It’s been several weeks since we checked the Q&A email file, so let’s get right to it.
Cyber security
Q - Would you venture an opinion in the growth potential of cyber security with reference to Evolve Cyber Security ETF? - Josh M.
A – Cyber security companies were doing very well until the recent sell-off in the tech sector brought them down a few notches. The strong performance should have come as no surprise, given the increasing number of high-profile ransomware attacks we’ve seen in recent years.
One of our Internet Wealth Builder recommendations in this field, Palo Alto Networks (PANW-Q), is up 623 per cent since we first advised buying in 2015. But it’s down almost 20 per cent from its all-time high, reached in early February.
The Evolve Cyber Security Index Fund (CYBR-T) shows a gain of 14.69 per cent for the year to Aug. 2. But most of that came in 2023; the year-to-date advance is only 1.81 per cent as the sell-off took a big bite out of profits.
Historically, the fund shows huge swings from year to year. It gained 24.64 per cent in 2019, 65.6 per cent in 2020, and 5.71 per cent in 2021, then lost 36.63 per cent in 2022. It rebounded by 43.31 per cent in 2023. So, if you decide to invest here, be prepared to ride out the peaks and valleys. My advice would be to wait until the market settles down before making a commitment. – G.P.
Sell utilities?
Q - Do you think it’s worthwhile to keep a utilities allocation given that rates may be coming down at some point or is it more worthwhile to put the cash somewhere else such as a growth stock? To be honest, I’m inclined to sell my utilities even at a loss and buy more Nvidia given the growth (I had a small amount and now it’s not so small). – Martha D.
A – Basically you are asking if it’s a good idea to sell low and buy high. The answer is obviously no.
Utilities struggled when interest rates started to rise, but they still offer good dividends and have upside potential as central banks start to ease. We’re already starting to see that happen: the S&P/TSX Capped Utilities Index is up 7.87 per cent so far in the third quarter (to Aug. 2).
Nvidia (NVDA-Q) is a great stock, but everyone piled in and drove it into bubble territory. As I write, it’s down almost 24 per cent from its all-time high reached on June 20 and still falling. It’s difficult to predict where it will settle, but the p/e ratio is still high at 62.73.
I don’t see much downside in utility stocks right now. As for Nvidia, who knows? – G.P.
U.S. election
Q - We have been thinking about the upcoming U.S. election and as much as I try to believe that the majority of Americans are not MAGA crazy we are worried about the effect of whatever outcome on the stock market.
Our RRIFs are modest, and we moved into a ‘preserving capital position’ a couple of years ago when the market took a dive again. Our funds are managed and right now are about 7 per cent in fixed income, 52 per cent common shares, 37 per cent in an RBC interest savings account (sort of a cash position), and 4 per cent in foreign securities.
We are wondering if we should move to an even more conservative position, perhaps 70 per cent cash and 30 per cent common shares.
Our accounts are managed by a team at RBC but sometimes I feel that they think all is well and elections and such won’t make a difference. I remember on the eve of the Quebec Referendum way back when a friend suggested we cash out a good portion and park our money until after the vote and then reinvest. We did and felt better having done it.
Is this another one of those times? If Trump gets in, do you think the world will tilt off its axis a bit? – Anne P.
A - If you look back, you’ll find the stock market reacted positively when Mr. Trump was first elected. That’s because most of his policies were business friendly, including tax cuts, deregulation, and a green light for energy – “Drill, baby, drill”, as he said in his acceptance speech at the Republican convention.
Some of his plans are still pro-business, such as his promise to extend his tax cuts. But I worry about his insistence he will slap a 10 per cent tariff on all goods imported into the U.S. That will result in higher prices (consumers bear the brunt of tariffs) which could lead to a resurgence of inflation and a new cycle of rate hikes. We know from recent history what impact that has on the stock market.
I don’t expect a huge sell-off if he is elected, but there will be nervousness until we have a clearer picture of his policies.
My advice is to do what makes you comfortable. It sounds like you are well off, so if you want to reduce your stock exposure, do so. A good night’s sleep is worth the sacrifice of a few bucks. - G.P.
Resource ETFs
Q - Is there a capped energy ETF and materials ETF that you recommend? – Ian B.
A – There are several good choices available on the energy side. The top two in my view are the iShares S&P/TSX Capped Energy Index ETF (XEG-T) and the Global X S&P/TSX Capped Energy Index Corporate Class ETF (HXE-T). Note that Global X is the new brand name for the Horizon funds.
Both these funds show similar characteristics. As the names suggest, both track the performance of the S&P/TSX Capped Energy Index, net of expenses. The iShares fund has a management expense ratio of 0.6 per cent while the Global X fund is cheaper at 0.27 per cent.
The lower MER is the reason for a slightly better performance record for HXE. To July 31, it had a one-year return of 22.15 per cent, while XEG was at 21.91 per cent. The three-year average annual compound rate of return was 37.58 per cent compared to 37.08 per cent for XEG. Five-year numbers show a similar pattern.
Not surprisingly, the portfolios of both ETFs are very similar, with the top holdings in both cases being Canadian Natural Resources. Suncor, Cenovus Energy, Tourmaline Oil, and Imperial Oil.
XEG makes quarterly distributions, which vary considerably. Over the past year, they have ranged from a high of 23.3 cents per unit (September 2023) to a low of 9.3 cents (March 2024). HXE is structured for tax efficiency and does not make any taxable distributions.
Unless you want cash flow, I’d choose HXE for its lower MER, which translates into slightly better returns.
For materials, the iShares S&P/TSX Capped Materials Index ETF (XMA-T) is a possibility, but it’s very heavily weighted to gold (59 per cent of total assets). It’s ahead 21 per cent so far this year and has a five-year average annual compound rate of return of just over 10 per cent. The MER is 0.61 per cent.
You could also consider the iShares North American Natural Resources ETF (IGE-A), which invests in both materials and energy stocks, with a little gold as well (an all-one package). – G.P.
One stock please – or maybe an ETF
Q - I am looking for a recommendation for the U.S. side of my TFSA. I’m in my early 50s and historically have under-utilized investing via my TFSA and want to top it up to my maximum available contribution limit. I have always had a risk taker’s profile, and still do, which has served me very well in both my RRSP and non-registered accounts but in this context I am not looking for a “swing for the fences” recommendation. I am interested specifically in a recommendation focused on long-term growth and I will treat it with a long investment timeline. I am patient and have no need to withdraw the money. Generation of dividends is not a priority although certainly welcome. I am not interested in buying the indexes but rather an individual stock pick, a very small bundle of picks, or an ETF that trades in U.S. currency.
I guess the simple version of my question is, if you could only pick one U.S. stock or a very small number of U.S. securities or an ETF, focused on long term growth, what would it be? – G. Foster
A – Several years ago someone asked me: “If you could only own one stock, what would it be?”
My answer was Microsoft (MSFT-Q). My answer today is still Microsoft. Yes, it’s a mature company but it’s on the leading edge of new AI technology to complement its already extensive business. The stock is up over 10 per cent in the past year, despite the recent sell-off. I own the stock myself and have no intention of selling.
As for an ETF, I like the JPMorgan U.S. Momentum Factor ETF (JMOM-N). It’s up about 15 per cent so far this year and was showing an average annual compound rate of return since inception of 13.43 per cent as of June 30. About one-third of the portfolio is in technology stocks (including Microsoft), but the managers can switch course at any time based on the hot-button sectors of the day. – G.P.
If you have a money question you’d like me to answer, send it to gordonpape@hotmail.com and write Globe Question on the subject line. I can’t guarantee a personal response but I’ll answer as many questions as possible in this space.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.