Finance professor sees payoff buying ETFs when times are gloomy

Jerome Gessaroli

Occupation

Finance professor

The portfolio

Exchange-traded funds, preferred shares, convertible debentures and corporate bonds.

The investor

Jerome Gessaroli is a finance professor at the British Columbia Institute of Technology. He is also the co-author of the textbook Financial Management: Theory and Practice (3rd edition).

"The more I read, the more I believe it's very difficult for an individual to consistently outperform the market," he said in his Me and My Money profile of 2010. That same view still holds today.

How he invests now

Since Mr. Gessaroli believes stock picking is unlikely to beat the market over the long run, he instead invests in low-cost ETFs that track all the stocks in a market index. At the core of his portfolio is the iShares S&P/TSX 60 Index ETF.

He bought units in late 2008, when the last great bear market was in full swing. He has studied financial markets enough to know that the best time to buy stocks is usually when they are "devastated by bad news" and selling at deep discounts.

In early 2016, there was a chance to put this contrarian strategy to work again. When the price of crude oil tumbled in 2015 and 2016, he bought units in the iShares S&P/TSX Capped Energy ETF. They were sold six months later for a nice capital gain.

Now, in his mid-fifties with retirement looming, Mr. Gessaroli also wants to keep his portfolio's risk level fairly conservative. In recent years, he has been buying more income securities – such as corporate bonds and the preferred shares of financial, utility and pipeline companies.

To maximize after-tax returns, he holds the bonds in his registered retirement savings plan or tax-free savings account. Dividends and capital gains are earned outside tax-sheltered accounts.

Best move since 2010

It was buying into the iShares S&P/TSX Capped Energy Index ETF in early 2016. "I sold it in August of 2016 for a gain of about 30 per cent," Mr. Gessaroli reports.

Worst move since 2010

Just before the oil sector was blindsided by falling prices, he bought Enbridge Inc.'s reset preferred shares (dividends reset every five years in line with government bond yields). At one point, the shares lost more than a third of their value.

Advice

He recommends investing in the broad market or a sector when all the news is gloomy. "And I mean really gloomy," he emphasizes. "Pick up a low-cost, high-quality diversified ETF or index-mutual fund in that beaten-down sector, and wait for the recovery."

Want to be in Me and My Money? Contact Larry MacDonald at mccolumn@yahoo.com.