June 5, 2023

This ETF is loaded with bank stocks and bonds – what could go wrong?

An exchange-traded fund that generates monthly income using financial stocks and bonds sounds like a no-brainer investment.

Considering that around $888 million has been invested in it iShares Canadian Financial Monthly Income ETF (FIE-T), investors seem to agree. FIE’s portfolio is quite simple – a mix of common stocks, preferred stocks and bonds issued by banks and other financial institutions. FIE shareholders have received 4 cents per share per month this year, which recently provided a fairly large return of 7.3 percent.

FIE’s problem this year is that its price had fallen by 17.2 percent on October 20. between. Think of FIE as a cautionary tale of how financial market events in 2022 will cause grief in surprising places.

Balanced funds are another example of this disorder. Both stocks and bonds have fallen this year, producing very poor results from portfolios built on the tried and true plan of 60 percent stocks and 40 percent bonds.

FIE’s problems are similar. Its second largest holding is a corporate bond ETF, which is itself 40 percent weighted to bonds issued by banks and other financial companies. Capital is a preferred stock ETF that is almost 55 percent financial weighted. Both mutual funds have fallen this year due to sharply rising interest rates.

Common shares issued by major banks make up approximately 52 percent of FIE’s assets, but there is no relief here either. Shares of the big six banks have fallen an average of about 10 percent over the past 12 months.

As an industry fund, FIE is fairly well diversified. And yet, you can add this fund to the list of investments and strategies that have been hurt by diversification challenges in 2022.

Times like these are a good opportunity to evaluate the things you own and decide if the disappointments still make sense. FIE’s administrative expense ratio is 0.84 percent, which is at best an outrageously high level. The FIE’s tax profile in non-registered accounts is complicated by the fact that dividends only make up about half of profits, which means limited use of the dividend tax credit. Capital return and capital gains make up the rest.

FIE has been a strong long-term performer, rising 7.4 percent on a 10-year annualized basis through September 30. That’s roughly the S&P/TSX Composite over that period. But FIE also offers a reminder that even the long-term leaders in your portfolio will need attention in 2022.

— Rob Carrick, personal finance columnist

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Stocks to consider

Finning International Inc. (FTT-T) Vancouver-based Finning is the world’s largest Caterpillar dealer. This dividend stock has eight analyst buy recommendations and one “market perform” recommendation, and the average one-year price target implies a potential return of 32 percent. Jennifer Dowty looks at the investment case and finds a company with a good balance sheet and trading at a fair value.


Are volatile stocks and rising interest rates scratching your head? Here is the path

Many investors are feeling a lot of uncertainty about what to do with their portfolios right now. Conservative investors are worried and want to invest their money somewhere safe, even if the return is lower than inflation. Those in the aggressive camp seem to think that the stock market is near its bottom—or even past it. Gordon Pape has advice on how all investors should navigate the confusing market landscape.

See also: Investors face thick cloud of gloom. But that doesn’t mean opponents are buying shares by the truckload

This “Blended Momentum” portfolio has left TSX returns in the dust for the past 22 years

For stocks, momentum is the tendency for trends to continue. Stocks that have seen big gains in recent months are expected to continue to rise in the short term. Similarly, those who are lagging behind – just like a certain bus – tend to continue to be late. Norman Rothery wanted to see how a mixed approach to momentum fared for Canadian stocks recently. The idea is to pick stocks that have the best combination of three, six and 12 months of past returns, while incorporating a few risk mitigation features. He found a portfolio that beat the S&P/TSX Composite for many years.

Corporate Profits Under Threat: Why Investors Should Ignore It

Over the past few years, investors have faced restrictions, the threat of economic collapse, accelerating inflation, war and rising interest rates. Now they face a new challenge: against corporate profits. Banks, energy producers and grocery chains in particular are being hit by top political voices who have dreamed of profits and drawn connections between the success of companies and inflation. With this outlook, investing in any of these sectors has become morally dubious – and potentially risky. But there are several reasons why investors should tune out the political noise and stay the course, writes David Berman.

What $220 million fund manager Andrew Pyle buys and sells

Veteran investor Andrew Pyle, now with CIBC Wood Gundy, hedges his bets on whether central banks overshoot their rate hikes by using a three-pronged strategy. That includes holding more cash, both as a defensive move and being prepared to buy stocks when they look like a bargain. He has also started buying shorter-dated government and investment-grade corporate bonds, believing that interest rate hikes are largely over for now. In terms of stocks, his choice is stocks that pay a higher dividend, for example in the banking, telecommunications and energy sectors, and the use of covered call options. Brenda Bouw learned more about her current investment strategy and the stocks she has bought and sold.

It’s tax collection time again

As the stock market collapses in 2022 amid fears of inflation, rising interest rates and recession, many investors are sitting on paper with a loss. As John Heinzl explains, fall is the perfect time to “fix” those losses in taxation.

How the US Intermediate Term could reflect through the stock market

Investors are focused on Tuesday’s U.S. midterm elections, which will determine control of Congress and could spur moves in everything from energy companies to cannabis stocks. Here are some areas of the stock market that will be in focus as Americans head to the polls.

See also: Trump-tied stock rally for possible 2024 presidential election

How to beat the US stock market with ETFs

There’s one strategy that should really beat US stocks over the next 10 years, but it takes a special person to make it work. Most importantly, you need to ignore short-term returns. The strategy is to buy country-specific exchange-traded funds (ETFs) with low cyclically-adjusted price-to-earnings (CAPE) ratios. Andrew Hallam explains how the strategy works.

Others (for subscribers)

Raj Lala’s first share: The CEO sold CIBC shares to pay off a student loan from the bank

Monday analyst level increases and decreases

Globe Advisor

Demand for innovative segment funds with evolving guarantees is growing amid volatile markets

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How about the coming days

Inflation data, midterm elections threaten struggling US stock rally

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Compiled by Globe Investor Staff

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