Skip to main content
investor newsletter

Citi U.S. equity strategist Scott Chronert believes that the S&P 500, and to some extent the U.S. economy, is on the verge of a big change. The adoption of new technology by old economy sectors will see them steadily grow as a percentage of the equity benchmark and the economy, at the expense of the technology dominance of the index we’ve seen in the post-Great Financial Crisis era.

In Mr. Chronert’s words, “our best description of what may lay ahead for investors is a gradual shift away from ‘providers of technology’ and toward ‘users of technology’.” He believes that while megacap technology stocks will remain important, they will have difficulty sustaining their current high growth rates and more than 20 per cent weighting in the S&P 500.

As goods sectors accelerate adoption of new technologies, Citi argues that their profitability and growth rates will improve. This will particularly be the case for energy and industrial stocks.

Mr. Chronert sees specific technologies that will improve the prospects for old economy companies. These include 3D printing, automation and robotics, the internet of things, medical technology and smart power grids.

The strategist identified almost 30 companies that would benefit most from the upcoming switch from a ‘widgets to smart widgets’ theme. Amazon.com and General Motors are included in the consumer discretionary sector. FactSet Research Systems is the sole financials stock while health-care companies are far more numerous: Abbott Laboratories, Baxter International, Boston Scientific Intuitive Surgical, Medtronic and Stryker are only a few of the stocks included (disclosure, I own a position in Stryker).

From the industrials sector, Deere and Co., Generac Holdings, Illinois Tool Works and Rockwell Automation are mentioned. Materials stocks include CF Industries Holdings, FMC Corp, International Flavors and Fragrances and Mosaic Co.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

The Rundown

The best and worst provinces to live in for dividend investing

There’s an immediate gratification aspect to dividend investing – cash is paid to you every three months. But there’s a deferred benefit to dividends as well - you pay less in taxes on dividends held in a non-registered account than you do on regular income, including bond interest. The dividend tax credit provides this benefit broadly, but the net impact depends on what province you live in. Rob Carrick looks at the breakdown across provinces.

Tax-loss selling in battered U.S. stocks could spur January snap-back

Investors who sell underperforming U.S. stocks to lock in tax benefits before year-end may be adding to recent pressure on equities while sowing the seeds of a January rebound in some corners of the market. as David Randall of Reuters reports.

When market forecasters should earn their spurs

Analysts almost always predict the year ahead will be a good one. Predictions for 2022 were no exception - and they were off by a country mile. This despite the fact that price pressures were already a clear and present danger this time last year. And even after Russia’s Feb. 24 invasion of Ukraine brought war to Europe’s doorstep, Wall Street’s confidence - some might say hubris - was alive and well. Jamie McGeever of Reuters looks back at the many failed forecasts for this year.

Also see:

CIBC reveals its top stock, sector and ETF picks for 2023

Recession worries could support U.S. dollar after monstrous 2022 rally

It’s time to revisit this simple regulatory change that may reduce analysts’ conflicts of interest

For many investors, the most obvious conflict of interest and the hardest to avoid is that of the sell-side brokerage analyst. They favour buy over sell recommendations by a factor of seven to one., and are understandably motivated to write positive stories about companies because they need to maintain access to management and hope to be involved in corporate finance deals. Is there a simple fix to reduce, if not eliminate, the obvious conflict by sell-side analysts? The European Union financial regulators certainly thought so, and as Robert Tattersall tells us, it holds some lessons for Canada.

Four lessons for investors from the FTX collapse

FTX Ltd., one of the largest cryptocurrency exchanges, declared bankruptcy on Nov. 11, 2022. Only a month earlier, the company was valued at as much as US$32-billion and its founder, Sam Bankman-Fried, saw his net worth collapse from around US$15-billion to zero over the same time frame. Students of investment history know that FTX was not the first and will not be the last such sorry story. So, what lessons can investors draw to avoid the next FTX?. Sam Sivarajan lists four of them.

Canadian regulators consider rules to reveal identities of short sellers and details of their trades

Canada’s securities regulators are considering whether the identity of short sellers, as well as the details of their trades, should be publicly disclosed when they take a significant position in a Canadian company.

The ‘SPAC King’ Chamath Palihapitiya is over it

Not long ago, Canadian-raised Chamath Palihapitiya could be called the Jim Cramer of SPACs. A Facebook executive turned venture capitalist, Palihapitiya talked up the special purpose acquisition companies — shell entities that provide companies a backdoor entry to public markets — to everyday investors with the same fervor that Cramer has long pitched stocks on television. Palihapitiya found an eager audience in 2020, when millions of people were stuck at home during the pandemic lockdowns, flush with stimulus checks and looking for new excitements. He launched 10 SPACs. Now, the SPAC boom has ended, throttled partly by new regulations. Palihapitiya now says that he was promoting SPACs at a time when investors were embracing all kinds of risky trades and that he wasn’t responsible for the cratering stock prices of the companies he took public. Instead, he blames the Fed’s policies. The New York Times chronicles his rise and fall.

Others (for subscribers)

The highest-yielding stocks on the TSX, plus risk data

Number Cruncher: Seven U.S.-listed dividend stocks powering the space industry

Number Cruncher: 16 ETFs packed with ‘moat’ companies that can keep their competitive advantage

Friday’s analyst upgrades and downgrades

Thursday’s analyst upgrades and downgrades

Vanguard quits net zero climate effort, citing need for independence

Globe Advisor

How the gates closed on Blackstone’s runaway real estate vehicle

Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.

Ask Globe Investor

Question: It seems to me that if an investor purchases an exchange-traded fund in a non-registered account and enrolls the units in a dividend reinvestment plan, there would be no need to look out for phantom distributions. That’s because the entire distribution would be reinvested so all of it would contribute to the adjusted cost base. Does that seem correct to you too?

Answer: Not quite. You are correct that, if you reinvest a regular cash ETF distribution as part of a dividend reinvestment plan, you (or your broker) would need to increase the adjusted cost base of your units by the amount of the reinvested distribution. It’s the same for a dividend stock enrolled in DRIP: Each time you buy additional shares, you should increase your ACB by the amount of the reinvested dividend.

However, phantom distributions are not the same as cash distributions. So, raising your ACB by the amount of the ETF’s regular cash distributions – as important as that is – will not take into account any phantom (non-cash) distributions the ETF may have declared. You may have to look up these reinvested distributions yourself (more on that later), as not all brokers include them in the “book value” or “average cost” figures for clients.

Here’s a key thing to understand: A phantom distribution is nothing more than a bookkeeping exercise for tax purposes. No cash changes hands. Typically, the only thing being “distributed” is a capital gains tax liability.

How does the tax liability about? Well, during the year, ETFs frequently buy and sell stocks. This triggers capital gains and capital losses. At the end of the year, if the ETF’s capital gains exceed its losses, the fund “distributes” the net capital gain (on paper only) to unitholders, who are responsible for paying the tax at their own marginal rate (Note: only 50 per cent of capital gains are included in income for tax purposes).

However, cash from the ETF’s capital gains doesn’t actually leave the fund. When an ETF sells a stock, it doesn’t leave the proceeds sitting around, because that would affect the ETF’s performance. Instead, it reinvests the cash internally.

This is why phantom distributions are also known as reinvested distributions. Even though the phantom distribution is declared at the end of the year, the money was already reinvested weeks or months earlier. The phantom distribution is just an accounting manoeuvre that makes the unitholder responsible for paying tax on the net capital gain that was already reinvested.

Why does any of this matter? Well, if you fail to raise your ACB by the amount of any phantom, non-cash distributions, your ACB will be lower than it should be. As a result, you will effectively end up paying tax twice – once in the year the capital gain is realized, and a second time when you eventually sell your units.

To see whether one of your ETFs is expected to declare a phantom distribution this year, check out the list of estimated reinvested capital gains distributions that ETF providers published in November. For example, you’ll find estimates for iShares ETFs here and for BMO ETFs here.

--John Heinzl (E-mail your questions to jheinzl@globeandmail.com)

What’s up in the days ahead

Are investors better off in oil stocks or clean energy stocks? Ian McGugan will have some thoughts. Plus, this weekend, Norman Rothery will reveal a new list of ‘megastar stocks’ on the TSX.

The grand 2022 central bank finale and other world market themes for the week ahead

Click here to see the Globe Investor earnings and economic news calendar.

Ask an Expert

In an upcoming interview, the Globe and Mail’s investment reporter, Jennifer Dowty, will be speaking with Beata Caranci, chief economist at TD Bank. If you have a question for Ms. Caranci, email jdowty@globeandmail.com and indicate “interview question” in the subject line. We regret that not all questions may be fielded to our guest due to limited time.

Compiled by Globe Investor Staff

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe