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welcome to spring into ETF investing on today’s special episode our panel of guest speakers will be discussing ETFs as a stock replacement tool ins sectors to watch in 2024 this is ETF Market insights and I’m Aaron Allen VP of online distribution with bimo ETFs welcome to to the channel for those who are new to our Channel our goal is to provide timely Market related insights and ETF focused education to Canadian do-it-yourself investors with the goal to become your trusted partner in investing we want to bring you access to the same level of highquality resources that advisors and institutions receive in our industry before we begin a quick reminder that today we are not providing you investment advice or recommendations our channel is all about providing education around investing and around ETFs today I’ll be passing off my hosting duties to Nate Kennedy Nate is the host of the new money Nate podcast where he chats about all things money and is a content creator with close to 1 million Tik Tok followers where he delivers a mix of personal finance education and motivational coaching to his followers thanks for joining us Nate take it away Welcome to our interview where we dive into the dynamic world of exchange traded funds ETFs and their pivotal role in redefining investment strategies throughout our discussion we will explore how ETF serve as an effective alternative to individual stocks offering diversification and risk mitigation additionally we’ll dissect the mechanics of ETF trading and some tools investors can leverage to improve their portfolios first I want to introduce my lovely panelist first we have the lovely Danielle nezel online distribution VP with bimo ETFs Danielle thank you so much for being here I’m also joined by Tony Dong journalist and ETF analyst with many Publications you definitely recognize like the mly fool and sibo ETF markets here in Canada Canada Danielle we’ve seen tremendous growth in the adoption of ETFs with DIY investors how do ETFs serve as an effective replacement for individual stocks in an Investment Portfolio great question and thanks for having me back on the channel it’s really great to be back talking about ETFs so ETFs have really boomed in Canada we’re looking at over $400 billion doar in assets that Canadians have put into ETFs 400 billion 400 billion a little more than that actually so Canadians are looking to ETFs for all of their benefits a lot of benefits that ETFs have over stocks have something to do with risk mitigation when Canadians are managing portfolios and Canadians looking to ETFs to help with managing risk in their portfolios so we always need to remember and I talk about this a lot when we’re managing our invest Investments we’re managing return Yes we think about that a lot but we’re also managing risk and you need to think about both sides of the equation to successfully manage your own portfolio so with ETFs right off the top one of the greatest benefits is diversification and this helps with risk management because instead of having one or two or three stocks now you have a portfolio of of stocks you have sometimes a hundred or even a thousand different Holdings within a single ETF so this already takes a lot of risk off the table by kind of smoothing out returns looking at being invested in a broad Market or a lot more Investments versus one or two different stocks yeah yeah and I think it’s really interesting you know there’s there’s so many companies in some of the ETFs you don’t even know but it’s it’s ETFs have this great thing where they’re self- cleansing where you know zsp for example you know bottom three get booted out if they don’t have the earnings and they can’t make it then the next three come out so they have this self- cleansing sort of tool Tony what are your thoughts on risk mitigation when it comes to ETFs and and how do you personally think that like it’s it’s a it’s a great tool versus individual stock great question so there’s a very good study out there that has this really cool graph that shows how your level of risk steadily falls off as the number of equities you hold increases and the magic number is around 30 or more of course it depends on the segment of the market for example if you’re dabbling in small caps you’re going to need a lot more stocks but the takeaway from that is for individual investors managing 30 or so odd positions is very hard right even with transaction free brokerages you need to think of the bid ass spread you need to think about rebalancing 30 positions on your own it’s a lot of work so much work so much work when you have a universe of hundreds of ETFs with that 400 billion assets under management there’s going to be an ETF out there that corresponds to the exact strategy you want whether it’s based on a pre-existing index whether the fund manager implements their own special rules or if it’s actively manage you have a a professional active manager overseeing it there’s going to be an ETF for you out there so what what are you guys thoughts on multiple ETFs with risk mitigation you know you imagine let’s say one ETF could as we said have thousands of different compan companies within it so you know is it a prudent thing for an investor to have multiple ETFs in their strategy or you know there are some all-in-one products um that are out there of course so what are your guys thoughts on on that sort of strategy maybe I’ll jump in there so I think an investor first needs to determine what is their goal for their invest their Investment Portfolio what’s their time Horizon there’s a couple questions they need to ask themselves uh and then they can look at finding several different ETFs that work for them as you mentioned there is asset allocation ETF so if there’s an investor that kind of wants to set it and for get it and make a single trade every year and be invested in the total Market with equities and fixed income there’s products out there for them and you can have a full full total uh exposure to the market using a single ETF which takes away from those transaction fees um and the rebalancing that you were talking about Tony but then there’s some other investors that think maybe a couple ETFs work for them perhaps they want to get invested in a dividend strategy or a low volatility strategy uh to tweak their portfolio in a certain direction we we kind of talk about core uh and satellite positions so maybe holding a couple broad Market Equity ETFs as a core position and then tweaking towards an income strategy for example with a cover call ETF or a dividend ETF or tweaking towards maybe a little more growth with with a thematic ETF so an investor kind of has to set out you know what’s their their goals for that that portfolio and those Investments um but a couple different ETFs can absolutely work or single ETF as well absolutely yeah so C can you actually walk us through uh the mechanisms of how an ETF trades and how they might differ from an individual stock in mutual funds because I’d imagine you know mutual funds standard One Price closes there’s it’s not trading so how but like in particular with a stock versus an ETF are are there similar like are they the exactly the trade the same or are they different like I’d love for you to walk us through that sure so we say the similarities are that an ETF and an equity both you can buy them and them uh on the exchange during Market hours so that’s the similarity uh where there’s some differences and this is actually a benefit for ETF investors is with an ETF you actually get more liquidity or another layer of liquidity than you do uh with stocks so a stock is issued by a company there’s a finite amount of units or shares uh that are issued and those are traded throughout the day between buyers and sellers and they can connect on the exchange to to buy and sell that that investment with an ETF we have certainly that level of of liquidity as well so you and I can say I would like to sell a share of zsp you might be on the other side of that transaction uh and we can buy and sell that that ETF we also use market makers in the ETF world so a market maker is a dealer and they hold an inventory of ETFs so quite often uh you are meeting a market maker at at the other side of the of the transaction you don’t know when you’re on your online brokerage and you’re making a trade but market makers hold an inventory of ETFs and they help with that extra liquidity so I kind of I use a car dealership as an example often you can sell your car or buy a car at a car dealership you don’t know who the end user is going to be if you’re selling your car um but that dealer facilitates the transaction for you the third layer of liquidity is unique to EFS and stocks don’t have this and this is a layer that a lot of investors aren’t aware of or they don’t think about and this is called The Creation Redemption mechanism and it’s important to understand because we get a lot of questions about volume on ETFs people come up to me and they say Danielle I wanted to buy this ETF but I looked in the volume um there’s not a lot of volume on it so I’m I’m concerned but in fact what they’re missing out on is the the liquidity that the underlying Holdings actually have so if you want to um we call create so the creation of an ETF is when we make more units of that ETF so if there’s a lot of demand and our portfolio managers will actually buy all the underlying stocks within that ETF and then deliver that ETF to the investor uh conversely if they want to redeem an ETF they basically dismantle the ETF and sell all the underlying shares and then provide cash to the investor so that’s the creation Redemption is that third layer of liquidity investors sometimes aren’t aware of or don’t totally understand and that creat creates extra liquidity for the end investor so another huge benefit for ETFs Tony let me ask you you know liquidity I’d imagine for institutional Traders is a very very important thing what what are your opinions when it comes to do it yourself investors a lot of the major ETFs have enough liquidity to get a pretty good price on it you know you’re buying maybe once a month or something like that so what are your thoughts on liquidity when it comes to do your do it-yourself investors is that something that should be at like the top of their priority list or is it just a consideration that they should have I think think liquidity should be factored into your total cost of ownership if you’re a DIY investor especially if you’re trading a lot so when you think about something like zsp it’s very liquid because the underlying S&P 500 Index and the stocks it holds which are 500 large and midcap US stocks are very liquid SO trading this ETF you incur a very minimal bid ask spread which is the difference between the Buy price and the sell price right now if your ETF is tracking some more illiquid assets for instance if it holds some you know some weird corporate bonds or Emerging Market bonds from a country across the world that may not be as liquid and that will incur a larger bit as spread for a Buy and Hold investor this consideration isn’t as important but if you’re going to remain in your position for only a short amount of time that difference between the bid and the ask should be yeah it should be added to your total cost of ownership right because you’re incurring a cost to jump in that position and out of that position so once again to reiterate what Danielle said it goes back to your objectives if you’re a long-term Buy and Hold investor it may be okay to you know accept any ETF with a wider bit aspre if that’s the strategy you’re looking for but if you want something liquid something that tracks a major index and you’re not planning to see that position for a long time absolutely look at the bit aspired and make sure that the underlying Assets in the ETF are liquid generally if you stick to large cap Canadian and US market indices that shouldn’t be a problem you should be okay but it’s it’s a it’s a huge consider absolutely watch out for it and be careful if you’re trading around Market open or Market Clos or during extreme times of Market volatility because the creation Redemption mechanism is really good but it can suffer dislocations there was an instance during the 2020 covid-19 pandemic where a lot of bond ETFs where the underlying bonds are traded over the counter uh when that credit crunch happened in March 2020 a lot of these ETFs their net asset value actually uh sorry their price actually fell below the net asset value because that creation Redemption mechanism wasn’t able to keep up during times of Market stress right but this is very rare but it can happen so as always when you’re making these Investments make sure you do your due d Ence and practice good risk management right size your position properly use limit orders and be patient Tony we’re going to stick with you so we’ve talked about replacing individual stocks in your portfolio with ETFs to increase diversification but what about the whole thing the entire portfolio what is available from bimo when it comes to a tool that can provide an all1 solution for investors so that’s totally viable too um I think there’s two types of DIY investors you have the slice and dicers which like to Cobble together different stocks in ETFs and then you have the couch potatoes I think you said you’re couch a lot of people are couch potatoes and it’s a good thing because you know I’ve heard this saying your Investment Portfolio is like a bar soap the more you touch it the smaller it guesss right sometimes it falls out of your hand and goes down the drink completely but if hopefully not but the all-in-one asset allocation ETFs make it a lot easier to be a couch or potato and the whole guiding principle behind this is that different asset classes different stocks of different geographies and sectors different bonds of different maturities issuers like government versus companies will behave as a whole better than the some of parts so individually these assets may be quite volatile but because they’re not all perfectly correlated some of them Zig while some of them zag when you combine them in different proportions you can actually maintain a Target level return without sacrificing too much risk right so you’re finding the optimal blend of risk and return so from bimo there’s a set of multiple ETFs corresponding to different time Horizons and risk tolerances for example my favorite one is zqt so this is a 100% Equity solution it’s all stocks no bonds but it’s globally Diversified so you have the usual allocation to the US Stock Market given how big it is but you also have what is called a Canadian Home Country bias so there’s an overweight to Canadian stocks relative to what their size is in the global market and the reason for that is historically it’s proven to lower volatility improve tax efficiency and reduce currency risk but that’s not where it ends you also have international developed markets like France Germany the UK and you have Emerging Markets like India China so really you’re holding thousands of stocks from around the world in one single ticker and I think that’s pretty cool but maybe 100% stocks isn’t your Jazz right think about this period of time it’s called The Lost decade you go back to 1999 to 2009 in the US US Stocks were completely flat I think like 1.7 annualized returns that’s a decade of seen stagnation but bonds during that time return much much more and I know we’re all subject to recency bias and in 2022 we saw bonds fall as hard as stocks did and that might have spooked some investors but there’s ample historical evidence that suggest that a lot of people tend to overestimate their risk tolerance during the good times and forget about the impact of bonds Tony when we think about diversification is it kind of similar to like taking your veggies like you know you should be doing it but like you’ve got the US market you’ve got Canada I find that you know a lot of investors when they talk about their portfolios they have a huge home bias right you have S&P 500 maybe a bit of bonds and you’re you know a lot of people are like okay well why do I need anything else and of course the Magnificent set are global companies but I guess how do you think DIY investors should be thinking about International markets Emerging Markets with a prudent investment strategy I don’t think it’s like eating your vegetables at all I think it’s more like being offered a free dessert and turning it down because you don’t want to try it out right maybe there was an argument 20 years ago where indexing International markets was quite expensive but now it’s very cheap for instance the beo asset allocation ETFs include that developed market and emerging markets allinone for very low fee and the other part to note is that by excluding International markets you are importantly leaving out around 30 to 40% of the global market by market cap you’re leaving out amazing companies like Taiwan semiconductor manufacturing asml Holdings two very big chip makers you’re leaving out Toyota you’re leaving out Nestle you’re leaving out unil lever BP I can go on and on and on right there is no evidence to suggest that the US markets were outperform perpetually similarly for Canada when you can get thousands of stocks from around the world in a turny solution for that cheap I think it’d be very very irresponsible to pass it up of course if you really believe in a country and that’s what you can stick to there’s nothing to say that you can’t do that but you know when you’re giving me that for that cheap I’m not going to turn it down personally yeah that that makes sense Danielle what about harder to access stocks and asset classes give us some examples of ways ETFs can be used to give us access to some of the hard-to-reach areas of the market yeah absolutely so ETFs have really opened up the market to investors especially do-it-yourself investors for these asset classes that are a lot harder to access or that historically only um institutional investors could access the first example which I think is the best one is fixed income so prior to ETFs uh I I don’t really know how a do it yourself investor would would be buying and selling bonds so the bonds don’t trade hard it’s hard exactly so they don’t trade on on a stock market like equities do you have to go through Bond dealer uh bonds are already a liquid by nature uh you would have to find out a price for them because there’s no price transparency since there’s no open market so getting fixed income into a portfolio would have been very very hard enter ETFs uh they have taken care of this for investors so now investors can trade fixed income just how they can trade equities and they can see intraday pricing on fixed income um so that that’s been a huge thing and Tony you mentioned U during the early days of the pandemic when the fixed Market completely froze up so the bond market froze fixed income ETFs were actually still trading so mind you with a very very wide bid ask spread because of of the market turmoil and uncertainty but investors could still get in and out of fixed income which is a remarkable thing when you think about a bond market being completely Frozen so there’s there’s a great benefit there how ETFs have opened up the fixed income market and then there’s other harder to access asset classes so we talked about Emerging Markets to buy and sell s uh for example Taiwan semiconductor which trades on the Taiwan or the Taiwanese stock exchange this would be almost impossible for a Canadian investor to do uh first of all the stock exchange in Taiwan would it would be in the middle of the night for a Canadian investor so things like that it’s so much easier to use get access to companies like this with an ETF that’s training on a Canadian exchange in Canadian hours and then we think about asset classes like gold so for example bimo just listed zld which is a gold bullion ETF so you can actually buy physical gold using an ETF instead of going to a bank and buying your your gold bullion and finding somewhere to store it paying those storage costs you there’s a lot of hurdles involved in in a transaction like that now you can do it sitting on your couch and watching Netflix uh crypto assets are another great example you don’t have to open up um a digital wallet if that if you wanted access to crypto in your portfolio but didn’t want to go through those add steps you can access that as well with an ETF so etf’s really just opening up so many hardto access markets and making them really easy for Canadian investors to add to a portfolio Tony we’ve talked mostly about equities but let’s look at bonds we did talk a little bit about bonds but I’m always surprised that there are still investors out there investing in individual bonds so you know similar to what Danielle said how have ETFs really innovated the fixed income space and allowed for easier access to the market absolutely so picture this you’re a retail investor you’re you’re trying to buy a bond you’re going to be going up against a bay or Wall Street Bond desk these are people who’ve been doing this professionally for years they’re armed with a Bloomberg terminal you maybe have wealth simple open on a phone or something imagine trying to trade bonds here and like Danielle said there’s no inter there’s no centralized pricing so you need to figure out the yield to maturity the duration the average credit quality all these different factors that are really hard for the average person to calculate but if I was to buy a beo Bond ETF like z a i can just go on the web page I can look up what the yield to maturity is which is the total return expected if all the individual bonds within were held into maturity I can look at the duration which governs how sensitive it is to interest rate changes I can even open up the portfolio composition file and see all the individual bonds that z a holds you know what their maturity is what their coupon is who they’re issued by is it the government of Canada is it another bank or something and most importantly I can trade it just like a stock with a bid and ask I can put in a limit order I can watch that fill and that also makes it really easy to rebalance cuz we need think about an individual Bond right you can’t really sell out of that you’re going to get eaten alive on the bid you’re going to get eaten alive on the ask and the coupons usually pay semiannually if I’m relying on my bond for income I don’t want to just get two payments a year I want one every month yeah but Bond ETFs they smooth out that income distribution you get a distribution usually every single month so if you’re an income investor wanting some lower risk income the bonds are a great way to do that and also accessibility is a thing so when you think about bonds most people think aggregate bonds so you have your government bonds your investment great corporates but what if I want access to the high yield Market what if I want access to Emerging Market bonds like an Argentinian Government Bond where am I going to find that individually that’s a nightmare but bimo has ETFs that correspond to both of these there’s one for uh junk bonds or high yield bonds there’s one for merem merging Market bonds you have floating rate bonds essentially if you’re a fix income Enthusiast you can find a bond ETF that gives you all the exposure you want but with a liquidity and convenience of a stock and personally I’m a bit of a fixed income nerd I love these products yeah yeah it it seems like there’s pretty much it’s like a buffet almost there’s any you want short duration long duration International you know here in Canada you can have at it so some investors adopt a particular strategy maybe they’re dividend investors or you know they like income like we’re talking about how have ETFs redefined uh how investors can access some of these different strategies so let’s say I was trying to make my own dividend portfolio right and I wanted monthly dividends I would literally have to pick a bunch of different dividend stocks make sure that the X dividend dates all occurred on different dates to get that staggered income but with a bimo dividend ETF like zdy or zdv I get that monthly distribution I get a portfolio stocks that are screened according to fundamental metrics on their dividend Health dividend sustainability dividend yield that’s rebalanced on my behalf and I get that income so it’s not like very chunky and so forth right but if I want more enhanced income I could write options on my own but to write an option I have to own a 100 shares of the underlying and then again I have to manage a bunch of different positions choose yeah I got to choose which strikes to write I got to choose how far out I set the expiry date too you know if my calls approach if my Call’s about to get assigned do I roll out do I roll up but or I could pay some basis points and leave that to a professional options Trader who does it on my behalf and delivers that uh distribution package to me every single month that’s what the cover call ETFs do so you know if you if you like managing that you can I personally don’t and I do this for a living so that’s why I like using the income ETFs yeah and and that makes total sense I think it it reduces a lot of work and you’re ultimately going to get the same if not better results so it’s it’s it’s quite a quite a good look there Danielle we’ve talked about adding ETFs to a portfolio to replace stocks but can you also use them to complement an existing stock portfolio if you’re not looking to sell your stocks like just walk us through a couple complimentary strategies that can be used absolutely so we’re seeing a lot of investors use this hybrid approach ETFs and stocks in their portfolio um again going back to that core satellite uh type of investment construction or portfolio construction has been pretty popular amongst Canadian investors so that’s when the core of the portfolio uh they use an ETF for the core so something like a broad Market ETF like a zsp to access us equities or zcn to access Canadian equities or even an asset allocation ETF and then their a satellite exposure so this is the smaller exposures around the largest part of the portfolio they use stocks and this might be just a personal preference and investors would like to make a couple bets in in the stock market uh to tilt their portfolio to to more of a growth scenario or a lot of investors uh receive stock options at work and so they have a lot of stock from um their employer and so they’re using ETF to kind of diversify away from those exposures yeah it could be I mean if you’re working somewhere you’ve got that’s how you earn your income that’s how you do everything and so ETFs can serve as a great way to basically not have all your eggs and sort of one absolutely yeah so Danielle are there tools beo or another tool providers can offer that can help investors find a replacement for stocks in their portfolio yeah so we actually built out uh some tool capabilities for investors they’re free to access at bimo etf.com we have uh several different ones but one specifically when we’re looking at stocks and ETFs so it’s our ETF screener tool or sometimes we call it our stock replacement tool so this is for an investor that wants exposure to a specific stock but would like to get that exposure within an ETF so for example if if an investor say they would like exposure to Tesla but don’t want to own Tesla outright they can type in uh the ticker for Tesla and they can find out which ETFs are listed in Canada that have the largest exposure to that company and so this way an investor can add an ETF to their portfolio still access that diversification a basket of equities but tilt towards a specific stock uh conversely if there’s a stock you do not want in your portfolio for maybe there’s an ESG reason or maybe it is a company you work for so you’re already over overweighted that company you can search that stock and you can screen and you can look for all the ETFs that don’t hold that stock so we’re finding investors are really using this tool to help them see you know look under the hood as we say in their ETFs and really see what they’re holding and then tweak exposures that way yeah and I do think it’s really important to have you know because there’s a lot of ethical investors that out there they like you said they might not like want big oil in their portfolio or something like that so it’s wonderful that you guys are you know able to help you know investors filter for that but I think that covers off our discussion today so thank you guys so much uh for coming and bringing such great insights to today’s session around ETFs and how they offer a power alternative to individual stocks and yeah thank you to bimo ETFs for continuing to host these educational uh segments for DIY investors and guys like thank you so much have a wonderful day and now I’m going to turn over my hosting duties to sel Patel host of the strictly money podcast and YouTube channel where she helps Canadians Master their personal finances SEL is a financial analyst award-winning business TV journalist with CNBC and BNN previously and a publicist with more than 20 years of experience in the financial industry we’re excited to have our host today’s session SEL over to you welcome to our discussion today where I am joined by some of our industry professionals to discuss what sectors to watch in 2024 with tech and the Magnificent 7 leading the change will explore what’s driving their growth geopolitical risks interest rate environments and much more with me today I have Chris mccy he’s a portfolio manager with bimo ETFs and Valerie grimma who is a market maker at RBC Capital markets welcome both thank thank you happy to be here so Chris let’s start with you and ETF fund flows I think we can both agree that the sector that got the most love was technology can you talk a little bit about what was driving the dominance there sure and you’re right technology is the sector that’s been getting the most investor love so to speak so far this year if we look at flows in the US Industries so year to date to the end of April uh technology sect ETFs have brought in 11 billion and there’s really no other sector that’s close to that in terms of the magnitude of of flows coming in um we see on the top uh other than Tech there’s been financials and energy getting a little bit of flows in more in recent months um so that’s an interesting um phenomenon there a little bit cyclical sectors getting some flows but again nothing really matches what’s been going into technology right now um as for the factors that are driving that um you really have this continued um momentum around this AI movement and it’s not from the technology companies themselves but we have a few quarters now of other CEOs and other Industries talking about AI how they’re using it in their business and how they’re going to deploy it to either gain efficiencies or add value in some other way and so when you have companies in the financial industry Communications consumer stocks all talking about this adoption it’s a real big buildout and the beneficiaries of course are those technology companies whether it’s the chips to uh run AI models whether it’s someone running an AI model themselves um or all the other infrastructure that goes into that um all roads lead back to those technology stocks and so that’s been a really big boom for them so far here this year also we have the continued resilience of the US economy in general um you know we went into the year thinking there might be a recession several rate Cuts potentially because of that and we’ve seen economic growth continue and I think that just boosts investor confidence in general and Technology as the sort of risk on sector tends to be the beneficiary of that Valerie let’s talk about the Magnificent 7 which uh when I look at it it’s actually contributed about half of the S&P index’s returns how are those stocks influencing the market dynamics yes listen the Magnificent 7 have been such a powerful momentum Force within this market for the past 18 months no doubt they have been been the key drivers of a lot of us Equity performance and the reality is is that to a certain extent they’re here to stay the s&p500 is as concentrated as it has been in the past decade right now the top 10 stocks account for nearly 35% of S&P 500 so no doubt kind of where those stocks go probably the broader Market will go as well um magnificent 7 year to date yes they’ve been big contributors but when you drill down into it it’s really about the Magnificent one uh that stock being Nvidia it’s up 90% year to date and it has been a big driver of kind of the overall performance and that again is to what Chris was talking to is this AI secular growth Trend they’ve been a big beneficiary of that the numbers have backed up the growth story and investors have rewarded the company accordingly now we have seen kind of valuations go up as these companies have grown larger uh and some might say that right now they might be priced to Perfection or they need to keep deliv in on strong growth to kind of see uh valuations or stock prices Rally from here we you might want to consider a looking forward as well there might be a future where we see kind of a rate cutting cycle come into play which I think we’ll discuss further but it could cause some kind of Market rotation there as well and you might see some of the other areas of the stock market that have been lagging sort of take a leadership role here so I think there’s a lot of interesting Dynamics at play and you probably ideally want to have exposure to both ends of that story yeah let’s talk about that Chris because there are some headwinds in in the tech sector there’s certainly some regulatory scrutiny especially when it comes to AI uh privacy concerns as Valerie mentioned valuation concerns and at the same time you’re see some Market volatility because people are questioning the timing of the interest rate Cuts so for investors who want to see growth in their portfolio but they still have to navigate the market volatility what do you suggest what sort of strategies can they use yeah there’s a few things investors can look at and your point is well taken that particularly recently we’ve seen a little bit of moderation from the technology sector in terms of their performance uh certainly it has been strong but in the last month or two we’ve seen a little bit of softening there um if we look at the most recent earning cycle uh companies like meta platforms Facebook uh delivering pretty negative earnings whereas Google or alphabet in the same space same sub sector uh very positive earnings and so even within a sector you can see this differentiation between companies and so you know just using sector ETFs in general I think speaks to um a great way for investors to to tackle that that diversification element that everyone knows about ETFs provide uh even within a narrow sector um you know utilizing a sector ETF rather than trying to pick one or two companies helps to reduce that overall volatility um one other thing investors could look at especially if you’re thinking about a potential moderation of growth going forward is to utilize an ETF that that provides a covered call overlay and for investors in Canada there are lots of covered call strategies on sector specific uh underlying portfolios and technology is one of those where you can get a nice income stream on top of uh the growth potential that technology companies provide um and that allows you to uh reduce volatility within the portfolio a little bit as well so that’s a couple of strategies investors could look at and of course the other um if we’re talking about technology you’ve probably had a pretty good run pretty good returns from that sector uh maybe you can take a little bit off the table there and rotate into another sector you know I mentioned energy and financials getting some uh interest and flows recently those sectors really have different drivers than technology does and so that’s a nice diversification element there a complimentary sector on top of the technology and that helps to ride out that volatility as well good stuff let’s talk was some of the big themes that are affecting the markets and and sectors um Valerie you mentioned interest rates uh the timing of interest rate cuts are still up for debate what sectors are going to benefit positively and then what sectors could benefit or not benefit they’ll be impacted negatively I mean it is the million-dollar question here right now everyone all the portfolio managers investors are trying to feel out when are we going to get this inflection Point we’ve had a very steep tightening cycle we’ve seen rates go up quite dramatically very quickly and everyone’s been waiting for that to kind of trickle down through the economy now it’s kind of Economics 101 um but really these central banks want to see a bit of pain at the ground level they want to see kind of some job losses GDP and growth to slow down giving them the ability to kind of fire off the biggest tool in their toolkit and that is to begin this rate cutting cycle now rate cutting cycle is stimulatory right that’s what it should do as we gu them these looser Financial conditions people can go out and spend more and borrow more freely so can corporations and you should have this kind of broad based kind of boost as this cycle kind of feels itself out through the market uh but there will be certain winners and uh probably sectors that underperform in that environment as well um and so the area of the market we would want to look at is cyclical sectors and this makes intuitive sense right these companies in within cyclical sectors kind of ride the tide of the economy right so they’re kind of High when the economy is doing well and maybe ride the tide downwards when the economy is doing poorly so if we expect to see that change towards a growing economic cycle then we would want to be invested in cyclical sectors so kind of what are those it’s consumer discretionary people can go out and spend it’s fin financials it’s energy materials and Industrials these are kind of your your in the ground type companies that will benefit from the most from a growing economy and then the flip side of that coin is the defensive sectors so these probably would underperform so that’s Consumer Staples if you think about it we’ve seen Costco and Walmart do really well recently and through this tightening condition so they they might underperform when things get relaxed Chris another theme that a lot of people are paying attention to our Global elections so we had uh elections in Russia as well as Taiwan now people are focused on India and the us and what unfolds there how do you think that’s going to impact markets yeah the other big question on people’s minds of course what’s going to happen with this big election coming in the fall um you know I think one thing that we can think about is obviously it’s very hard to predict who will win this election and in particular in the US I’m I’m talking specifically uh we see many polls that are very close and so it’s hard to predict what the outcome of that’s going to be as well as what the Outlook is for the rest of the government as well and uh the Senate and the house of Commerce um and so I think uh one thing we can take away is that regardless of uh which party wins likely we’re going to see continued inflationary pressures from fiscal policy whether that’s through tariffs which we’re already seeing from the current Administration um you know the new Administration or the perspective Ive Republican as well is talking about a lot of tariffs as well and so that trend is going to continue and that’s going to keep prices relatively high as well Democrats uh want to continue spending as well and that could have inflationary impacts also um so it’s kind of hard to predict again what’s going to happen and what the result will be but I think one thing we could take from elections if we look in the past is that they introduce volatility uh we’re pretty certain that there will be higher volatility this year as there generally is in election years and one thing that’s interesting this time around is that if you look at the Futures market for vix uh the market is already pricing in higher volatility around November and that’s pretty rare for this time of year for the market to already be pricing that in so really the market participants are already telling us there will be higher volatility this fall um and so I think what investors should do is think about how they want to ride out that volatility if they’re happy to take that on because that is opportunity as well or if they want to take strategies to maybe reduce that volatility in general uh one thing we do tend to see in election years is an increased flow into short-term fixed income and uh one thing that we can get this year that we might not have had in past election Cycles is a nice yield out of that short-term fixed income you can get five plus percent from Ultra short-term uh ETFs right now and so that’s not a bad place to hide out if you want to take a little bit of your risk off the table put it into that short-term fixed income earn a nice yield on it and then you have some of dry powder to you know put back to work depending on what the results are of the election depending on what your thesis is you can get that money to work fairly quickly um the other thing investors could do is just look at um alternative asset classes or alternative strategies and I’m thinking about things like gold for example very uncorrelated to both fixed income and equities uh but could be a source of return for investors and so gold could be a decent allocation in terms of return potential and that also helps address uh the potential inflation concern I was talking about regardless of which party wins that election um you know that inflationary pressure could continue and and gold would be a nice hedge against that Valerie are you seeing geopolitical tensions affect certain sectors more than others and and do you think that’ll continue yes unfortunately there is a lot going on geopolitically you know we’ve got a number of conflicts issues like tariffs that Chris brought up as well so there’s a lot for an investor to consider um fortunately we haven’t seen impact of conflict yet on the US Stock Market it’s operated relatively agnostically here corporate earnings have been growing and the stock market has followed but where you have seen the impact of geopolitical tensions is in the commodity space so we’ve had crew prices go up almost 20% earlier this year gold hit an all-time high silver is up even more on a percentage basis and we’ve even seen copper rally 20% this year so these are big moves for the underlying commodity prices and we have seen the trickle down effect to the equ the related equities so that would be the energy sector and the material sector now obviously these are companies they have a lot more going on operationally but net net higher commodity prices should help their bottom line at the end of the day another thing to consider if you think that geopolitical conflict is going to escalate or stay elevated here is that kind of pressure coming from higher commodity prices so the one way we back into that is that energy has a very big impact on inflation data it is a big input into the inflation numbers that central banks look at so if you expect oil prices to remain higher on the back of maybe escalating or continued geopolitical tensions that could have wider reaching implications through to central bank’s movements and maybe even push out the timeline for the big interest rate cutting cycle that everyone is kind of on tender hooks trying to pinpoint when exactly we’re going to get that so it’s a bit chicken in the egg and a bit far-reaching there but I think it’s an important consideration when we talk about what’s going on geopolitically right now so Chris for investors who want to use ETFs to gain exposure to certain sectors as you know some of the sectors that even Valerie had mentioned um what are some of the considerations what they have to what do they have to look at well I think first of all investors should look at their existing portfolio and determine how much exposure they already might have um and I’m thinking you know if you have the S&P 500 in your portfolio you probably have a decent weight to technology already or if you have the Canadian composite for example you probably have a lot of financials in your portfolio already so understanding your current exposure helps you de size that that sector trade that you’re going to put on um the other thing I think once you’ve decided okay I’m going to go into X sector and this is how much I’m going to go into you really want to take a look at the composition of the different ETFs within that sector and what the waiting methodology is of the index or ETF that’s tracking that sector um you know in particular in Canada if you’re at the sector level you could get very narrow representation as few as 10 stocks perhaps in some sectors or even smaller um and so if you’re looking at a Market cap-based ETF that could be dominated really by only one or two stocks uh whereas an equal weight ETF will give you exposure obviously equal exposure across all of the companies in that sector so that rounds out the sector exposure a little more better than a very topheavy market cap based sector ETF okay so before I wrap up I have to ask you both what is the number one sector to watch in 2024 and why I’ll start with you Valerie so it’s a perfect segue thanks for teeing it up for me Chris but is energy there is a lot to like about energy we like it from both a top down macroanalysis and also bottom up so our team of research analysts that cover energy stocks specifically they have said they’ve kind of never felt more favorable towards a sector in the past decade they are entering their financially prudent era and a result of this Capital Prudence is that they are generating a lot more free cash flow and that is a boon for investors right because then they can boost shareholder return through this free cash flow generation so you’re seeing that through special dividends the actual dividend which the sector is now paying out close to 4% uh and again on just stronger D lever balance sheets so kind of like the financial health of the sector is a lot better as well and then from a top down perspective first of all Chris mentioned uh kind of a sector exposure within an index energy is very very small percentage of the S&P 500 it’s a little bit larger here in Canada but again it’s a smaller percentage if you own kind of a benchmark index so it kind of gives you that toggle there and can actually kind of provide a bit of juice to returns and then of course we have all of the Tailwinds that we discussed already you know energy tends to do well leading up to a US election it has a bit of a value tilt uh it does well if geopolitical issues worsen so it provides a bit of insurance there and valuations are super favorable they look great on both a relative basis and an absolute basis again it kind of Trends towards that value side of the equation but we think that from both perspectives uh there’s a lot to like about owning energy here for the balance of 2024 okay so Energy’s your pick yours Chris uh I’ll have to go with financials uh myself and particularly I’m looking South of the Border um I think financials in general have started to benefit from this higher interest rate environment that we’re in uh We’ve also talked already about continued inflationary pressures and potential for interest rates to stay relatively High even if we do see uh a few Cuts uh in the near future uh but financials do tend to benefit from from that higher interest rate environment and the normalizing of the yield curve we have this inverted yield curve right now where short-term interest rates are higher than long-term interest rates um that’s not beneficial for financials but as as we start to see that start to shift as we get closer to these interest rate Cuts uh that yield Curve will start to normalize and that will benefit financials again particularly South of the Border uh in the S&P 500 they do not make up a big part of that index and so if you have that broad us exposure um you’re not loaded up on financials already and so you know entering a probably a favorable backdrop uh might make sense to add some financials into the book thanks Chris well that covers off our discussion today thank you so much to Valerie and Chris for sharing their insights to summarize amidst notable uncertainties such as the US election outcome geopolitical issues and the timing of Ray Cuts investors would be wise to stay informed diversify and seize upcoming opportunities thank you for joining us as we explore the dynamic landscape of this year’s key sectors and a special thank you to ETF Market insights for bringing us together to host these educational segments for investors thanks for watching
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Very helpful series.