An exchange-traded fund generating monthly income using stocks and bonds from the financial sector sounds like a no-brainer investment.
Given that there’s about $888-million invested in the iShares Canadian Financial Monthly Income ETF (FIE-T), investors seem to agree. FIE’s portfolio is pretty simple - a mix of common shares, preferred shares and bonds issued by banks and other financials. FIE shareholders have received 4 cents of income per share each month this year, a distribution that recently offered a rather large yield of 7.3 per cent.
The problem with FIE this year is that its price was down 17.2 per cent for the year through Oct. 20. Consider FIE a cautionary story about how the financial market events of 2022 are causing grief in surprising places.
Balanced funds are another example of this disruption. Both stocks and bonds have fallen this year, producing extremely bad results from portfolios built on the tried and true blueprint of 60 per cent stocks and 40 per cent bonds.
FIE’s problems are similar. Its second-largest holding is a corporate bond ETF, which is itself 40 per cent weighted to bonds issued by banks and other financial companies. The top holding is a preferred share ETF, which is close to 55 per cent weighted to financials. Both of these underlying funds have fallen hard this year because of rising interest rates.
Common shares issued by the big banks account for about 52 per cent of FIE’s assets, but there’s no relief here, either. On average, shares of the Big Six banks have fallen about 10 per cent in the past 12 months.
As a sector fund, FIE is pretty well diversified. And yet, you can add this fund to the list of investments and strategies that have been hurt in 2022 by diversification challenges.
Times like these are a good opportunity to review what you own and decide whether disappointing holdings continue to make sense. FIE has a management expense ratio of 0.84 per cent, which is outrageously high at the best of times. FIE’s tax profile in non-registered accounts is complicated by the fact that dividends account for only about half of distributions, which means limited use of the dividend tax credit. A return of capital and capital gains account for the rest.
FIE’s been a strong long-term performer, with a 10-year annualized gain of 7.4 per cent to Sept. 30. That’s pretty much what the S&P/TSX Composite Index made over that period. But FIE also offers a reminder that even the long-term stalwarts in your portfolio need some attention in 2022.
-- Rob Carrick, personal finance columnist
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.
Stocks to ponder
Finning International Inc. (FTT-T) Vancouver-based Finning is the world’s largest Caterpillar dealer. This dividend stock has eight buy recommendations by analysts and one “market perform” recommendation, and the average one-year price target implies a potential price return of 32 per cent. Jennifer Dowty looks at the investment case, and finds a company with a healthy balance sheet that’s trading at a reasonable valuation.
The Rundown
Do volatile stocks and rising interest rates have you scratching your head? Here’s a path to take
Many investors are feeling a lot of uncertainty about what to do with their portfolios right now. Conservative investors are worried and want to put their money somewhere safe, even if the returns fall short of inflation. Those in the aggressive camp appear to be of the view that the stock market is near its bottom – or in fact may have passed it. Gordon Pape has some advice on how all investors should navigate the confusing market landscape.
This ‘Blended Momentum’ portfolio has left TSX returns in the dust for the past 22 years
When it comes to stocks, momentum is the propensity for trends to continue. Stocks with big gains in recent months are expected to continue to climb in the short term. Similarly, the laggards – much like a certain bus – usually continue to lag. Norman Rothery wanted to see how a blended approach to momentum fared in recent times for Canadian stocks. The idea is to pick stocks with the best combination of three-, six- and 12-month prior returns while including a few risk-reduction features along the way. What he discovered was a portfolio that heavily beat the S&P/TSX Composite Index over many years.
Corporate profits under attack: Why investors should ignore it
Over the past few years, investors have been confronted with lockdowns, the threat of economic collapse, surging inflation, war and rising interest rates. Now, they face a new challenge: A pushback against corporate profits. Banks, energy producers and grocery chains, in particular, are being battered by top political voices who have cast aspersions on profits and drawn connections between corporate success and inflation. Investing in any of these sectors, it seems, has become morally questionable – and potentially risky. But there are several reasons why investors should tune out the political noise and stay the course, writes David Berman.
What $220-million fund manager Andrew Pyle is buying and selling
Veteran investor Andrew Pyle, now with CIBC Wood Gundy, is hedging his bets on whether central banks will overshoot on their interest-rate hikes, using a three-pronged strategy. It includes having more cash on hand as both a defensive move and readying to buy stocks when they seem like a bargain. He’s also starting to buy shorter-term government and investment-grade corporate bonds, believing the fixed-income rout is largely over, for now. With equities, his choice is higher dividend-paying stocks in sectors such as banking, telecommunications and energy, and using covered call options. Brenda Bouw found out more about his current investing strategy and the stocks that he’s been buying and selling.
It’s tax-loss harvesting time again
With stock markets slumping in 2022 amid inflation, rising interest rates and recession fears, many investors are sitting on paper losses. As John Heinzl explains, fall is the perfect time to “harvest” these losses for tax purposes.
How the U.S. midterms could ripple through the stock market
Investors are turning their focus to Tuesday’s U.S. midterm elections, which will determine control of Congress and could spur moves in everything from energy companies to cannabis stocks. Here are some areas of the stock market that will be in focus as Americans head to the polls.
Also see: Trump-linked stocks rally on possible 2024 presidential run
How to beat the U.S. stock market using ETFs
There is one strategy that really should thump U.S. stocks over the next 10 years, but it takes a special kind of person to make it work. Most importantly, you would need to ignore short-term returns. The strategy is to buy country-specific exchange-traded funds (ETFs) with low cyclically adjusted price-to-earnings (CAPE) ratios. Andrew Hallam explains how the strategy works.
Others (for subscribers)
Raj Lala’s first stock: CEO sold his CIBC stocks to pay down a student loan from the bank
Monday’s analyst upgrades and downgrades
Globe Advisor
Innovative seg funds with evolving guarantees see growing demand amid volatile markets
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.
What’s up in the days ahead
Inflation data, midterm elections loom for struggling U.S. stock rally
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
Compiled by Globe Investor Staff
Rob Carrick