Fear and loathing in the bond market would be a good title for a summary of investing so far in 2021. And yet, money flows into exchange-traded funds holding bonds were strong last month. Are investors doing the wrong thing? Far from it. In fact, I’d argue that maintaining exposure to bonds is one of three smart investing trends that emerge from the April, 2021, sales data for ETFs.
Strong bond ETF sales
Bond ETFs took in $717-million in April, making them the second most popular asset class after Canadian equity funds and crypto assets.
Now is not the time to overweight bonds, by any stretch. Bond yields have risen sharply since the turn of the year, which means bond prices are down on a year-to-date basis. So are bond ETF prices. Yet with stocks on a tear, it’s smart to maintain some exposure to bonds to hedge against a sharp decline for stock markets.
Investors were putting money into pretty much all types of fixed-income ETFs, with the exception of those holding mid- to long-term bonds and cash alternative ETFs that keep your money in savings accounts. With rates on the rise, it’s best to stick to short-term bond ETFs, so avoidance of longer-term debt makes sense.
Cash alternative ETFs are a perfectly good parking spot for cash in your investing account, but most brokers charge commissions to buy and sell them. This cost works against the modest yield of these funds.
Rotation to Canadian from U.S. equity funds
U.S. stocks have outshone Canadian stocks in recent years, but results for the first four months of the year have shifted the focus a little. The S&P/TSX Composite Index was up 11 per cent over this period on a total return basis, while the S&P 500 was up 7.8 per cent in Canadian dollars. The U.S.-dollar gain for the S&P 500 was up 11.8 per cent, but a rising Canadian dollar cut that back unless you own a U.S. equity ETF with currency hedging.
If inflation advances as the pandemic recedes and economic growth picks up, the resource-heavy Canadian stock market could benefit more than the U.S. market. So there’s a decent case for adding money to Canadian equity ETFs, possibly by taking profits from your U.S. equity funds. In fact, there was net selling of U.S. equity funds in the amount of $125-million, while Canadian equity funds took in $1.5-billion.
Strong crypto asset sales
Let’s agree that investing in crypto ETFs is about speculative fun and not adding a core buy-and-forget building block to a portfolio. In that context, using ETFs to invest in cryptocurrencies makes some sense. Investors are right on this theme – they put a net $1.3-billion in crypto asset funds in April.
You can trade crypto in a tax-free savings account via ETFs, and registered retirement savings plans as well (though crypto and retirement saving seem ill-matched for now). Crypto ETFs basically turn bitcoin and ethereum to stocks, which means accessibility through familiar brokers and trading apps, with none of the usual storage issues for crypto assets – the easiest way to play with crypto as a speculative investment.
-- Rob Carrick, personal finance columnist
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Stocks to ponder
Héroux-Devtek Inc. (HRX-T) With a pandemic exit plan having dominated markets for the last six months, investors have thoroughly picked over the obvious reopening plays. But this stock doesn’t appear to be among them. As a producer of aircraft landing gear, the Quebec-based company is heavily exposed to the resumption of commercial air travel. As Tim Shufelt reports, you wouldn’t know that by looking at how the company is valued.
The Lion Electric Company (LEV-T) This stock just began trading on the Toronto Stock Exchange May 7. A mere 12 trading days later, the share price already gained 12 per cent. The company operates in an industry that has sparked a great deal of investor interest: the rapidly growing electric vehicle market. Given the positive industry momentum, this stock has tremendous earnings growth forecast in the years ahead. Jennifer Dowty tells us why this is a stock to watch.
The Rundown
Short sales on the TSX: What bearish investors are betting against
Short interest is edging up on the Toronto Stock Exchange, with bets in particular on the rise against cryptocurrency ETFs and a specific Canadian bank stock strategy. Larry MacDonald reviews all the latest trends exhibited by bearish investors looking for a profit.
Yes, this is a market bubble - and it may burst sooner than you think
George Athanassakos, a professor of finance who holds the Ben Graham Chair in Value Investing at the Ivey Business School, isn’t mincing words. He thinks we’re in an asset valuation bubble, and we may be closer to it bursting than many think. Brave investors will want to read his rationale.
Forest products stocks are well off their highs as lumber prices remain sky high. Time to buy the dip?
If your instinct is to sell Canadian forestry stocks out of concern that record-high lumber prices can’t possibly be sustained, you’re not alone: The stocks have fallen about 15 per cent as a group over the past three weeks. But should you tame that instinct? David Berman provides some reasons why.
World stocks to rise modestly, correction unlikely: poll
World stocks will continue to rise this year on robust economic and earnings recoveries but any quickening of inflation would temper that enthusiasm, according to Reuters polls of analysts, a majority of whom said a near-term correction was unlikely. Reuters polls of nearly 300 equity strategists taken May 10-26 showed all 17 stock indexes surveyed on were forecast to rise, with annual gains in nearly all of them predicted to be in double digits this year.
Also see: Funds recommended cutting equity exposure in May to lowest level this year
Betting against volatile stock market makes comeback as summer nears
Some investors are revisiting a popular trade that has largely been out of favour since last year’s market tumble: betting against stock market turbulence. Assets in the ProShares Short VIX Short-Term Futures ETF, a popular vehicle for betting against stock market gyrations, have nearly doubled over the last six months to $562 million. Saqib Iqbal Ahmed of Reuters explains why.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Friday’s analyst upgrades and downgrades
Friday’s Insider Report: Billionaire businessman invests $3-million in this stock that recently hit at a record high
Thursday’s analyst upgrades and downgrades
Thursday’s Insider Report: CEO invests over $500,000 in this small-cap stock
Number Cruncher: Eight funds that have outperformed in the risky small-cap space
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Ask Globe Investor
Question: I own a resource mutual fund: NBI Resource Fund. I have had it a long time. It was originally an Altamira fund. The management expense ratio is about 2 per cent. I was hoping you can recommend an equivalent ETF with a lower MER.
Answer: You may want to look at the BMO Equal Weight Global Base Metals Hedged to CAD Index ETF. It invests in a portfolio of 29 mining companies from around the world, mainly the United States, Canada and Australia. Top holdings include Capstone Mining Corp., Copper Mountain Mining Corp., Alcoa Corp., Arconic Corp. and Turquoise Hill Resources Ltd. Other recognizable names in the top 10 are First Quantum Minerals Ltd., Hudbay Minerals Inc., Rio Tinto Ltd. and Freeport-McMoRan Inc.
This is a very volatile fund, with huge swings up and down. Right now, it’s riding the wave of rising commodity prices with a one-year gain to the end of April of 104.8 per cent.
This should be considered an opportunistic fund. Get in when the cycle is right and sell when commodity prices start to fall. This is not a buy-and-hold ETF; the 10-year average annual compound rate of return is in the red, at minus 6.1 per cent.
The fund was launched in 2000 and has net assets of $90-million. The management expense ratio is 0.61 per cent.
--Gordon Pape
What’s up in the days ahead
This weekend, we’ll take a look at growing concerns about corporate profit margins, which have been a key catalyst of the bull market.
A looming labour crunch? World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
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Compiled by Globe Investor Staff