t.

That unfortunate retirement start date

In a separate post Norm looked at creating retirement income from that unfortunate year 2000 start date.

In a recent Sunday Reads post I looked at that chart and retiring during the dot com crash. You’ll find plenty of other commentary in that link, including what happened to the all-equity portfolio as it tried to take on that severe market correction. Also for consideration, it might be more about your risk tolerance and emotions compared to the portfolio math. That post also shows that retirees with more conservative portfolios feel free to spend more. Your emotions can certainly get in the way of your spending plans, and hence your retirement lifestyle. Continue Reading…

Then and Now – Revisiting the need for bonds

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Image courtesy myownadvisor/Pexels

By Mark Seed, myownadvisor

Special to Financial Independence Hub

It has been said bonds make bad times better.

Is this the reason to own bonds?

Welcome to another Then and Now post, a continuation of my series where I revisit some older blogposts and either rip them to shreds (because my thinking has totally changed on such subjects) or I’ll confirm my position on various personal finance topics or specific stock and ETF investments.

Since my last Then and Now post (whereby I shared I sold out of all Johnson & Johnson (JNJ) stock to buy other equities in recent years), I figured it might be interesting to review this post and update my thinking from a few years ago before the pandemic hit – on bonds.

Then – on bonds

Back in 2015 when the original post was shared, I referenced this quote that frames my own portfolio management approach when it comes to my bias to owning stocks over bonds:

“If you want to make the most money, you should invest in stocks. But if you want to keep the money you made in stocks, you should invest in bonds.” – Paul Merriman.

Bonds are essentially parachutes when equity markets fall; bonds will cushion the portfolio landing. And equity markets can fail big at times!

While I understand there are different ways to measure the “equity risk premium,” the summary IMO is the same: the risk premium is the measure of the additional return that investors demand or expect for taking on a particular kind of risk, relative to some alternative.

Buy a bond and hold it until it matures and you know what you will get back.

Invest in equities and the range of outcomes is wide.

With equities, you could make a lot of money, but you could lose a lot.

Equities have to have a higher expected return to compensate investors for taking on this risk.

Otherwise, if the risk premium is not there – why bother with stocks at all?

Now – on bonds

That’s the rub these days, for many investors. Why invest in stocks when interest rates are higher and you can earn 4-5% essentially risk-free?

Of course, there is no way of knowing how equities or bonds will perform until returns for each happen. You can consider rebalancing your portfolio from time to time between stocks and bonds because you expect equities will do better longer-term but that doesn’t mean they will short-term.

Which brings me back to this: risk is the price of the entry ticket to buy and hold stocks. Continue Reading…

June Checkup: Healthcare & Technology

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Image courtesy Harvest ETFs

By Ambrose O’Callaghan, Harvest ETFs

(Sponsor Blog)

The United States stock markets have delivered positive returns through much of 2024, continuing the positive momentum that was established in the previous year.

However, that performance has increasingly been powered by a smaller segment of large-cap companies. Indeed, readers have undoubtedly heard about the outsized performance of the “Magnificent 7” in the tech space over the past year. If we strip out the “big six” of Amazon, Meta, Nvidia, Microsoft, Apple, and Alphabet from the S&P 500, we have experienced three calendar quarters of negative earnings growth across the rest of the market.

Investors took profits in the month of April. Demand resumed in the month of May, but with a broader range of equities. Nvidia continued to show its dominance, but there were other sectors and stocks that were able to catch up with the leaders to close out the first half of 2024.

The summer season is historically slow in the markets. Harvest’s portfolio management team expects volatility to persist for both bonds and equities. Moreover, the team emphasizes that this summer is a key moment to stay active, attentive, and invested. A prudent strategy in this environment involves looking under the surface for opportunities while generating cash flow from call options to support total returns.

June Healthcare check up

The healthcare sector pulled back slightly in the month of May 2024. Negative moves in the healthcare sector over the course of May 2024 were driven by stock specific events. Macroeconomic data sets impacted the healthcare sector in line with others. Within healthcare, the managed care subsectors experienced volatility earlier in 2024 and changes to reimbursement structures impacted valuations in the near term. The Tools & Diagnostics sub-sector has also proven volatile due largely to a slower-than-expected recovery in China.

Regardless, there are still very promising opportunities in the GLP-1 drug category space for diabetes and obesity. The uptake of these drugs in the U.S. has been significant at a still-early stage in their lifespan. A recent study from Manulife Canada found that drug claims for anti-obesity medications in Canada rose more than 42% from 2022 to 2023.

Harvest Healthcare Leaders Income ETF (HHL:TSX) offers exposure to the innovative leaders in this vital sector. This equally weighted portfolio of 20 large-cap global Healthcare companies aims to select stocks for their potential to provide attractive monthly income as well as long-term growth. HHL is the largest active healthcare ETF in Canada and boasts a high monthly cash distribution of $0.0583.

Harvest Healthcare Leaders Enhanced Income ETF (HHLE:TSX) is built to provide higher income every month by applying modest leverage to HHL. It last paid out a monthly cash distribution of $0.0913 per unit. That represents a current yield of 10.44% as at June 14, 2024.

Where does the technology sector stand right now?

Investors poured back into technology stocks in May 2024 after taking profits in the month of April. However, they were more discriminating than in previous months and showed a preference for hardware stocks, specifically semiconductors.

Nvidia maintained its leadership position. It has soared past a $3 trillion market capitalization in the first half of June 2024. However, other AI-related tech stocks encountered turbulence which may give some investors pause around the broader bullish case for AI. Continue Reading…

6 ways to decide which ETFs to Invest in for Maximum Portfolio Gains

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Image courtesy TSInetwork.ca

ETFs aim to provide broad market exposure with low cost and our Best ETFs for Canadian Investors advisory covers ETFs like no other publication in North America.

Notably, we recently released our top ETF to buy in 2024 in this newsletter. However, you’ll need to subscribe to find out what that top ETF to buy in 2024 is!

This ETF offers a solid 1.4% yield, while at the same time charging you a very low 0.0945% MER. Going forward, the fund — and its investors — should gain from an expanding U.S. economy. Plus, the ETF’s U.S. dollar exposure provides valuable currency diversification for Canadian investors; that’s a long-term positive.

When it comes to ETFs, we take a close look at the following criteria:

6 Important considerations for choosing ETFs to invest in:

  1. Know how broad the ETF’s stock holdings are, so you can determine its volatility. The broader the ETF, the less volatility it may have. A sector-based ETF, like one that tracks resource stocks, may be more volatile.
  2. Know the economic stability of countries that an international ETF invests in. It’s also worth mentioning that foreign leaders may not be your ally when it comes to passing laws or imposing regulations that can affect your investments
  3. Know the liquidity of ETFs you invest in; look at the volume of shares that trade hands on a daily basis.
  4. Consider buying ETFs in a lump sum rather than with periodic small amounts, so you can cut down on brokerage fees.
  5. ETFs can still be volatile, even with the diversification they offer.
  6. Don’t invest in ETFs that show wide disparities between the stocks they hold and the investments that the sales literature describes. Despite the increased attention for ETFs, many ETF managers continue to describe their investing style in vague (or sometimes misleading) terms.

Meanwhile, rather than using the six criteria above, some investors decide when to buy an ETF using technical analysis.

Technical analysis is a useful tool in deciding when to buy ETFs, but only if you recognize it as one of many tools. Before making any recommendations or transactions in client accounts, I always look at a chart. However, I don’t look at the chart for a prediction of what’s going to happen. I look to see if the pattern on the chart seems to support the view I’ve formed of the stock/ETF based on its finances and other fundamental factors. Continue Reading…

Index Investing and the S&P 500

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Image BMO ETFs/Getty Images

By Chris McHaney, CFA

(Sponsor Blog)

Index investing, a strategy adopted by cost-conscious investors and passive investing aficionados, is continuing to gain in popularity across individual investors, advisors and institutions alike.

The S&P 500 Index is widely regarded as a gauge of the overall large-cap U.S. equities market. The index, which dates back to the 1920s, includes 500 leading companies and covers approximately 80% of available market capitalization.1  Other popular indices for U.S. equities include the Dow Jones Industrial Average (covering a smaller number of companies: ~30), and the Nasdaq 100 Index (tracking the largest 100 companies listed on the Nasdaq Stock Market).

ETFs make index investing more efficient, helping investors save time and money relative to holding all the constituents of their favorite market index. Take the S&P 500, for example. Not only would you need to buy 500 companies, you would need to make sure they maintain the appropriate weight in the portfolio over time: requiring a lot of time, and money in trading those securities.

ETF units are primarily bought and sold between different investors. This means there are typically fewer realizations of capital gains and losses with ETFs than with other investment products. Similarly, as passive ETFs track the performance of a specific benchmark, they tend to have lower overall portfolio turnover. Fewer transactions within the ETF again means fewer realizations of capital gains and losses that may flow through to ETF holders.

Investing in the S&P 500 Index has been made simple with ZSP2 – BMO S&P 500 Index ETF.  Also available in hedged and USD (ZUE/ZSP.U)2, these ETFs give you exposure to this broad market index at a low cost of 0.09% 6(MER – Management Expense Ratio) and can be used as a core in your portfolio.  Index based ETFs like ZSP provide broad market exposure and diversification across various sectors and asset classes according to their underlying index. It’s not about timing the market with index-based ETFs, it’s about time in the market and these solutions provide a long-term strategy for investors.

What does the research show?

Another reason index-based investing is becoming a staple in investors’ portfolios is the increase in available research showing passive outperforming active over the long term. The best known of this research, the SPIVA report, which coming from S&P Dow Jones Indexes research division has been looking at this phenomenon for 20 years, measuring actively managed funds, against their index benchmarks worldwide.

Looking at the data as of Dec 31st 2023, and focusing on Canadian Equity Funds, 96.63% of active fund managers underperform the S&P/TSX Composite over 10 years.  Put another way just 3.37% of funds outperformed the S&P/TSX composite over that time period.3 This research holds across time periods and geographies, with the numbers changing year to year but the story remaining compellingly in favor of passive. While there are active managers that out-perform their benchmark, this can be challenging to do consistently over time, even for the professionals.

Innovation in Index Investing

“Losses loom larger than gains.” – Daniel Kahneman & Amos Tversk4

Famed researchers in behavioural finance, Daniel Kahneman and Amos Tversky, once hypothesized the psychological pain of loss is about twice as powerful as the pleasure of gaining. After strong performances from U.S. stocks over the past two quarters, some may find themselves dusting off the pair’s work and asking, is now the time to lock in gains and take some downside insurance?

We have seen a remarkable run from stocks such as Nvidia, lifting the S&P 500 Index to all-time highs. This may cause some valuation concerns among investors. The S&P 500 is currently trading at a price-to-earnings ratio9(P/E) of about 25 times, which from a historical perspective can be considered rich relative to the average of 17.5 Continue Reading…