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

US ETF’s bought in Cdn$. How do you hedge the loss with a rising Cdn$? You can actively manage the currency position of your portfolio by either buying hedged or unhedged ETF’s. In his case, active decisions on currency is a big part of what he does. At the moment, he is not hedged, deciding not to react to what was happening in a rising Cdn$, simply because he thinks the Cdn$ for the balance of the year will stay in a range of $.75 plus or minus $.02. Currently you are at the top end of the range and down at $0.73 at the bottom end of the range. You can either play that spread by trading in and out, choose to ignore it, or if you are more conservative, you can buy currency hedged ETF’s.

Market. We are a week away from the Bank of Canada’s decision. They will probably hike interest rates, but he is not sure there is a particularly good reason for this. To slow down housing markets, it would seem that the housing specific rules are accomplishing that anyway. He would worry about the strengthening of the Cdn$ and the impact of that on exports. He is in a strange spot at the moment in that he is bullish on energy, but bearish on almost everything else. It’ll be interesting to see, if he is right on energy, what happens to the rest of the market. The issue on energy is that a lot of money was raised, a lot of money has been spent and no money has actually been made. You can grow production all you want, but at some point economics has to kick in, which he believes is happening now.

Market. His portfolios have been 2/3 US and 1/3 Canada since 2012. The US provides more diversity and you don’t live and die by what happens to commodities. How do you partition a portfolio for a continued upside we have seen, but at the same time, position portfolios to be able to weather a correction? He starts with a conservative mandate, so all his positions are dividend paying names, and never has more than 5% in any one name. He has about 5% cash, and since February has had about a 5% weighting in gold bullion. Bought that unhedged, which has given him an external layer of return. The 5% cash and 5% gold is his defence, because in this type of market, you have to be very careful. With 5% cash, you can still beat the market with good stock picking. He stays away from China and India, and really focuses on developed markets. When you go into emerging market countries, you take on a few layers of extra risks, such as validity of their accounting standards or regulations.

Market. Financials and energy are poised for a rebound in the 2^nd half of the year. Our banks are net down for the year, which is unusual. Home Capital worry is dissipating and banks have now retreated to an average multiple, so they will now be positive. Energy has overshot a little, and is set up to get into the low $50. We may well outperform the US in the 2^nd half of the year. Dividends will provide the bulk of the returns for the rest of 2017. He sees returns as mid-single digits.

Longevity of Canadian Banks? These have been around for over 100 years. They are innovative and have very good capital positions. They have such good capital and such entrenched positions in the oligopoly of Canadian banking, he doesn’t see a problem. He is completely comfortable owning these for the dividend, with some growth.

Food stocks? He would be reluctant to own something that is just Canadian. Owns nothing in the food group, but does own Alimentation Couche-Tard because it is a Canadian way to get some retail, but it is about 90% non-Canadian.

Something that gives good dividends? There are a number of very good dividend paying ETF’s such as iShares Cdn Div (XDV-T), BMO Canadian Dividend (ZDV-T), etc. that are all paying about 3.5%. You can also take a look at a couple of bond ETF’s.

Using option straddles? A straddle is basically a situation where you can’t decide which direction the stock is going to go. You Buy a Put and you Buy a Call in roughly equal amounts. Your costs on going in on both sides can be fairly substantial. The only time he would do a straddle is when it is event driven. You have depleting time value on both sides, and it’s a good way to lose your shirt.

Iron Condors? A limited risk nondirectional option strategy. He finds it is never worth it, because you are getting gobbled up on commissions on 4 different sides, and you are dealing with market makers beating you up on 4 different sides, for relatively marginal gains. Don’t do it.

Buy a stock on dips or sell Naked Puts and collect the premiums? If you are a fairly sophisticated investor and like dealing with options, take your pick. Most people do this because they don’t have the cash to buy the stock. Make sure you have the cash available to back you up.

ETF which includes India and South Korea? iShares MSCI South Korea (EWY-N) will give you South Korea and iShares CNX Nifty India (XID-T) will give you India.

Market. Thinks it is going to be pretty good for the rest of the year and will surprise a lot of people. There is a bit of investor confusion. A narrative is starting to be built, rightly or wrongly, that inflation is going to come and rates are going to go there. There are certain sectors that are going to benefit from that, particularly financials. We are clearly now in a pro-growth environment. Besides the financials, industrials are going to start to do well along with materials. Energy will probably start to catch up here. It has been beaten up for a fair bit. He recently got rid of all his utilities. A lot of his defensives were pared back last week, and he’ll continue getting rid of his bonds.

Markets. We are seeing a blurring of the lines between the mutual funds and the ETFs. Mutual funds are offering index strategies. It is getting bewildering for consumers to deal with all of those issuing ETFs, which are lower in fees than mutual funds. Canada’s are amongst the highest of the mutual funds in the world. Active management has a place and a lot of studies have incorporate costs, so they show mutual funds not performing as well as ETFs because of the fees. Mutual funds work well for a lot of investors. But for specific investors, other investments work better. His economists have started to turn the corner on Canada. He is now tilting toward the TSX.

Marijuana companies. He would steer one away from here, but an ETF that is diversified would be okay, but beware it is steered toward a niche sector. They could offer the prospect of a lot of capital growth. It depends on your age. You might want to revisit this holding at the next election.

Know what you are buying. An ETF is like any other fund. Names of the funds are descriptive of the asset class, but that is not enough. Look inside the portfolio. Check the fee. Some are low, but don’t put everything on that because the advantages may not work for a very long time. Don’t be ashamed to ask for help. Make sure you are not overweighting any particular equities in your portfolio. Don’t double down unknowingly on declining sectors.