The inbox is full again, so let’s tackle some of your questions.
Where to invest money from cottage
Q – We sold our summer cabin and when the deal closes in April we will have about $500,000 in cash after taxes. We are both retired in our 70s with decent pensions that provide for our day-to-day expenses. In normal times, I lean towards being fully invested in high-quality dividend stocks or ETFs but recently I have trimmed our investments, putting some funds into cash or HISA ETFs for a bit of a buffer.
I am wondering how best to deal with this money in April. My current thinking is to keep half in cash or similar and invest the rest in high quality dividend ETFs. My current choices are VDY and ZLB and I would likely just add to my positions to keep things simple. My broker has no commission on those, so I simply reinvest the dividends as they arrive at no cost. It’s not a bad problem to have to be honest but I am open to other options. Any ideas? - Fred S., Nanaimo BC
A - My advice is to hold off on any decision until you receive the money in April. This is likely to be a turbulent year for investors, with Donald Trump’s policies and statements creating a great deal of uncertainty. By April, the investing climate may look very different than it does today.
For example, both ZLB and VDY are almost exclusively invested in Canada. Depending on what happens with Mr. Trump’s tariffs and his other policies, Canadian stocks may not be the most attractive place for your money by April.
This is going to be a year when flexibility will be critical to success. So, I suggest you sit back and watch for the next few months. Hopefully, things will be clearer by then and you can make a more informed decision. – G.P.
Buying XSTP
Q - I read about iShares XSTP-U in your newsletter. Sounds like an interesting option. I see that there are two versions on the TSX: XSTP-U and XSTP, which is in Canadian dollars. I am interested in XSTP-U which you mentioned.
Do I purchase XSTP-U with U.S. dollars in my U.S. account or since it is on TSX in Canadian dollars do I buy it in Canadian dollars, and it hedges to the U.S. dollar? – Paul H., Victoria, BC
A – You can buy it either way. The Canadian dollar version was ahead 14.11 per cent last year but that reflects the exchange rate deferential. Also, don’t expect the return on XSTP (either version) to continue at the current level. Exchange rates aside, the big jump was related to the inverted yield curve last year, which had short-term rates higher than long-term ones. The curve is now closer to normal. So, excluding exchange rate gains, I would expect this ETF to return between 1.5 per cent and 2 per cent in 2025. – G.P.
Wants to add more fixed income
Q - I am a retired investor with a substantial RRIF portfolio. Due to my advancing age and my outlook for the next couple of years of geo-political uncertainty, I am de-risking my portfolio by tilting the equity-to-fixed income ratio even more in favour of fixed income holdings.
I currently have holdings in the following (with current yields): XBB (3.21 per cent), XTLT (3.57 per cent), and ZPL (3.83 per cent). My research has led to the following other possible candidates: XLB (3.73 per cent), ZMMK ( 4.81 per cent), and CMR (6.57 per cent). I have two questions for you:
1. How does CMR manage to generate such a “huge” yield and is it safe?
2. Which of the above six alternatives (or others you could suggest) would you recommend to further add to my fixed income holdings? - Larry H.
A – It appears you are using a variation of the “barbell” approach. This strategy postulates that the best way to strike a balance between reward and risk is to invest in the two extremes of high-risk and low-risk assets while avoiding middle-of-the-road choices.
All your investments, both current and potential, are either short-term or long-term positions with one exception – XBB, which is the iShares Universe Bond Fund. It doesn’t fit, if the barbell is your objective.
All the ETFs that you mention are viable choices. CMR is the iShares Premium Money Market ETF, which invests in short-term, high quality fixed income securities. It’s about as safe an ETF as you’ll find and hasn’t lost money over a calendar year since at least 2019, although it only broke even in 2021. It gained 4.69 per cent last year, but that’s an anomaly created by the inverted yield curve earlier in the year. Going forward, expect a return that’s closer to the fund’s 10-year average of 1.56 per cent.
My suggestion is that you decide on what strategy you will use. If it’s the barbell, then XBB should be sold and the short- and long- term holdings should be evenly balanced. If the goal is a middle of the road strategy, XBB should be the core position and the long and short positions should be adjusted depending on your risk tolerance. – G.P.
U.S. dollar high interest account
Q – I was wondering about HISU.U and similar funds. This one trades on the TSX, but the website says it is a high interest savings ETF on the U.S. side. Is this just hedged? Also, is there a recommendation for a U.S. dollar high interest savings ETF in pure U.S. funds? – Dennis F.
A – HISU.U is the ticker symbol for the Evolve U.S. High Interest Savings Account Fund. Although it trades on the Toronto exchange, the units are denominated in U.S. dollars and the fund invests primarily in U.S. dollar high interest accounts. So, this is the type of pure U.S. dollar fund you’re looking for. It’s not hedged back into Canadian dollars; all the transactions are in American currency.
The fund has a current net yield of 4.24 per cent, according to the Evolve website. The one-year return to Dec. 31 was 5.22 per cent, but I don’t expect it will be that high in 2025. Declining interest rates will eat away at that yield.
Note that the return does not reflect the currency gain for Canadian investors. That would boost the profit significantly. Of course, if the loonie rebounds the exchange rate differential will work against you. – G.P.
Sell long bonds?
Q - Will inflation concerns and slowing interest rate cuts affect bond ETF performance in 2025? Is it a good time to cut back on long term bond ETF exposure? - M.M.
A –Inflation seems to be under control, at least for now, however the Bank of Canada is still expected to cut rates this year to bolster the sluggish economy. However, it’s likely the pace will be much slower than last year.
Falling interest rates should be good news for long-term bonds, but that hasn’t been the case so far in the current cycle. The iShares Core Canadian Long Term Bond Index ETF (XLB-T) gained only 1.13 per cent in 2024 and has given all that back and a little more so far this year.
Given these realities, if you’re overweighted in long-term bonds, it might be a good idea to reduce your exposure. We could still see a rebound, but it’s looking less likely. – G.P.
If you have a money question you’d like answered, send it to me at gordonpape@hotmail.com and write Globe Question on the subject line. I can’t promise a personal response but I’ll answer as many questions as possible in this space.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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