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Tag: investing strategy

  • Should you do options trading? – MoneySense

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    What is an option?

    An option is a contract to buy or sell a security for a specific price, called the strike price, on or before the option’s expiration date. Options are available for individual stocks, stock indexes, commodities and other securities. They trade on stock exchanges and can be bought and sold both through brokers and self-directed investing platforms.

    Read more in the MoneySense Glossary: What is an option?

    Why are options popular right now?

    Combined with more stock market chatter on social media and market volatility, options trading has gained steam with mom and pop Canadian investors. The trend truly picked up during the pandemic when many were stuck at home and has since continued, with options trading surging 89.4 per cent in 2023 compared with the year before, a World Federation of Exchanges report shows. 

    Social media and online commentary have pushed demand for options trading, said Josh Sheluk, portfolio manager at Verecan Capital Management. “People hear about how great somebody on Reddit has done with a specific options trade and they want to try to do the same thing and get very, very rich, very, very quickly,” Sheluk said. “It’s become very appealing.”

    However, he cautioned that this type of trading is very risky for do-it-yourself investors. “I don’t think many of the do-it-yourself investors truly understand how much risk that they’re taking with options trades.”

    What can you do with options?

    Options—a derivative whose value is directly linked to an underlying asset or stock—allows investors to bet on which way a stock will move in a specific time period. It’s a contract between two investors. There are two types of options: puts and calls.

    What is a put option?

    Put options are derivatives. This means their value is based on the value of another security, typically a stock. Puts are also available on currencies, indexes and other assets. A put option, or put, is a contract that gives you the right, but not the obligation, to sell the underlying investment at a specific price, called the strike price, before the option expires. The price of a put is called the premium, which fluctuates depending on a number of factors, including the current stock price and the time left until the expiration date.

    Read more in the MoneySense Glossary: What is a put option?

    What are a call options?

    A call option gives investors the right to buy a stock at a certain price and a put option is the right to sell a stock at a certain price. For example, if an individual stock is trading at $50 per share, an investor can buy a call option for $55—predicting the stock will go up five dollars within a period of time, Sheluk said.

    “As the holder of that ‘call’ option, if the stock price goes from $50 to $60, you’re pretty happy because you can now buy that stock at $55, where on the market, it would be $60,” he explained. It’s not so great for the seller of the option, who will have to buy the stock at market value and sell it back at the option strike price of $55.

    Where can you buy call options in Canada?

    Josh Sheluk photo courtesy of Verecan Capital Management

    If the stock doesn’t reach the option’s strike price, the entire investment will be lost. A drop in options trading fees, primarily on DIY investment platforms, has also attracted young investors to the space. On Wealthsimple, for example, investors can trade options for as low as $1.

    Big banks have also started to lower their options trading fees as competition among investment platforms grows. Last month, the Bank of Montreal lowered fees for options traders making more than 150 trades per quarter.

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    The Canadian Press

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  • Making sense of the markets this week: November 3, 2024 – MoneySense

    Making sense of the markets this week: November 3, 2024 – MoneySense

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    Amazon earnings highlights

    Share prices were up 5% in after-hours trading on Thursday after the strong earnings beat.

    • Amazon (AMZN/NASDAQ): Earnings per share of $1.43 (versus $0.14 predicted) and revenues of $134.4 billion (versus $131.5 billion predicted).

    Amazon Web Services (AWS) remains the golden goose, even though very few of Amazon’s retail customers know it exists. Revenues climbed 19% during the quarter, and totalled $27.4 billion. Amazon’s advertising revenues were another highlighted area of the report, as they were up 19%. Overall operating profits grew 56% year over year to $17.4 billion, mostly credited to the 27,000 jobs cut by the company since 2022.

    Founder, executive chairman and former president and CEO of Amazon, Jeff Bezos was in the headlines this week in his role as owner of the Washington Post. He refused to allow the Post’s editorial team to print their endorsement of Kamala Harris for president, and it was met with widespread outrage from Post readers. As of Tuesday, more than 250,000 subscriptions were cancelled as a result. 

    Source: The Sporting News

    Fortunately for Bezos, he purchased the Washington Post (one of the world’s premier news brands) for “chump change”—$250 million (roughly a mere 1.2% of his net worth). So, if he drives it into the ground, I don’t think he’ll shed tears.

    No doubt co-founder and CEO of Tesla, Elon Musk, is making similar calculations with his luxury purchase two years ago of Twitter (which he rebranded as X). Critics say he has turned the social platform into an echo chamber for Republican presidential candidate Donald Trump. What are the billions for, if a person can’t even enjoy themselves by buying a little media, am I right? (That’s sarcasm.)

    So far we’ve yet to see analysis to show Bezos’ editorial decision affecting Amazon’s share price or revenue numbers. Apparently Republicans buy Amazon Prime, too.

    Canada’s best dividend stocks

    Microsoft, Meta and Google: Predictably incredible earnings

    While not having quite as large a market cap as Nvidia and Apple, other mega tech stocks in the U.S. are no slouches. For example, Microsoft is also as valuable as the entirety of Canada’s stock exchanges at $3.2 trillion. Alphabet and Meta clock in at $2.1 trillion and $1.5 trillion respectively. (All figures in this section are in U.S. dollars.)

    Other Big Tech stock news highlights

    Here’s what these companies announced this week.

    • Alphabet (GOOGL/NASDAQ): Earnings per share came in at $2.12 (versus $1.51 predicted) on revenues of $88.27 billion (versus $86.30 billion predicted).
    • Microsoft (MSFT/NASDAQ): Earnings per share of $3.30 (versus $3.10 predicted), and revenues of $65.59 billion (versus $64.51 predicted).
    • Meta (META/NASDAQ): Earnings per share coming in at $6.03 (versus $5.25 predicted) and revenues of $40.59 billion (versus $40.29 predicted).

    All three companies crushed earning estimates across the board. However, shareholders’ reactions to these earnings beats were still muted. Meta shares were down 2.5% in after-hours trading on Wednesday, and it was a similar situation for Microsoft. Alphabet fared better as its shares were up 3%.

    It’s hard to put these numbers into the massive context into which they belong, because the world has never seen anything like these companies before. Here are highlights from the earnings calls. (Scroll the chart left to right with your fingers or press shift, as you use scroll wheel on your mouse to read.)

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    Kyle Prevost

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  • What is Sun Life’s new decumulation product? – MoneySense

    What is Sun Life’s new decumulation product? – MoneySense

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    A Canadian retiree’s main decision with this Sun Life product is the age they want the funds to last until (the maturity age). They can choose from 85, 90, 95 or 100 (or select a few with a combination of ages); but they can also start drawing down as early as age 50. Sun Life recalculates the client payments annually, at the start of each year, based on the account’s balance. That has the firm looking at the total amount invested, payment frequency, number of years remaining before the selected maturity age, estimated annual rate of return (expected return is 5.5% but a conservative 4.5% rate is used in the calculations) and any annual applicable regulatory minimums and maximums.

    Birenbaum says holders of MyRetirementIncome can arrange transfers to their bank accounts anywhere from biweekly to annually. While the payment amount isn’t guaranteed, they can expect what Sun Life calls a “steady income” to maturity age, so the payment isn’t expected to change much from year to year. If the client’s circumstances change, they can alter the maturity date or payment frequency at any time. While not available inside registered retirement savings plans (RRSPs), most other account types are accommodated, including registered retirement income funds (RRIFs), life income funds (LIFs), tax-free savings accounts (TFSAs) and open (taxable) accounts.

    Compare the best RRSP rates in Canada

    Emphasis on simplicity and flexibility

    In a telephone interview, Eric Monteiro, Sun Life’s senior vice president of group retirement services, said, in MyRetirementIncome’s initial implementation, most investments will be in RRIFs. He expects that many will use it as one portion of a retirement portfolio, although some may use it 100%. Initial feedback from Canadian advisors, consultants and plan sponsors has been positive, he says, especially about its flexibility and consistency. 

    As said above, unlike life annuities, the return is not guaranteed, but Monteiro says “that’s the only question mark.” Sun Life looked at the competitive landscape and decided to focus on simplicity and flexibility, “precisely because these others did not take off as expected.” The all-in fee management expense ratio (MER) is 2.09% for up to $300,000 in assets, but then it falls to 1.58% beyond that. Monteiro says the fee is “in line with other actively managed products.”

    Birenbaum lists the pros to be simplicity and accessibility, with limited input needed from clients, who “simply decide the age to which” they want funds to last. The residual balance isn’t lost at death but passes onto a named beneficiary or estate. Every year, the target withdrawal amount is calculated based on current market value and time to life expectancy, so drawdowns can be as sustainable as possible. This is helpful if the investor becomes unable to competently manage investments in old age and doesn’t have a trusted power of attorney to assist them. 

    As for cons, Birenbaum says that it’s currently available only to existing Sun Life Group Retirement Plan members. “A single fund may not be optimal for such a huge range of client needs, risk tolerance and time horizons.” In her experience, “clients tend to underestimate life expectancy” leaving them exposed to longevity risk. To her, Sun Life’s approach seems overly simplistic: you “can’t replace a comprehensive financial plan in terms of estimating sustainable level of annual draws with this product.” 

    In short, there is “a high cost for Sun Life doing a bit of math on behalf of clients… This is a way for Sun Life to retain group RRSP savings when their customers retire … to put small accounts on automatic pilot supported by a call centre, and ultimately, a chatbot. For a retiree with no other investments, it’s a simple way to initiate a retirement income.”

    However, “anyone with a great wealth advisor who provides planning as well as investment management can do better than this product,” Birenbaum says. “For those without advisors, a simple low-cost balanced fund or ETF in a discount brokerage will save the client more than 1% a year in fees in exchange for doing a little annual math.”

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    Jonathan Chevreau

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  • Making sense of the markets this week: October 27, 2024 – MoneySense

    Making sense of the markets this week: October 27, 2024 – MoneySense

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    Despite these setbacks, CPKC posted an income gain of 7% year over year. The four categories that made the most impact were grain, energy, plastics and chemicals, and they grew revenues by 11%. CPKC says the shipment of wheat to Mexico from the Canadian and American Prairies over the past 12 months was exactly the type of “synergy win” that it was hoping for when the former Canadian Pacific acquired Kansas City Southern back in 2021. This railway remains the only one to span Canada, the United States and Mexico.

    CNR CEO Tracy Robinson commented on the railway’s operational challenges. “Our scheduled operating plan demonstrated its resilience in the third quarter, allowing us to adapt our operations to challenges posed by wildfires and prolonged labor issues,” she said. “Our operations recovered quickly and the railroad is running well. As we close 2024, we will continue to focus on recovering volumes, growth, and ensuring our resources are aligned to demand.”

    CNR’s revenues were up 3% year over year; however, increased expenses meant the company’s operating ratio rose 1.1% to 63.1% (indicating that expenses are growing as a share of revenue). The railway announced it was  raising its quarterly dividend from $0.79 to $0.845. This raise of nearly 7% is right in line with CNR’s mission to conservatively raise its dividend payouts each year.

    For more information on these railroads, check out my article on Canadian railway stocks at MillionDollarJourney.ca.

    Canada’s best dividend stocks

    Rough day for Rogers 

    Thursday’s revenue miss left some Rogers shareholders shaking their heads. 

    Rogers earnings highlights

    Here’s what the large mobile company reported this week:

    • Rogers Communications (RCI/TSX): Earnings per share of $1.42 (versus $1.34 predicted) and revenues of $5.13 billion (versus $5.17 predicted).

    While solid earnings numbers did take away some of the sting, Rogers’ share price was down 3% on Thursday. Lower-than-expected numbers for new wireless customers were at the root of low revenue growth. The oligopolistic Canadian wireless market remains uncharacteristically competitive as Rogers, Telus and Bell all continue to fight for market share. That competition is hurting profit margins for all three telecommunications giants at the moment. (Unlike in past years, when the three telcos all enjoyed charging some of the highest wireless plan fees in the world.)

    One highlight for Rogers was its sports revenue vertical, which was up 11% from last quarter. Rogers has really doubled down on its sports media strategy over the last few years and now owns a controlling share of the: 

    • Toronto Blue Jays in the Major League Baseball league (MLB)
    • Toronto Maple Leafs in the National Hockey League (NHL)
    • Toronto Raptors in the National Basketball Association (NBA)
    • Toronto FC in Major League Soccer (MLS)
    • Toronto Argonauts in the Canadian Football League (CFL)
    • SportsNet, a major Canadian sports network
    • Toronto’s Rogers Centre and Scotiabank Arena venues
    • Naming rights of sports venues in Edmonton, Toronto and Vancouver
    • National NHL media rights in Canada
    • Local media rights to the NHL’s Vancouver Canucks, Calgary Flames and Edmonton Oilers
    • Partial local media rights to the Maple Leafs and Raptors
    • Several minor-league franchises and esports (gaming) teams

    Despite owning all those household-name sports assets, it’s worth noting that Rogers’ wireless and cable divisions were responsible for close to 90% of revenues, with sports and media making up the rest.

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    Kyle Prevost

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  • Making sense of the markets this week: October 20, 2024 – MoneySense

    Making sense of the markets this week: October 20, 2024 – MoneySense

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    Netflix shows a steady stream of profits

    Netflix (NFLX/NASDAQ) shareholders were happy on Thursday, as they saw share prices rise 5% in after-hours trading on the back of another excellent earnings announcement. (All figures in U.S. dollars.) Earnings per share came in at $5.40 (versus $5.12 predicted) and revenues were $9.83 billion (versus $9.77 billion predicted).

    Paid memberships also topped expectations, at 282.7 million, compared to the 282.15 million predicted by analysts. Netflix chalked up the increase in viewers to new hit shows such as The Perfect Couple, Nobody Wants This and Tokyo Swindlers, as well as new seasons of favourites Emily in Paris and Cobra Kai. Looking ahead to the next quarter, Netflix is banking on the new season of Squid Game and its foray into the world of live sports. Two National Football League (NFL) games and a massively anticipated boxing bout between Jake Paul and Mike Tyson represent new attractions for the streaming giant.

    Photo courtesy of United Airlines

    United Airlines shares take to the sky

    Tuesday was a massive earnings day for United Airlines (UAL/NASDAQ) as earnings per share came in at $3.33, well outpacing the $3.17 that analysts were predicting. (All figures in U.S. dollars.) Revenues were $14.84 billion (versus $14.78 billion predicted). Shares were up more than 13% on the outperformance and the news that the airline was starting a $1.5-billion share buyback program.

    Corporate revenue was up more than 13% year over year, while basic economy seat sales clocked an even more impressive 20% increase. Last week, the company announced new international routes headed to Mongolia, Senegal, Spain, Greenland and more.

    The best online brokers in Canada

    The inflation dragon has been slain

    It doesn’t seem that long ago that annualized inflation rates were topping 8%, and there appeared to be no end in sight. Well, the end has arrived. Statistics Canada announced this week that the Consumer Price Index (CPI) annualized inflation rate for September had dropped all the way down to 1.6%. That’s substantially lower than the Bank of Canada’s 2% target.

    Led by deflation in clothing and footwear, as well as transportation, the downward trend appears to be widespread. Gasoline was also down 10.7% from this time last year.

    List of items contributing to decrease in CPI, September 2024

    Source: Statistics Canada

    Of course, increased shelter costs remain the major concern for many Canadians. Rent increases were up 8.2% year-over-year; while that’s down from August’s figure of 8.9%, it’s still a bitter pill to swallow for many.

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    Kyle Prevost

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  • Making sense of the markets this week: October 13, 2024 – MoneySense

    Making sense of the markets this week: October 13, 2024 – MoneySense

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    Canadian Natural Resources doubles down on Canada

    For a decade now, big acquisitions by Canadian oil-and-gas producers have mostly been met with distaste by investors. So we’ll take it as a heartening sign how well the markets received Canadian Natural Resources’ (CNQ/TSX) decision to buy the Alberta upstream assets of Chevron Corp. (CVX/NYSE) for USD$6.5 billion in cash. CNQ stock rose 3.7% Monday in the wake of the announcement. Chevron was up 0.7% on a day when oil prices increased.

    The assets in question comprise a 20% stake in the Athabasca Oil Sands Project, along with 70% of the Kaybob Duvernay shale play. That should add 122,500 barrels of oil equivalent per day to Canadian Natural Resource’s 2025 output, the company said. It also announced a 7% bump to its quarterly dividend, to 56.25 Canadian cents a share, beginning in January.

    Chevron explained the asset sale in terms of freeing up cash for U.S. shale acquisitions as well as targeted positions abroad, such as in Kazakhstan, which it considers to hold better long-term profit potential.

    Canada’s best dividend stocks

    Nvidia moves up to number 2 in market cap

    Reports of the death of the Magnificent 7 tech stocks’ decade-long run are greatly exaggerated, Nvidia (NVDA/Nasdaq) seemed to say this week as its shares rose past $130. (All figures in U.S. dollars.) That pushed its market capitalization ahead of Microsoft Corp. to $3.19 trillion. That leaves only Apple, with a market cap of $3.4 trillion, worth more than the AI-focused chip-maker.

    Nvidia’s stock is up 26% in the past month, compared to a 6% advance for the S&P 500. Nvidia has grown tenfold in just two years. The price movement this week appeared to come from a positive report from Super Micro Computer, a provider of advanced server products and services. It found that sales of its liquid cooling products, deployed alongside Nvidia’s graphics processing units (GPUs), would be even stronger than expected this quarter. Analyst estimates of Nvidia’s adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) for the three-month period ended this month is $21.9 billion.

    The best online brokers in Canada

    Pepsi earnings leave a sour taste

    Posting its second straight disappointing set of quarterly results on Tuesday, beverage-and-snack maker PepsiCo lowered its full-year guidance for organic revenue unrelated to acquisitions. 

    Results were hampered by recalls of the company’s Quaker Foods products, related to potential salmonella contamination. PepsiCo also experienced weak demand in the U.S. and business disruptions in some overseas markets, such as the Middle East. Pepsi’s North American beverage volumes fell 3% year-over-year, mostly due to declines in energy drink sales. Meanwhile, its Frito-Lay division suffered a 1.5% decline.

    “After outperforming packaged food categories in previous years, salty and savory snacks have underperformed year-to-date,” executives said in a prepared statement. Overall, PepsiCo revised its 2024 sales growth outlook from the previous 4% to low single digits.

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    Michael McCullough

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  • How high tax rates hurt the economy – MoneySense

    How high tax rates hurt the economy – MoneySense

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    At a time when Canada, just like every other country, is looking for highly skilled workers, our tax rates make it more difficult for them to choose to work here. This is equally true for Canadian citizens and potential new immigrants. Anecdotally, I’m hearing more and more from clients and people in my network that their children who have chosen to study abroad aren’t coming back home because they can earn and keep more of their income elsewhere. I’m not surprised.

    Our high tax rates also make it hard to attract investment into our country and for existing businesses to expand. That is essential to improve productivity, innovate, create jobs and compete against peers in lower-tax jurisdictions.

    The Allan Small Financial Show, featuring three tax experts—Fred O’Riordan of Ernst & Young, Jake Fuss of The Fraser Institute and Tim Cestnick, a Globe and Mail tax columnist and CEO of Our Family Office—originally aired on September 18, 2024.

    Let’s explore a flat tax

    We need a better, more thoughtful tax strategy as a country—one that is fair for everyone. Canada has not taken a hard, comprehensive look at our tax system since 1962, when Prime Minister John Diefenbaker appointed the Royal Commission on Taxation.

    At the very least, it would be an opportunity to streamline what is a very complicated system, as I see it. At best, it may point to a better way forward. One potential way to streamline our tax system, and make it more efficient and fair, is to implement a flat tax rate across the board. This is not a new concept for taxation.

    For the past decade, Estonia has reaped the rewards of having the most competitive, simple and transparent tax system in the OECD. Its personal and corporate tax rates are 20%. It’s set to increase to 22% in 2025 to match its consumption tax, which increased from 20% to 22% in 2024. In the case of individuals, the tax rate does not apply to dividend income; and businesses only pay tax on distributed profits.

    The result: the country has been very successful attracting startups and investment.

    And we don’t have to leave Canada for an example of a flat tax. From 2001 to 2014, Alberta had a single 10% personal and business income tax rate, dubbed the Alberta Tax Advantage. The Fraser Institute is now calling for Alberta to implement an even lower flat tax of 8% on personal and business income to attract people, businesses and investment in the province and to encourage spending. When Canadians pay less tax, they have more to spend and put back into the Canadian economy.

    Another potential way to ensure tax fairness and generate revenue to meet government responsibilities is to foster more opportunities for the public, business and government to collaborate. For example, why not give individuals and businesses the ability to invest in infrastructure projects, such as new roads and highways, and get a rate of return over time.

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    Allan Small, FMA, FCSI

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  • Boost your portfolio: Why and how to increase small-cap exposure with ETFs – MoneySense

    Boost your portfolio: Why and how to increase small-cap exposure with ETFs – MoneySense

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    Interestingly, small-cap stocks have historically outperformed their larger counterparts and, if academics are to be believed, will continue to do so over the long term. Don’t let recency bias sway you; the dominance of mega-cap stocks over the last decade isn’t the whole story.

    What is a market cap?

    Market cap, short for market capitalization, is the total market value of a company’s outstanding shares, or stocks. To calculate market cap, multiple the number of shares by the market price of one share. (For example, a company with 10 million shares priced at $25 each has a market cap of $250 million.) People in the investing community use market cap to indicate a company’s value and compare its size relative to others in the same industry or sector. Stock exchanges and cryptocurrencies also have a market cap. 

    Read more in the MoneySense Glossary of Investing terms: What is a market cap?

    When it comes to the stock market, there are certain formulas, known as asset pricing models, that help us understand why stocks move the way they do. You might have heard of one called CAPM, or the Capital Asset Pricing Model. Basically, CAPM tells us that the return you should expect from a stock is tied to how risky it is compared to the whole market. It’s like saying, the riskier the stock, the bigger the potential reward should be.

    Here’s the twist: CAPM doesn’t reveal the whole story. It misses out on some other factors that can also affect a stock’s performance. Back in the 1990s, two professors from the University of Chicago, Eugene Fama and Kenneth French, added more layers to this model. It’s called the Fama-French three-factor model. It later grew into a five-factor model, but to keep it simple, let’s go with the original three:

    1. Market Factor (Rm-Rf): This is the extra return you’d expect from investing in the stock market over something super safe, like government bonds.
    2. Size Factor (SMB for Small Minus Big): This one’s interesting because it shows that smaller companies often outperform larger ones. It’s kind of like rooting for the underdog.
    3. Value Factor (HML for High Minus Low): This tells us that stocks that are priced lower relative to their book values (think bargain stocks) often do better than those that are more expensive.

    So, focusing on the size factor, it explains why, over time, these smaller companies, or “small caps” as we call them, might give you better returns than the giants of the stock world. 

    Source: Test.io

    To understand the performance dynamics between large- and small-cap stocks, we can examine two older U.S. index-based mutual funds: the Vanguard 500 Index Fund Admiral Shares (VFIAX), which tracks the S&P 500, and the Vanguard Small-Cap Index Fund Admiral Shares (VSMAX). 

    We’ll use a back-test period from November 14, 2000, to September 19, 2024. This timeline is particularly insightful as it includes several major market events: the dot-com bust, the 2008 financial crisis, the COVID-19 pandemic and the ensuing bull market primarily driven by technology stocks.

    During this period, small caps, represented by VSMAX, outperformed the S&P 500, as tracked by VFIAX. The Compound Annual Growth Rate (CAGR) for VSMAX stood at 9.21% compared to 7.98% for VFIAX. However, this higher return came with increased volatility and larger drawdowns (price drops from peak to trough).

    On a risk-adjusted basis, the performance of both funds essentially leveled out with an identical 0.31 Sharpe ratio, meaning that investors in VSMAX were compensated more or less fairly for the higher risk associated with small-cap investments. 

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    Tony Dong

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  • Making sense of the markets this week: October 6, 2024 – MoneySense

    Making sense of the markets this week: October 6, 2024 – MoneySense

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    Some experts speculate the real sticking point in negotiations isn’t about wages but protection from automation. The ILA refused to allow its members to work on automated vessels docking at U.S. ports. As a result, American ports are getting more and more inefficient, ranking not only behind ports in China, but also Colombo, Sri Lanka. (The Container Port Performance Index is put together annually by The World Bank and S&P Global Market Intelligence.)

    For reference, the highest-rated port in Canada is Halifax, listed at 108th in the world. Halifax’s port efficiency was well behind not only Sri Lanka, but also economic powerhouses like Tripoli, Lebanon. To give further Canadian context, Montreal is 348th, and Vancouver is 356th, which is just ahead of Benghazi, Libya.

    Something tells me that negotiating for USD$300,000-per-year dockworkers is not going to help these North American efficiency numbers. The higher salaries get, the more attractive automation strategies will quickly become. Clearly there will be an eventual reckoning. In the meantime, for at least one more important presidential news cycle, dockworkers will be able to extract large wage gains as they hold the broader economy hostage.

    Why utilities aren’t “boring”—any more

    As income-oriented Canadian investors start to grow less enamoured of high-interest savings accounts and guaranteed investment certificates (GICs), the dividend yields of dependable North American utility stocks should begin to look more attractive. Given how quickly interest rates are likely to fall, it’s clear that there is a stampede of investors heading for the stocks of utility companies. 

    The iShares U.S. Utilities ETF (IDU/NYSE) is up more than 30% year to date, and the iShares S&P/TSX Capped Utilities Index ETF (XUT/TSX) is up about 15% year to date. (Check out MoneySense’s ETF screener for Canadian investors.)

    Most of the time utilities (especially those in sectors regulated by federal and local governments) are perceived as “boring.” Sure, the profits are dependable, but if the government is going to determine how much is paid for electricity or natural gas, then a company’s profit margins are tough to change. The dividend income is dependable. But that’s really the whole sales job in a nutshell.

    Lately, however, due to AI’s electricity needs and possible AI-fuelled efficiency increases, utilities have been getting some glowing press. Falling interest rates mean that annual interest costs will drop (utilities often have to borrow a lot of money to complete big projects). Meanwhile, Canadian investors looking for safe cash flow are pouring in. Utility stocks make up about 4% of the S&P/TSX Composite Index. The largest utility companies—such as Fortis, Emera, Hydro-One and Brookfield Infrastructure—are some of Canada’s largest companies.

    Some of the same income-oriented investors who like utility stocks may also be interested in two new exchange-traded funds (ETFs) that J.P. Morgan Asset Management Canada just launched. The JPMorgan US Equity Premium Income Active ETF (JEPI/TSX) and the JPMorgan Nasdaq Equity Premium Income Active ETF (JEPQ) use options strategies to “juice” the income already provided by higher-dividend-yielding stocks. 

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    Kyle Prevost

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  • Cap-weighted vs. equal-weighted ETFs: Which is best for Canadian investors? – MoneySense

    Cap-weighted vs. equal-weighted ETFs: Which is best for Canadian investors? – MoneySense

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    Source: Multpl.com

    The CAPE Ratio assesses a stock’s price compared to its average earnings over the past 10 years, adjusted for inflation. A high CAPE Ratio suggests that stocks might be overvalued relative to historical earnings, indicating potential downside risks.

    The picture isn’t as clear-cut as it seems, however. One of the primary drawbacks of equal weighting, as critics point out, is the additional drag on performance from its methodology. 

    Source: testfol.io

    Take the Invesco S&P 500 Equal Weight ETF (RSP) as an example. It has a 21% turnover and a 0.20% expense ratio. The Canadian-listed version is the Invesco S&P 500 Equal Weight Index ETF (EQL, EQL.F). In contrast, SPY maintains a mere 2% turnover and a lower expense ratio of 0.0945%.

    While it’s true that RSP outperformed SPY in total returns since its inception in April 2003, the victory isn’t as clear-cut as it might seem. The risk-adjusted return of RSP, indicated by a Sharpe ratio of 0.45, is slightly lower than SPY’s 0.48. What does that mean? It could suggest that RSP took on higher volatility for only marginally better returns. Moreover, RSP experienced a deeper maximum drawdown than SPY. A maximum drawdown measures the largest single drop from peak to trough during a specified period, indicating a higher historical risk of losses for investors.

    Source: testfol.io

    Further analysis via factor regression reveals that most of RSP’s outperformance can be attributed to the size. Essentially, RSP’s equal-weighted methodology has inadvertently skewed its exposure towards smaller and more undervalued companies, which historically have contributed to outperformance.

    This raises a critical point: If the goal is to invest in these kinds of companies, wouldn’t it be more straightforward and efficient to target them directly based on fundamental metrics rather than adopting a blanket equal-weighting approach to the entire S&P 500?

    I find myself siding with cap weighting now. The primary appeal is simplicity. Market-cap strategies require fewer decisions regarding rebalancing or reconstitution, which in turn keeps sources of friction like turnover and fees considerably lower—resulting in fewer headwinds to performance.

    In an ideal frictionless world, the appeal of equal weighting is clear. However, the reality of quarterly rebalancing and higher fees associated with equal-weight ETFs has not historically yielded better risk-adjusted returns over the last two decades. 

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    Tony Dong

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  • Making sense of the markets this week: September 29, 2024 – MoneySense

    Making sense of the markets this week: September 29, 2024 – MoneySense

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    The Chinese government commands the economy to grow

    Many people like to sort countries’ economies as either communist, socialist, capitalist or free markets. But these days, every country has some version of a mixed economy. The practical implementation of fiscal and monetary policy is becoming increasingly more grey than our old black-and-white economics textbooks would have us believe. Yet, even within the grey, China’s approach for its economic system is uniquely difficult to define.

    Back in 1962, when asked about building a socialist market economy, future China leader Deng Xiaoping famously said, “It doesn’t matter whether the cat is black or white, so long as it catches mice.”

    Well, the current China leaders have let the fiscal and monetary cats out of the bag, and they’re hoping those cats are hungry.

    We wrote about China’s housing problems about a year ago, warning about rising deflation fears. These issues seem to have gotten worse, and the biggest news in world markets this week was that China’s government decided enough was enough. And in a “command” economy (which is probably the most accurate way to describe its approach), the government has a very high degree of control over economic levers. Consequently, markets reacted swiftly and positively to this news. 

    Here are the highlights of the multi-pronged fiscal and monetary stimulus that the Chinese government has decided to implement:

    • Banks cut the amount of cash they need in reserve (this is known as the reservation requirement ratio) by 0.50%. This will incentivize banks to lend more money (basically “creating” 1 trillion yuan, USD$142 billion).
    • The People’s Bank of China (PBOC) Governor Pan Gongsheng said another cut may come later in 2024.
    • Interest rates for mortgages and minimum down payments on homes were cut.
    • A USD$71 billion fund was created for buying Chinese stocks.

    That last point is pretty interesting to me. Here you have a supposedly communist government essentially creating a big pot of money to spend within a free stock market. The fund is to directly purchase stocks, as well as providing cash to Chinese companies to execute stock buybacks. Good luck defining that action in traditional economic terms. 

    The idea is to give investors and consumers faith that they should go out there and buy or invest in China’s expanding economy. Clearly something major had to be done to jolt Chinese consumers out of their malaise.

    Source: FinancialTimes.com

    Early reports are speculating that the Chinese gross domestic product (GDP) could fail to rise by less than the 5% target set by the government. If so, we’re about to see what happens when the commander(s) behind a command economy decide that the GDP will rise no matter what.

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    Kyle Prevost

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  • Making sense of the markets this week: September 22, 2024 – MoneySense

    Making sense of the markets this week: September 22, 2024 – MoneySense

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    U.S. Fed cuts rates for the first time in four years

    The U.S. dollar remains the most important currency in the world, and the American economy is arguably the most important financial system as well. Consequently, when the U.S. Federal Reserve makes a big announcement, it creates an economic wave that ripples everywhere. That’s why Wednesday’s decision to cut the key overnight borrowing rate by 0.50% is a very big deal.

    Many speculated the U.S. Fed would begin cutting rates this week, but it was generally thought it would go with a 0.25% drop to begin an interest rate-cut cycle. The 50 basis points cut lowers the federal funds rate range 4.75% to 5%.

    Source: CNBC

    The U.S. Fed announced in a statement: “The Committee has gained greater confidence that inflation is moving sustainably toward 2%, and judges that the risks to achieving its employment and inflation goals are roughly in balance.”

    Federal Reserve Chair Jerome Powell said, “We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal.”

    Immediately after the news of the U.S.’s first interest rate cuts in four years, major stock market indices responded with a brief jump on Wednesday. But they ended the day nearly flat. That seemed to be a bit of a delayed reaction from investors, as the Bulls returned Thursday with Nasdaq soaring 2.5% and the Dow leaping 1.3% to pass 42,000 for the first time ever.

    Notably, former U.S. President Donald J. Trump continued to criticize the monetary decisions made by the U.S. Federal Reserve. This despite centuries of financial wisdom telling us that politicians getting involved in short-term monetary policy is a bad idea. (See: Turkey – Erdoğan, Tayyip.) At bitcoin bar PubKey on Wednesday, Trump said, “The economy would be very bad, or they’re playing politics.”

    The larger-than-expected rate cut left some commentators questioning if this action would spook the markets. But, if the U.S. Fed manages to thread the needle and cut rates without a recession, it could be a good thing. The historical precedents are very positive for shareholders. 

    Source: EdwardJones.ca

    This large rate cut helps ease pressures on emerging markets that borrowed in U.S. dollars. And, it takes some of the pressure off other central banks around the world that didn’t want to see their currencies devalued too much relative to the mighty USD.

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    Kyle Prevost

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  • How to invest tax-free in a bitcoin ETF in Canada – MoneySense

    How to invest tax-free in a bitcoin ETF in Canada – MoneySense

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    Investment Investment account Purchase price Sale price Gain Capital gains tax After-tax gains
    Bitcoin Non-registered $23,500 $61,000 $37,500 $3,750 $33,750
    Bitcoin ETF TFSA $23,500 $61,000 $37,500 $0 $37,500

    As you can see, in this hypothetical situation, gains for the tax-free bitcoin ETF come out ahead by $3,750, which is about 11% more than the after-tax gain on bitcoin.

    Canadian crypto ETFs 

    The table below lists all the crypto spot ETFs based in Canada. You can buy bitcoin ETFs (ETFs that invest entirely in BTC), ethereum or ether ETFs (those that invest entirely in ETH) or multi-crypto ETFs (those that invest in BTC and ETH). As of now, BTC and ETH are the only cryptocurrencies available through ETFs. (Figures are current as of Aug. 30, 2024.)

    ETF Ticker symbol Management expense ratio (MER) Assets under management
    (in Canadian dollars)
    Bitcoin ETFs
    Purpose Bitcoin ETF BTCC / BTCC.B 1.5% $2.1 billion
    CI Galaxy Bitcoin ETF BTCX.B 0.77% $724.7 million
    Fidelity Advantage Bitcoin ETF FBTC 0.69% $491.6 million
    3iQ Coinshares Bitcoin ETF BTCQ 1.75% $283 million
    Evolve Bitcoin ETF EBIT 0.75% $165.5 million
    Ethereum (ether) ETFs
    Purpose Ether ETF ETHH / ETHH.B 1.47%–1.49% $318.7 million
    CI Galaxy Ethereum ETF ETHX.B 0.77% $385 million
    Evolve Ether ETF ETHR 0.75% $55.2 million
    3iQ Ether Staking ETF ETHQ 1.97% $65.8 million
    Fidelity Advantage Ether ETF FETH 0.95% $18.7 million
    Multiple cryptocurrency ETFs
    Evolve Cryptocurrencies ETF ETC 0.85% $35.4 million
    CI Galaxy Multi-Crypto ETF CMCX.B 1.03% $3.7 million

    U.S. crypto ETFs: Should you invest?

    U.S.-based bitcoin ETFs have created quite a buzz in 2024. The Securities and Exchange Commission (SEC) approved the first one in January, almost three years after Purpose Investments launched Canada’s first spot bitcoin ETF. 

    Numerous American ETF providers now offer bitcoin ETFs, including big investment brands like BlackRock’s iShares, Fidelity and Invesco. Canadian investors can buy these ETFs, too, through their discount brokerage account—just like they would any U.S. stock or ETF. And, yes, these ETFs can be held in registered accounts like the TFSA or RRSP.

    Which is better: Canadian or U.S. ETFs? 

    Truth be told, there’s not much difference between the two. For instance, bitcoin ETFs in both countries hold the same underlying asset: bitcoin. Investors could make a decision based on their preferred parameters. 

    For example, you may pick the bitcoin ETF with the lowest management expense ratio (MER) or the highest assets under management (AUM), or you could look for the oldest fund—regardless of where it’s based. 

    If you go with a Canadian ETF, you could have more choices to make: Do you want a Canadian ETF that hedges its currency risk or one that doesn’t? Do you want to hold the ETF in U.S. dollars? The table below lays out the options for one example, the Purpose Bitcoin ETF. (Figures are current as of Sept. 13, 2024.)

    ETF (ticker symbol) Currency Currency hedge One-year return
    BTCC Canadian dollar Yes 117.94%
    BTCC.B Canadian dollar No 121.15%
    BTCC.U U.S. dollar No 120.88%

    In the right-hand column, you’ll notice there’s a difference in the ETFs’ one-year historical return, even though they all hold bitcoin as their underlying asset. This difference is because of the appreciation or depreciation of the currency in which the ETF holds its bitcoin. In this case, the non-hedged ETF delivered higher returns because it benefited from the appreciation of the U.S. dollar against the Canadian dollar. But there’s no way to have known this one year ago. Like all financial markets, the currency market is largely unpredictable.

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    Aditya Nain

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  • Sobeys/FreshCo parent company, Empire reports earnings – MoneySense

    Sobeys/FreshCo parent company, Empire reports earnings – MoneySense

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    Growing grocery delivery business and other opportunities

    The company also said it’s hitting pause on a new fulfilment centre to help save costs in its grocery delivery business Voilà, among other changes. 

    “While the market penetration of Voilà continues to be strong, the size and growth of the Canadian grocery e-commerce market is smaller than anticipated, resulting in higher net earnings dilution than originally estimated,” Empire said in its press release. The company says it’s focusing on driving volume and performance at its three existing centres. 

    Empire also prematurely ended its mutual exclusivity agreement with technology provider Ocado, as part of changes it’s made to lower costs and increase flexibility. The changes “are expected to have a significant, positive impact on Voilà’s profitability in fiscal 2025 and 2026,” Empire said.
    The company says its profit amounted to $0.86 per diluted share for the 13-week period ended Aug. 3.

    The result was down from a profit of $1.03 per diluted share in the same quarter last year when its bottom line was boosted by the sale of 56 gas stations in Western Canada.

    Analyst take on Empire’s quarter

    RBC analyst Irene Nattel said Empire’s operating results came in “a tick above forecast as consumer value-seeking behaviour stabilizes.” She said in a note that the company continues to execute on its strategy to maximize revenue in its full-service stores, despite the broader momentum in discount stores, though she added Empire is also growing its discount presence. Nattel has previously said Empire is overly exposed to the full-service part of the grocery sector compared with its competitors, giving it a relative disadvantage amid heightened price sensitivity. 

    Empire earnings highlights

    Here’s a breakdown of the results this week.

    • Empire Company (EMP/TSX): Earnings per share of $0.63 (versus $0.62 predicted). Revenue of $7.41 billion (meeting the prediction).

    Sales for what was the company’s first quarter totalled $8.14 billion, up from $8.08 billion a year earlier. Same-store sales for the quarter were up 0.5%, while same-store sales, excluding fuel, increased 1%.

    Medline said a year and a half after completing the rollout of loyalty program Scene+ across Canada, the program has more than 15 million members, with those members spending on average 55% more than non-members. “Scene+ has significantly boosted our incremental sales and margin compared to our prior loyalty program,” he said. 

    On an adjusted basis, Empire says it earned $0.90 per share in its latest quarter, up from an adjusted profit of $0.78 per diluted share in the same quarter last year. Shares in Empire closed up 5.6% on the Toronto Stock Exchange at $40.62. 

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    The Canadian Press

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  • Making sense of the markets this week: September 15, 2024 – MoneySense

    Making sense of the markets this week: September 15, 2024 – MoneySense

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    Trump’s down, Oracle’s up

    Tuesday’s earnings call was the best day that Oracle shareholders have seen in a while. 

    Oracle earnings highlights

    All figures in U.S. currency in this section.

    • Oracle (ORCL/NYSE): Earnings per share came in at $1.39 (versus $1.32 predicted), and revenues of $13.31 billion (versus $13.23 billion predicted). 

    Share prices rose more than 13% after the tech giant showed profits that were up nearly 20% from last year. Revenues across the company’s cloud services division continue to increase. And CEO Safra Catz said, “I will say that demand is still outstripping supply. But I can live with that.”

    Founder Larry Ellison (who recently passed Mark Zuckerberg to become the second richest person in the world) excitedly predicted that Oracle would one day operate more than 2,000 data centres, which is up from the 162 today. The current project that he highlighted is a massive data centre that will use three modular nuclear reactors to produce the needed gigawatts of electricity.

    In other U.S. stock market news, Trump Media and Technology Group (DJT/NASDAQ) investors face a big decision this week. The stock plummeted from highs of $66 per share on March 27, to $16.56 after the debate on Wednesday. Don’t say we didn’t warn you. 

    That’s not the worst news for DJT investors though. Next week, a potentially crippling event occurs: the entity that owns 57% of the shares can sell the stock for the first time. If it were to sell all its shares (in order to get as much money as possible out of a business venture that loses millions of dollars every month), the share price would tank. 

    What is the “entity”? It’s actually a question of who not what: Donald Trump. 

    Even at reduced share price levels, Trump’s slice of Truth Social is worth about $1.9 billion. It’s not like he needs money for pressing issues or anything like that…

    Dell and Palantir kick American Airlines and Etsy out of the S&P 500

    In other big events to look forward to, September 23 will see major U.S. market indices experience a reweighting. Given that trillions of dollars are now passively invested into indice-based index funds, whether your company is a member of a specific index or not can make a big difference in its share price. That said, these indice moves are largely anticipated by the market, so a lot of the value movement has already been priced in.

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    Kyle Prevost

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  • Private equity, private debt and more alternative investments: Should you invest? – MoneySense

    Private equity, private debt and more alternative investments: Should you invest? – MoneySense

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    What are private investments?

    “Private investments” is a catch-all term referring to financial assets that do not trade on public stock, bond or derivatives markets. They include private equity, private debt, private real estate pools, venture capital, infrastructure and alternative strategies (a.k.a. hedge funds). Until recently, you had to be an accredited investor, with a certain net worth and income level, for an asset manager or third-party advisor to sell you private investments. For their part, private asset managers typically demanded minimum investments and lock-in periods that deterred all but the rich. But a 2019 rule change that permitted “liquid alternative” mutual funds and other innovations in Canada made private investments accessible to a wider spectrum of investors.

    Why are people talking about private assets?

    The number of investors and the money they have to invest has increased over the years, but the size of the public markets has not kept pace. The number of operating companies (not including exchange-traded funds, or ETFs) trading on the Toronto Stock Exchange actually declined to 712 at the end of 2023 from around 1,200 at the turn of the millennium. The same phenomenon has been noted in most developed markets. U.S. listings have fallen from 8,000 in the late 1990s to approximately 4,300 today. Logically that would make the price of public securities go up, which may have happened. But something else did, too.

    Beginning 30 years ago, big institutional investors such as pension funds, sovereign wealth funds and university endowments started allocating money to private investments instead. On the other side of the table, all manner of investment companies sprang up to package and sell private investments—for example, private equity firms that specialize in buying companies from their founders or on the public markets, making them more profitable, then selling them seven or 10 years later for double or triple the price. The flow of money into private equity has grown 10 times over since the global financial crisis of 2008.

    In the past, companies that needed more capital to grow often had to go public; now, they have the option of staying private, backed by private investors. Many prefer to do so, to avoid the cumbersome and expensive reporting requirements of public companies and the pressure to please shareholders quarter after quarter. So, public companies represent a smaller share of the economy than in the past.

    Raising the urgency, stocks and bonds have become more positively correlated in recent years; in an almost unprecedented event, both asset classes fell in tandem in 2022. Not just pension funds but small investors, too, now worry that they must get exposure to private markets or be left behind.

    What can private investments add to my portfolio?

    There are two main reasons why investors might want private investments in their portfolio:

    • Diversification benefits: Private investments are considered a different asset class than publicly traded securities. Private investments’ returns are not strongly correlated to either the stock or bond market. As such, they help diversify a portfolio and smooth out its ups and downs.
    • Superior returns: According to Bain & Company, private equity has outperformed public equity over each of the past three decades. But findings like this are debatable, not just because Bain itself is a private equity firm but because there are no broad indices measuring the performance of private assets—the evidence is little more than anecdotal—and their track record is short. Some academic studies have concluded that part or all of private investments’ perceived superior performance can be attributed to long holding periods, which is a proven strategy in almost any asset class. Because of their illiquidity, investors must hold them for seven years or more (depending on the investment type).

    What are the drawbacks of private investments?

    Though the barriers to private asset investing have come down somewhat, investors still have to contend with:

    • lliquidity: Traditional private investment funds require a minimum investment period, typically seven to 12 years. Even “evergreen” funds that keep reinvesting (rather than winding down after 10 to 15 years) have restrictions around redemptions, such as how often you can redeem and how much notice you must give.
    • Less regulatory oversight: Private funds are exempt from many of the disclosure requirements of public securities. Having name-brand asset managers can provide some reassurance, but they often charge the highest fees.
    • Short track records: Relatively new asset types—such as private mortgages and private corporate loans—have a limited history and small sample sizes, making due diligence harder compared to researching the stock and bond markets.
    • May not qualify for registered accounts: You can’t hold some kinds of private company shares or general partnership units in a registered retirement savings plan (RRSP), for example.
    • High management fees: Another reason why private investments are proliferating: as discount brokerages, indexing and ETFs drive down costs in traditional asset classes, private investments represent a market where the investment industry can still make fat fees. The hedge fund standard is “two and 20”—a management fee of 2% of assets per year plus 20% of gains over a certain threshold. Even their “liquid alt” cousins in Canada charge 1.25% for management and a 15.7% performance fee on average. Asset managers thus have an interest in packaging and promoting more private asset offerings.

    How can retail investors buy private investments?

    To invest in private investment funds the conventional way, you still have to be an accredited investor—which in Canada means having $1 million in financial assets (minus liabilities), $5 million in total net worth or $200,000 in pre-tax income in each of the past two years ($300,000 for a couple). But for investors of lesser means, there is a growing array of workarounds:

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    Michael McCullough

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  • Which savings should retirees draw down first? – MoneySense

    Which savings should retirees draw down first? – MoneySense

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    Working as a financial planner, I am often asked, “What is the most tax-efficient way to draw down on investments?” From the outset, I question if a decumulation plan based on tax efficiency is the best use of someone’s money. I wonder whether it is even possible to design “the best” long-term, tax-efficient withdrawal strategy.  

    I have modelled many different combinations of withdrawal strategies, such as RRSP first, non-registered first, blending the two, depleting registered retirement income funds (RRIFs) by age 90, dividends from a holding company, integrating tax-free savings accounts (TFSAs), and so on. In most cases, there is no significant difference to the estate over a 25- or 30-year retirement period, with the odd exception.

    You may have read articles suggesting the right withdrawal strategy can have a major impact on your retirement. The challenge when reading these articles is you don’t know the underlying assumptions. For example, if the planner is using a 5% annual return, is it all interest income and fully taxable? What is the mix of interest, dividends, foreign dividends, capital gains and turnover rate that makes up the 5% return? There is no standard all planners use, which leads to confusion and can make things seem more complicated than they need to be.

    Think spending, not decumulation

    Here is my approach to designing a decumulation plan. First, think about my opening. You have about 20 years of active living left to get the most out of your money. What do you want to do? Twenty years from now, do you want to look back on your life and say, “I sure was tax-efficient,” or would you rather say, “I had a great time, I did this and that and I helped…” I write this because it is not uncommon for me to see people be too restrictive on their spending in the name of tax efficiency, or not wanting or having the confidence to draw down their investments when they could.

    Stop thinking decumulation; that puts the focus on the money. Instead, think spending. How do you want to spend your money? I know you can’t predict over 20 years, so focus on this year. How can you make this a fantastic year while living within your means? Do you even know the limit to your means? 

    Now prepare an expense sheet so you can see where you are spending your money and where you want to spend it. This is where a financial planner with sophisticated software can help. Have your expenses modelled and projected over time. Will your income and assets support your ideal lifestyle or even allow you to enhance your lifestyle?

    Now do the math

    Once you have a spending plan supported by your income and assets, do the projections showing different withdrawal strategies. You need the spending plan first, because the amount and timing of your spending dictates the withdrawal plan. Plus, detailing your spending gives you a better view behind the curtain to see the impact of spending amounts and frequency on tax and capital changes of different withdrawals. What does spending on things like vehicles, special vacations and renovations mean?

    I suspect that as you work through this exercise, ideally with a planner capable of using sophisticated software, you will see that the withdrawal order doesn’t matter too much and can be easily influenced by various assumptions. If that is your result, you are in a good position. It allows you to manage your affairs so you are tax-efficient each year. 

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    Allan Norman, MSc, CFP, CIM

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  • Making sense of the markets this week: September 8, 2024 – MoneySense

    Making sense of the markets this week: September 8, 2024 – MoneySense

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    Macklem says we could see a soft landing

    For the third straight month, the Bank of Canada (BoC) decided to cut interest rates. The quarter-point cut takes the Bank’s key interest rate down to 4.25%.

    The news that’s perhaps bigger than the widely anticipated rate cut was how aggressive BoC governor Tiff Macklem sounded in his prepared remarks. Macklem stated, “If we need to take a bigger step, we’re prepared to take a bigger step.” That sentence will be focused on by financial markets looking to price in larger potential cuts in the months to come. As of Thursday, financial markets were predicting a 93% probability that October would see another 0.25% rate cut. Several economists believe interest rates would fall to around 3% by next summer.

    While describing a potential soft landing to the bumpy pandemic-fuelled inflation flight we’ve been on, Macklem stated, “The runway’s in sight, but we have not landed it yet.” It appears that the real debate is no longer if the BoC should cut interest rates, but instead, how quickly it should cut them, and whether a 0.50% cut may be in the cards sooner rather than later.

    With unemployment rates increasing, it follows that the inflation rate of labour-intensive services should continue to fall. Lower variable-rate mortgage interest payments will automatically have a deflationary impact on shelter costs across Canada as well.

    You can read our article about the best low-risk investments in Canada at Milliondollarjourney.com if lowered interest rates have you thinking about adjusting your portfolio.

    Will Couche-Tard go global?

    Last week we wrote about the Alimentation Couche-Tard (ATD/TSX) proposed buyout of 7-Eleven parent company Seven & i Holdings Co. If the buyout goes through, ATD would go from being Canada’s 14th-largest company to being in the running for third-largest company. That’s a big if: on Friday morning, just hours before we went to press, Seven & i said it is rejecting ATD’s $38.5-billion cash bid on the grounds it was not in the best interests of shareholders and was likely to face major anti-trust challenges in the U.S. (All figures in this section are in U.S. dollars.)

    It’s interesting to note that 7-Eleven has been much better at running convenience stores in Japan (where it has a 38% profit margin) versus outside of Japan (where it has a 4% margin). That’s partly due to the fact that locations outside of Japan sell a large amount of low-margin gasoline. Couche-Tard, however, has been able to unlock margins in the 8% range in similar gasoline-dominated locations, indicating substantial room for growth. With 7-Eleven’s overall returns falling far behind its Japanese benchmark index over the last eight years, there is clearly a business case to be made to current shareholders.

    The political dimensions to the acquisition are much harder to quantify than the business case. While Japan did change its laws to become more foreign-acquisition-friendly in 2023, it still classifies companies as “core,” “non-core” and “protected,” under the Foreign Exchange and Foreign Trade Act. Logically, it seems that a convenience-store company would fit the textbook definition of “non-core.” However, Seven & i Holdings has asked the government to change the classification of its corporation to “core” or “protected.” That would effectively kill any wholesale acquisition opportunities.

    There is also an American legal aspect to the deal. The Federal Trade Commission (FTC) would have to rule on whether ATD’s resulting U.S. market share of 13% would be too dominant. Barry Schwartz, chief investment officer and portfolio manager at Baskin Wealth Management, speculated that the most likely outcome might be a sale of 7-Eleven’s overseas assets to ATD, with the company holding on to its Japan-based assets.

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    Kyle Prevost

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  • Is VFV a good buy? What about other U.S. ETFs with even lower fees? – MoneySense

    Is VFV a good buy? What about other U.S. ETFs with even lower fees? – MoneySense

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    Sure, investing in these ETFs means you’ll forfeit 15% of your dividends to withholding tax. Yet, for many, it’s a worthwhile trade-off to gain access the most significant U.S. equity index—a benchmark that, according to the Standard & Poor’s Indices Versus Active (SPIVA) report, has outperformed 88% of all U.S. large-cap funds over the past 15 years.

    But hold on, these aren’t your only choices. And here’s something you might not know: they aren’t even the cheapest around. Just like opting for no-name brands at the store can offer the same quality for a lower price, other ETF managers have been quietly rolling out competing U.S. equity index ETFs that come with even lower fees. Here’s what you need to know to make an informed choice.

    Exploring cheaper alternatives to the well-known S&P 500 ETFs—like VFV, ZSP and XUS—leads us to a pair of lesser known but highly competitive options: the TD U.S. Equity Index ETF (TPU) and the Desjardins American Equity Index ETF (DMEU). Launched in March 2016 and April 2024, respectively, these ETFs track the Solactive US Large Cap CAD Index (CA NTR) and the Solactive GBS United States 500 CAD Index. The “CA NTR” stands for “net total return,” which means the index accounts for after-withholding tax returns, providing a more accurate measure of what Canadian investors might take home.

    Essentially, these indices offer U.S. equity exposure without the licensing costs associated with the brand-name S&P 500 index, which is a significant advantage for keeping expenses low. You can think of Solactive as the RC Cola of the indexing industry, and S&P Global as Coca-Cola, and MSCI as Pepsi. 

    For TPU, the management fee is set at 0.06%, with a total MER of 0.07%. DMEU charges a management fee of just 0.05%. Since it hasn’t been trading for a full year yet, its MER is still to be determined but is expected to be competitively low.

    In terms of portfolio composition, there’s scant difference between the these ETFs: VFV, TPU and DMEU. Glance at the top 10 holdings, and you’ll see the weightings of these ETFs reveals very similar exposure, with only minor deviations. Similarly, when comparing sector allocations between TPU and VFV, they align closely, reflecting a consistent approach to capturing the broad U.S. equity market. However, look a bit deeper into the technical aspects, the indices that these ETFs track—the Solactive indices for TPU and DMEU versus the S&P 500 for VFV—exhibit some notable differences. 

    The S&P 500 is not as straightforward as it might seem, though. It doesn’t just track the 500 largest U.S. stocks. Instead, what is included is at the discretion of a committee, subject to eligibility criteria including market capitalization, liquidity, public float and positive earnings. This makes it more stringent and somewhat more active than you might have thought.

    In contrast, the Solactive indices used by TPU and DMEU are more passive. They simply track the largest 500 U.S. stocks by market cap, with minimal additional screening criteria. This straightforward approach lends a more passive characteristic to these indices compared to the S&P 500.

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    Tony Dong

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