A Comment -- General Comments From an Expert (A Commentary)

ETFs and Withholding Tax. He is not a taxation expert and suggests you seek expert opinion. A withholding tax will have only a marginal impact if the yield is low. Some registered account may not allow for all this to be recovered. When it is a US ETF that holds foreign tax, then it becomes even more complicated.

Swap based ETFs taxation. He is not a taxation expert and suggests you seek expert opinion. The total return swap based ETFs don’t hold the underlying stocks, which introduces counter-party risks of the derivate swap sources. There is no dividend income from a derivative based ETF, so this does offer a form of tax deferral. Corporate class ETFs offer other advantages because it holds a mix of Canadian and US stocks, but they are sometimes classified as a Canadian holdings thus avoiding US withholding tax issues.

Block Chain ETFs. There are now three block chain ETFs in Canada, the first being HBLK-T, and there are more on the way. This space is in its very earliest development, which makes it challenging to build an ETF with good diversification and liquidity. Early investors may be taking on speculative risk and would not recommend it for a large long-term holding.

Canadian corporate profits looks promising--and overlooked by investors. Earnings are up 23% on the TSX from the same time a year ago. Earnings, oil price rises and less NAFTA risk have pushed the Canadian market up. Regardless of the state of NAFTA, we have to get on with business. It's possible we could have a deal at any time; the U.S. faces mid-terms in November, so maybe they want a deal locked by then. Tailwinds for oil: Venezeula is collapsing into chaos will tighten supply; Iranian sanctions looming; and U.S. shale was supposed to fill any supply gaps and drive down oil prices, but the U.S. is finding the same problem we have--lack of pipelines to carry their oil to market. Can Bill Morneau and the Liberals get the Kinder Morgan pipeline built? Today he took the soft, as opposed to hardline, approach.

Will debt-laden Canadians slow consumer staples stocks? Yes, rising interest rates and higher mortgage payments will take a bite out of consumer spending. But consumer staples aren't discretionary; there are groceries and prescription drugs. A real worry is consumer discretionary like cars and furniture.

There's talk of reforms forbidding Canadian banks from selling mutual funds beyond their own brand which will decrease bank stocks. There's long been talk about such reforms. Things move very slow in Canadian regulatory affairs. If this happens, the banks will find ways to recoup margins by squeezing the margins of the independent fund managers. Further, in Canada, we lack the animosity that American banks and regulators have. Canadian banks are stable, so your risk and bank dividends are safe.

Overview. Interest rates are going up gradually in the States. He thinks low rates have supported the bull market in equities and he feels cautious in response to their rise. He expects two more rate hikes from the Fed this year. The Canadian 5-year rate has been dragged up by the US rate increases, and this leads to a strengthening of the dollar, which also has a tightening impact. It can take a year for the effect of an interest-rate rise to play out. For a Canadian family with a variable-rate mortgage, the increased interest rates will cost about $40 per week. Longer-term fixed rates will follow. This will have an effect on the rest of the economy. With so much consumer debt in the Canadian economy, the effect could be significant. He would avoid Canadian consumer stocks at this time.

Market-neutral investing. This involves paired trades: going long one stock that he believes will gain, while going short another that should be hurt by the same trends in the market. He believes that the market has entered a stagflationary trend rather than a disinflationary trend. This is not good for equities or for fixed income.

He expected three things to happen in 2018: Interest rates would normalize and that's happening; Canada to underperform again, despite a lift in oil prices; and a shift to international markets (Europe and Asia). He's minimum bonds and maxmimum stocks. The market is getting used to Trump (and reacting less), because he's contradicting himself--sometimes on the same day. Truth is, the U.S. needs to trade with China. Trump makes more out of it than there really is. A lot this is empty sabre-rattling. We've never seen a person in such an important position act so crudely and cavalier.

Comment on Cannabis. Cultivators are overvalued, but he sees potential in additional products and services that support the production or sale of cannabis. His is long Hydropothecary Corp. (THCX-V), which makes a spray delivery system. He is interested in the idea of companies that test cannabis products on their way to the market. He is also interested in the U.S. cannabis market because President Trump only recently came out in favour of medical marijuana and of leaving recreational use up to the states. He thinks institutional money in the US will now start to finance cannabis growers. He is long iAnthus Capital Holdings (IAN-CD) and in others just going public.

People are looking to Shell to spearhead liquid natural gas sales from Canada. However, there are structural problems with pricing of natural gas due to the lack of infrastructure (such as pipelines). He expects Canadian natural gas to continue to be very difficult. The differential between the Alberta price (AECO) and the global price continues to increase, which will make LNG more and more attractive because it can be shipped globally. He think it is too late to short natural gas stocks. He is now looking to go long, but he things that those trades will be on the new generation of companies that rise next year.

What is a fair MER on an ETF, passive or managed? No more than 0.5-0.75% for an actively managed one, like HPR-T's (for preferred shares) is 0.55%.

How much of a role does shorting play in the ETF space? We're seeing more shorting on ETFs as institutions pay more attention to ETFs. They're hedging their portfolios. If an ETF has a high correlation to, say, a US index, they will short part or all of that ETF. It's not a nefarious thing. For covered calls, you're writing overlays, so technically you're shorting.

What's a good balanced ETF with moderate risk with 70% stocks and 50% US, 25% Canada and 25% world? There are multi-asset ETFs. But if you have the discipline, you can put 30% in Canadian bonds like XBB-T, then buy ETFs to serve those three geographic areas. Now, you have four ETFs without paying an outside manager. The hard part is on your birthday is to re-balance your portfolio according to that asset mix--then don't touch it.

A Canadian ETF that invests in the US. Is there an exhange tariff? There is a withholding tax and/or s minor SEC charge when you sell the stock/ETF. Don't be scared off--Canadian companies offer many ETFs that hold U.S. stocks.