How balanced ETFs are rewiring investor brains. Plus, top growth and dividend stock picks and the green-power portfolio surge

How balanced ETFs are rewiring investor brains. Plus, top growth and dividend stock picks and the green-power portfolio surge

No investment product has done more good in the past 20 or so years than the balanced ETF.

Investors are pouring money into these exchange-traded funds because they take the guesswork out of building a portfolio. Balanced ETFs, also called asset allocation ETFs, come in a bunch of different mixes of stocks and bonds. Pick the one that suits your needs, add money when you can and let the markets do their work of creating long-term wealth.

I’ve never seen a product engage investors like balanced ETFs, particularly retirees. The questions I’m getting from readers suggest investors are thinking in depth about how these products are constructed and how suitable they are in today’s investing environment.

There may be some overthinking going on, though. A lot of investors I’ve heard from like the idea of balanced ETFs, but not the fact that most of them have a substantial weighting in bonds.

In a recent column, I discussed the case of a reader on the edge of retirement who was looking at balanced ETFs with an 80-20 mix of stocks and bonds and wondering if that was too tame in a world of ultra low interest rates. My answer, a flat no, prompted another question from someone else near retirement who wondered about an all-equity asset allocation ETF (offers exposure to stocks from around the world).

“What about having everything in [an all-stocks balanced ETF], but with four to five years worth of needed income during retirement set aside in guaranteed investment certificates?” this person asked.

For the right sort of investor, that could work. I’m thinking of someone who is experienced enough with investing that they can watch a portfolio plunge 20 or 30 per cent and not be tempted to sell in a panic because they have GICs as a backstop.

The GICs are a practical way to avoid having to sell hard-hit stocks to provide retirement income. But they don’t address the sense of dread people feel when their investments are plunging in value. For that, you need bonds. When stocks sink, they float.

A couple of alternatives for the investor who chafes at bonds in a balanced ETF: Look for a balanced ETF with a 70-30 mix of stocks and bonds, or pick a suitable balanced ETF and add a complement to juice the bond yield. Maybe an ETF holding long-term bonds, corporate bonds (investment grade or high yield) or emerging market bonds.

The all-stocks approach looks rational now, but most investors will regret it on the first day of the next bear market.

— Rob Carrick, personal finance columnist

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Stocks to ponder

Labrador Iron Ore Royalty Corp. (LIF-T) This stock is benefiting from iron ore prices surging to multi-year highs, driven by strong demand in China and tight supply conditions. Two analysts have recently upgraded their recommendation, and the stock had a particularly strong session on Thursday of this week. The stock pays regular and special dividends, and could be of particular interest to yield hunters. Jennifer Dowty has this full profile of the stock. (for subscribers)

Also see: Vale’s disappointing iron ore output adds fuel to scorching price rise

NFI Group Inc. (NFI-T) Shares in this dividend-paying Winnipeg-based bus maker shot up Friday amid investor hopes that an injection of government stimulus spending south of the border will fuel demand for its heavy-duty transit buses. Brenda Bouw tells us more about what analysts are expecting for the stock. (for subscribers)

The Rundown

Morgan Stanley picks the top growth stocks for the long term

Webster’s Dictionary defines the word secular as “existing or continuing through ages or centuries” and this makes secular growth stocks, with the implications of above-market profit increases over the long term, the very best kind of investments. The research team at Morgan Stanley recently scoured their U.S. coverage universe for companies they believe represent the best secular growth investing opportunities. The quantitative portion of the stock selection method uncovered companies generating positive year-over-year revenue growth in each of the past 12 quarters, both before and after the initial shock of the pandemic. Scott Barlow tells us more about the picks and provides the full list. (for subscribers)

Investors should be wary as green-power stocks surge

Solar energy stocks are finally emerging from their long dark night. One ETF that tracks them is up 165 per cent since the start of this year. The challenge for investors is not to be blinded by the sudden glare. Ian McGugan has this analysis of the sector. (for subscribers)

Three top dividend stock picks in the TSX energy sector from $1.5-billion fund manager Michele Robitaille

It’s been a rough year for Canadian dividend investors as the pandemic hit some high-yield sectors such as energy, commercial real estate and banks particularly hard. But where there’s investor pain there’s also an opportunity to find future gains – and dividend-focused fund manager Michele Robitaille believes the broader energy space is one of those areas. The managing director of Canadian equities at Guardian Capital LP, who manages about $1.5-billion in assets (the firm overall manages about $32.7-billion), believes high-quality companies in the energy, pipeline and utilities space are looking attractive these days. She tells Brenda Bouw about three of her top picks. (For subscribers)

After blazing energy rally, investors check the fuel gauge

Investors are gauging how far a rally in beaten-down energy shares could run, as an expected recovery for the coronavirus-hit economy clashes with skepticism about the long-term prospects of fossil fuels. Lewis Krauskopf of Reuters reports. (for subscribers)

As stocks soar, government shutdown looms amid pandemic

Investors worried about whether a looming government shutdown could slow U.S. stocks’ recent surge can take comfort in history: markets have tended to shrug off shutdowns despite their potentially nasty economic impact. Saqib Iqbal Ahmed of Reuters reports. (for subscribers)

U.S. dollar bears emerge from hibernation as post-COVID normality beckons

The U.S. dollar’s decade-long bull run is at an end, say top money managers, who are positioning for a stronger-growth, weaker-dollar world. This bearish take on the dollar was the near unanimous verdict of investors attending the annual Reuters Investment Outlook summit this week, who predicted that non-U.S. assets, from commodities to emerging markets to European stocks will perform well while U.S. interest rates remain stapled to the floor. Saikat Chatterjee of Reuters reports. (for subscribers)

Others (for subscribers)

Strategists raise forecasts for Canadian dollar in latest poll

The week’s most oversold and overbought stocks on the TSX

‘We were quite surprised’: Investors punish RioCan units after REIT slashes monthly payout

Cowen’s CEO sees gains in biotech, helped by easier access to cash

Tesla bear Chanos reduces size of his short bet

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Thursday’s Insider Report: Chairman invests nearly $700,000 in this stock that’s up 40% in 2020

Number Cruncher: Searching for value among these ten rebounding financial stocks

Number Cruncher: These 15 U.S. stocks with growing profits also score well on ESG risk

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Ask Globe Investor

Question: I’d like your thoughts on a basic approach for my youngest daughter, who is 29 and single. She is saving for a future home purchase and also wants to build an emergency fund. She currently does not have an RRSP.

Most of her current savings are in a regular “high interest” savings account at a bank. She has opened a TFSA at the bank, with only a small amount in it, and also has begun contributing to a Wealthsimple TFSA with automatic monthly contributions. Both are very small, so she has almost all the cumulative room available for TFSA contributions.

Would you advise having investments for saving towards a future home purchase and emergency funds in the same TFSA? I was thinking of a few high dividend stocks, (e.g. BCE, Telus, Fortis, RBC). Would that be liquid enough to serve as emergency funds, or should she have a portion of high interest savings only for the emergency portion? The other question would be whether to subscribe to DRIPs if available for the stocks, or let the dividends accrue to the emergency cash?

I understand you can have several TFSAs at different institutions, as long as you keep track of your total annual contribution limits, so would the emergency cash portion be better held somewhere like Motive Financial? – Paul P.

Answer: There are several questions here so let me address each in turn.

First, TFSAs. Yes, legally you can have as many plans as you wish. In practical terms, I don’t advise multiple plans. It may not be a problem now when your daughter has lots of contribution room but in future years it may become more difficult to keep track of how much room is available if you have multiple accounts. I would limit the total number of accounts to two at most, and preferably one.

For the house saving portion, your idea of high-quality dividend stocks would work well. I would use DRIPs to gradually increase positions in each company. I can’t comment on whether that would produce a better return than the Wealthsimple TFSA because it depends on the asset mix selected. However, she would have more control by choosing her own stocks. It comes down to how active she wants to be in managing her money.

As for the emergency fund, how much does she need? She has no dependents who rely on her for support. Presumably, she wants to protect herself against job loss, which is certainly a concern these days. In that case, I think a fund equivalent to six months take-home pay would be adequate.

I would not invest this money in the stock market. Even blue-chip stocks fall when the market crashes, as we saw in March. Keep the money in a high-interest savings account. Motive Financial offers 1.55 per cent in a TFSA, the same as in its non-registered Savvy Savings Account.

If your daughter doesn’t think it might create problems in the future, she could use a Motive Financial TFSA for the emergency fund and Wealthsimple or a self-directed plan for the house. Alternatively, she can ask about investing a portion of her Wealthsimple TFSA in cash and see what rate they offer. – G.P.

–Gordon Pape

What’s up in the days ahead

Ian McGugan this weekend looks at whether irrational exuberance has returned to markets.

Click here to see the Globe Investor earnings and economic news calendar.

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Compiled by Globe Investor Staff

Published at Fri, 04 Dec 2020 18:09:51 +0000