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[music] >> Hello, I'm Greg Bonnell. Welcome to MoneyTalk Live, brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to talk about what areas of the ETF market have been getting attention from investors. TD Securities Andres Rincon joins us.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Cowen report on the rail sector.
And in today's WebBroker education segment, Hiren Amin is going to show us how you can find information about low volatility funds on the platform.
So here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get our Guest of the day, let's get you an update on the markets. We will start your, Bay Street with the TSX Composite Index. About 107 point deficit, about half a percent.
Among most actively traded names on the TSX at this hour include Baytex energy.
You can see at 429, and not that it's a dramatic move but is just not catching the bit off the higher price of crude.
The price of crude has been volatile in recent sessions as well. One name that is moving on fairly robust trading activity is K92 mining. We don't talk a lot about it on the show. Investors seem pleased about their reports. The S&P 500, we had a firm rally led by the semiconductors yesterday. That put significant points on the table.
The NASDAQ is in negative territory. It's been flirting around the breakeven line.
There's a lot of excitement now, AI, not that this is new excitement, but now it's about AI in the home with semiconductors made for our PCs. Also Juniper Networks right now, I want to check in on the same.
They got a big jump today. 23%.
Unconfirmed reports out there that Hewlett Packard Enterprises has a bid to buy Juniper.
Juniper is up quite substantially, a little more than 37 bucks per share. And that's your market update.
There have been no shortage of concern for investors in the past year, from the economy to inflation to interest rates.
Despite all that, exchange traded funds in Canada saw one of the best years when it came to fund flows.
So where were investors putting their money to work? Joining us now to discuss is Andres Rincon, head of ETF sales and strategy at TD Security. Great to have you back.
>> Thank you for having me.
>> It feels like we've been living through a lot of news recently. In terms of fund flows, it's an interesting year for ETFs.
>> You mentioned, we had one of the best years for ETFs over the past five years and thus to the tune of $40 million in Canada. To put it into contrast, the mutual fund industry saw $50 billion in outflows so that's a big swing between ETFs and mutual funds. Obviously, a lot of investors in Canada are favouring ETFs for their investments.
Back to your point, where are they favouring and where are they putting their money? This last year was a year of active ETFs in the year of fixed income ETFs. The reason I say that is that they actually brought in quite a bit of inflows this last year to the tune of more than 50% of every dollar that was coming into Canada.
Every $0.50 that was coming into Canada was going into fixed income ETFs.
That's really a first for Canada.
We haven't seen a lot of money going into fixed income ETFs for some time. Remember, this is despite the fixed income market being only 33% of the makeup in Canada.
A lot of money going into fixed income ETFs, and active ETFs. It covered calls, we've seen money continue to pile into cover call ETFs. It's a very popular area.
Also cash management ETFs. Cash was king last year. Obviously with a higher yield but with the most recent OSFI ruling, we've seen as a less interest in those ETFs in the last few weeks or so but still very popular in the market in Canada.
>> I noticed when we put up that graphic for the audience, we talk about fixed income, because we knew that people were going into cash earlier in the year, it felt like in the last couple of months of the year, people finally said, okay, if 2024 is the year of not only rate pauses but actual rate cuts, then maybe some cash starts flowing towards traditional fixed income. Was that sort of like a late sort of ended the your story?
>> No, this happened for most of the year.
>> Because people got position early?
>> We saw a lot of people get into fixed income early with higher rates, just the need for yield. What we see in Canada and what Canadian investors like his yield and with higher rates we are seeing a lot of people pile in. As you mentioned, there is an opportunity it is believed that if we see rates going down, many of these funds would do well in this environment. But also we were seeing that in the active space. We are seeing a lot of people taking an active manager than is the fixed income space which can be a little bit more complicated than traditionally so we see a lot of money going to active fixed income.
>> Let's talk a bit about that. When we look at ETFs, if you have an active manager, as a general rule, the management expense ratio is a little bit higher because you have someone with their hands on. Despite that, investors are not simply going for the passive side, they want someone with their hands on the portfolios.
>> Good question. Canada is the leader in actively managed ETFs globally. We have one of the largest portions of active ETFs as a percentage of all ETFs that we have here in Canada. What we are seeing a lot is the transition or conversion of mutual funds to ETFs or what we see more in Canada is the launch of an ETF series of an existing mutual fund. So the traditional mutual fund that you see in Canada, we are seeing now an ETF series of that same fund. Often, they go hand in hand with lower fees so what ends up happening is a mutual fund also lowers its fees. Because of that, we are seeing a lot more active strategies in the market. What I can tell you is an example is we have pretty good insight us the pipeline for this year into what's going to launch and I can tell you that most of it is actually active.
>> Is active, that leads us into a discussion of what we might expect. We are into 2024. It's early innings.
Not halfway through January yet. But after the year that we have for ETFs in 2023, what do you expect in 2024?
>> The need for yield is going to be very important.
That plays hand-in-hand with fixed income because there is a good chance that if we see lower rates this year, so what we see is fixed income continuing to become more and more popular but also cover call big yielding strategies like high dividend paying stocks let's say might be very, very popular this year but also cover call.
What I would say is we are going to continue to see yield enhance strategies to be popular but also on the fixed income side to be popular.
>> We had discussions last year about cover call ETFs.
Remind the audience again about what the product looks like, how it structured, some of the pros and cons.
>> On the yield enhance decide?
>> On the yield enhanced side.
>> Now there is a huge variety of them. We have covered calls, we have… What they are doing is overlaying an option strategy over a normal portfolio, be it the brought S&P 500 or whatever it is. The sole goal of that is to earn more yield on that portfolio. We have a very yield starved audience here in Canada. People like the consistency of a specific yield so these are products that go, come in high demand and tend to be more tax efficient than some other income generating strategies.
>> On the other hand I believe some of these products that you will get this yield enhancement through the moves they are making but you might miss some of the upside of the underlying asset.
Or you won't capture the full upside if you do get a big run.
>> One of the cons of these products is that you are capping, on the cover call ones for example, you are capping your upside.
You are basically making an active decision to Your upside in exchange for yield. So investors that say, in this time and at this environment I prefer yield versus growth, this is a very good product for those investors that think that, that want more yield because what they are doing, as you are saying, they are capping their upside by selling calls but at the same time they are generating more yield that they can take home and maybe that's very valuable to the client in retirement.
So those stories have become very, very popular. On the put side or premium yield funds, there's a lot more selling puts and calls and it's more mixed in that scenario.
Generally speaking, cover call options are most popular. We are also seeing it now on bonds.
That's one of the biggest changes that we've seen over the last year or so where Canada, we had the first launches of bond cover call ETFs and those have been very successful and the yields are very high.
>> Interesting stuff to watch for.
Regular viewers are going to recall that my guest hosts a show called Buyside Views where he speaks of prominent members of the investment industry about the trends they are seeing.
Coming up later on today show, we are going to have a preview of his latest episode. Also coming up, we will get to your questions about exchange traded funds for Andres and a reminder that you get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
There are rumblings of a possible multibillion dollar deal in the technology sector.
several unconfirmed reports that Hewlett Packard Enterprises is in talks by Juniper Networks in a deal that would be valued in the neighbourhood of $13 billion US. The reports have shares of Juniper on the rise. Right now Hewlett-Packard is down 7% but Juniper, we checked the top of the show, is up over 22%. Shares of online dating company Match Group in the smelly today.
There up 3%. There is a report that activist investor Elliott Management is building a stake in the name. This is the company behind tender and Hinge. While those sites enjoyed a surge in growth during the pandemic, the last several quarters have been more challenging for match and some of its online dating properties. We saw some dealmaking today in the Canadian engineering services industry. Stantec is buying engineering and management for Morrison Hirschfield and Adela says will expand its presence in Canada and the US. Financial terms of the transaction were not disclosed. Stantec is up a little less than 2%. A quick check in on the market. We will start on Bay Street with the TSX Composite Index.
The price of crude stabilizing today. It's not doing a lot for the big energy names considering some of the we saw action we have seen in prices in recent sessions.
Got the TSX down about hundred and five points or have a percent. Because of the border, the S&P 500, a big rally yesterday and a bit of a pause on that today.
Of course, it getting inflation out of the states in the US later this week and Big Bang earnings, down very modestly four points or less than 1/10 of a percent.
We are back with Andres Rincon, taking your questions about exchange traded funds. Let's get to them.
We have a question about your view on the Japanese market. They are interested in the Franklin FTSE Japan ETF, ticker FLJP.
Of course, we cannot get into buy and sell recommendations.
>> In late December, they actually raise their economic growth forecast to 1.6 from 1.3 and that's because they are seeing more external demand in autos and tourism because they have opened up now because of that they think they are going to see more economic growth.
Obviously, that is a little bit offset by internal demand within Japan which obviously they are not growing internally as fast. It is interesting. We are seeing a lot of oranges from investors in the space. In terms of FLJP, it is actually one of the cheapest ETFs in this space that covers… >> In terms of management expense ratio?
>> In terms of management extensor ratio.
There is another list in Canada that similar. Another one in this space, EW J, has been out there for my shares for many years. It's over $13 million of assets under management. It's very liquid so is used very often as a trading vehicle because it's good in the market.
If you're a long-term investor, something that has a lower management fee might be more adaptable for that investor specifically. To give you an example, the management fee or the MER in this case specifically for EW J is about 50 beeps compared to 10 or nine for the other one.
There are about four or five similar ETFs in Canada and the US they give you exposure to Japan.
>> Apart from this question about Japan, have you been noticing in your business people getting interested in the space? It seemed for the longest time that no one talked to Japan from an investment lens because of some of the things you mentioned: aging population, slowing growth. But there definitely seems to be more interest now.
>> We are seeing it on the institutional side.
A lot more institutions are getting into Japan, they are using ETS given the low cost that we mention. So we are seeing a lot more interest in Canada and Japan in that space.
>> Another question from the audience. If you are wants to get your thoughts on Taiwan and the EWT, I guess that would be… That's the iShares Taiwan ETF. What is interesting about Taiwan right now?
>> I think it's January 13 where they have elections and the incumbent is up in the polls by a small margin and China views the incumbent as a separatist. Obviously, what we might see as more taxes were duties going across the border for Taiwanese products into China which are the biggest trading partner. If that's the case that he wins again.
They have been reducing their exposure or their dependence on China, so maybe the impact is a little bit lower but there might be some negative impacts if he does in fact win. If he doesn't win, I think the impact might also be quite substantial. So in terms of ETFs that cover that space, there is only really to in the market. It's a hard market to get exposure to. EWT is by far the biggest one. It is just over $3 billion, 59 beep management fee. But once again, Franklin has a cheaper version of that same or similar exposure and they are both indexed and diversified products in general.
The Franklin one is about 19 beeps.
>> If someone asked me, because I'm not an expert on Taiwan, semiconductors always comes to mind. Has it sort of benefited from the whole interest in semis last year?
>> 100%.
That's where most of them are and that's the reason the US is trying to get their own semiconductor industry because of how important it is to the global economy.
>> Another question now, this one about the bond market. If you are wants to know if it's time to add to their position in is that LC?
This is the PMO along corporate. You're on the platform, we cannot give buy or sell recommendations but we can talk about what's been happening in fixed income and maybe with some of the expectations are for the short end and the long end of this year.
>> What we have seen is a bit of a Bärbel approach and interest in ETFs. So we have the majority of interest in short-term fixed income.
That's because we have pretty juicy deals on the short end of the curve. And we have very low volatility there. But slowly we are starting to see is a lot more money going into the long end of the curve.
That's really twofold. A lot of people expect inflation to go lower next year or this year.
>> It's getting hard to remember that we are in 2024.
>> May be late this year or next year because we are seeing a lot more interest in long-duration product. We are seeing that let's say with TLT in the US are many of the products in Canada like the Z FL and many other providers that have or will give you exposure to the long end of the curve in federal or Canadian bonds let's say but also you are seeing it in US treasuries, for example.
This product specifically looks at corporate's which obviously introduces the factor of credit which makes it a little bit more interesting I would say because if you have lower inflation and you expect maybe the markets rally so maybe that does well, but whether credit rates will move first, it's hard to say. When you look at the long end of the curve is interesting when you add more… So if you get it right, it might do quite well or you might see… Or rates go lower but can also go the other way where you see credit spreads widening and maybe interest rates don't move or stay stagnant for longer periods of time.
>> Interesting stat. As always, make sure you do your own research before making any investment decisions.
We are going to get back your questions for Andres Rincon on exchange traded funds and just moments time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
Today show is about ETFs and one type of product that investors may consider in times of uncertainty are low volatility funds.
Hiren Amin, Senior client education instructor with TD Direct Investing joins us now. He is going to discuss how these funds work and where you can find more information about them on the platform.
First walk us through how these low volatility ETFs work.
>> Absolutely, Greg. Thanks for having me here.
Great topic to talk about because I don't know if you've ever been to a themepark but we know how roller coasters work. We love them because they last about a minute or so. We love the stomach wrenching moments and that's about it.
But we don't want to see that kind of effect happen on our stock portfolio so we don't want to go through those moments where we have these big dips in our portfolios and it causes these gutwrenching moments. That's where low volatility funds come into the picture.
Low volatility funds or ETFs I should say specifically who provide or look to provide market like returns with less volatility than the overall market. So in other words, they are providing you a smoother ride with the primary objective that the way they do this is by investing in stocks that are less volatile and some of the common sectors you're going to find that have less volatility will be healthcare, utilities, consumer staples.
One thing to note about these low volatility ETFs as well as they do have, they do generate better risk-adjusted returns over time since they do capture less on the downside of the market and that could also lead to overall stronger performance on the long-term end. Now, they don't eliminate investment risk altogether. That's important to understand. Or prevent a loss in terms of market downturns. They are defensively positioned to better protect against market drawdowns.
Now, they also do sometimes underperform or leg of the broader market when markets are doing well or undergoing big, strong growth cycles.
>> Let's talk about how investors can actually use the platform now to screen for the list of low volatility ETFs.
>> Absolutely. Let's jump into a broker.
We are going to bring up our screeners tool to be able to do that. I'm going to click on the research tab appear. Under the tool section, we are going to head over to screeners.
Within the screeners page, we want to look for ETFs specifically so we are going to click on the ETFs tab over here.
We are going to run a custom screen. I'm going to click on create custom screen right over here. Once this loads of, you can start picking and choosing your criteria. We are going to keep it broad-based today.
First of all, we have country selected.
I'm going to localize it to our Canadian ETF issuers.
Next they I'm going to choose as the fund category. Now it's important because most of these low volatility funds are equity-based ones so we are going to look for anything that's considered to be equity funds.
We will go ahead and choose our Canadian equity for example and just throw and also the US equity and you can add some other ones in there so let's go down the list and look for the US equity ones. I believe that's going to be towards the bottom there. So we will throw that in and then we will go and look at one of the criteria that we are looking to add over here.
I think I had it here. I might just have to run through my screeners tool.
I prebuilt it there. So let me just throw the Canadian equity here for a moment and we will go with that and I will just talk about the next criteria that we are going to have. The second criteria I'm going to head over to as ratings and risk and specifically we are going to look at beta.
Beta is a measure of essentially a fund or stocks volatility against its benchmark and because these are low volatility funds, let's go ahead with the beta, we want to look for the lowest, below average and average as well and find out what results we have over here. Once you populate these results, you will see your matches, Pierre. We are going to make sure we remove these mutual funds out of the page.
Then you are going to see all of your lists pop up over here of the various stocks.
There are a couple of low volatility ones that you are going to dissector here.
There are some other ones mixed in the bag but then you can go ahead and screen through these and we can run comparisons against other funds.
This is just a broad way of doing the search and looking for those low volatility funds and getting you on your way there.
>> All right. Great stuff as always.
Thanks for that.
>> Are welcome.
>> Hiren Amin, Senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about exchange traded funds for Andres Rincon, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
All right.
We're back with Andres Rincon, head of ETF sales and strategy at TD Security. As mentioned earlier, has his own show where he speaks of industry executives about trends they are seeing. In the latest episode, he spoke with the two chief investment officers from Mackenzie Investments, they talked about the conditions they are seeing in Canada.
>> Despite the fact that we are seeing very high level of interest rates, we are only really just starting to see the impact of that on the biggest economy in the world, that being the United States.
So a lot of uncertainty comes from what happens here. I would sort of describe it as the best of times and the worst of times altogether. We are in the midst of this little spike in economic growth but every piece of data that we are seeing day-to-day now is reinforcing this view that the economic backdrop is going to have headwinds.
>> That was Lesley Marks from Mackenzie Investments.
I know Leslie well from my days at Bloomberg. I always found her comments are insightful. What else did you talk about?
>> We also had the co-CIO and we mostly focus on fixed income. And then we have Leslie who looks at the equity side. We talked a bit about what they see in this year and the challenges for this year.
Generally speaking, more challenges for equity and fixed income given the environment.
We also talked a little bit about some of the changes that they made recently at MacKenzie and the how that will build them for the future.
That was a wonderful conversation. The first time I had two guests on Buyside Views. If anybody wants to listen to the podcast of the video, they can look us up on Apple podcast, saponify and Google or on our website, TD Securities.com where all of our podcasts are.
>> Many ways to watch and listen. Let's get back to your questions now on ETFs for Andres.
I have read the passive investing in ETFs is much less popular in Canada than in the United States and other countries. Is that true and why?
>> I wouldn't say it's less popular. I would say that Canada has done a better job of allowing active strategies in the ETF market.
There are a lot of guardrails in the US to launching an actively managed strategy in an ETF and that's what we are going through right now, some of the changes in the US because it is evolving and one of the fastest-growing areas in the US is actively managed ETFs the same way that we are seeing it here. So I wouldn't say that it's less popular. I would say that the regulators have been terrific at allowing the strategy is to flourish and launch into market because of that a lot of investors have been able to invest in the strategy.
But passive investing is considerably larger than active investing here in Canada.
It's about 1/4 of the market that we have here in Canada is active.
The rest for the most part is indexed.
>> We are used to being the smaller sibling to the US, but Canada has been a leader in the space from the beginning.
>> Yes, maybe because of need. We have always needed to innovate. We were the first ones to launch a fixed income ETF, the first Argo ETF came from Canada, the first crypto ETF came from Canada. We have a long list of firsts here in Canada and once again, we are a leader in the actively managed space.
>> Interesting stuff. Here's the next question from the audience.
Just interested in a discussion on covered call ETFs, their pros and cons, particularly in the current market picture. If this isn't the environment for them, what is a good time? What kind of market conditions work for cover call ETFs?
>> I touched a little bit on this earlier so I won't go through all of that but it's important to remember the best environment for cover calls as an investor if you're trying to outperformance it is an environment where you have a flat or a down market. Why? Because what you are doing as I mentioned is you are giving up growth in exchange for yield.
You can persistently want yield instead of growth for a portion of your portfolio but if you're trying to pick and choose, then obviously you would more actively investing covered call ETFs if you thought that the market was going to go sideways or down.
Another big factor for these ETFs is volatility. The higher the volatility, the higher the yields that these ETFs get. So you're actually being paid for volatility which makes it a significant offset to having it long only portfolio that is long volatility naturally. So if you see volatility increase, sometimes it actually pays to get paid yield instead of growth because these ETFs actually pay much more when there's higher volatility.
>> Interesting stuff and things to consider for the audience. Another question.
Please expand on the benefits of ZFL for long-term and short-term investment. As EFL as the PMO along federal bond index ETF.
>> We touched on ZFL earlier because we are looking at long bonds. Z FL can be used in the short term. On the long end of curve it has more duration in Canada.
If expectations change in the short term, you will see some movement in that.
It is amongst the more volatile ones on the fixed income side. But really a lot of our investors are playing it more on the long end.
They are playing the long game of inflation coming down and these ETFs benefiting from interest rates going lower.
>> Is the wildcard here, in Canada, we have seen a substantial cooling of the labour markets and the economy but we get these data points out of the states. Last week, the jobs number in the market kept saying how can the US economy be this resilient after all these rate hikes? Is that a wildcard for this year, figuring out when the US economy finally says, borrowing costs are high, maybe we should cool it?
>> A lot of investors are using this as a long-term head, a long-term play given how stubborn some of the data has been in the US and Canada too.
>> Are any high-yield bond ETFs worth looking at?
>> There are many ETFs here in Canada that look at the high-yield market. To be clear, while they are listed in Canada, most ETFs focus almost entirely in the US market.
The high-yield market is relatively small here in Canada. There aren't many high-yield company is and the US has a ton. There's a lot more exposure there.
Most of these funds are passive. You have a variety of ETFs and just name a couple like ZHY or XHI and these ETFs really their goal is to give you a diversified basket of exposure to high-yield and why it's important by the ETF vehicle is because it's very difficult to pick and choose your high-yield bond.
Unless you are an expert in fixing, and really track these specific bonds and companies, it's very hard to pick and choose which ones are going to go bankrupt and which ones aren't, which ones are going to be good long-term. So building a diversified portfolio is quite key in investing in high-yield and this is obviously what they do. There is about four in Canada.
And HYB NPF H from Invesco that are pretty popular.
>> When you dig into the fixed income space, you can talk about investment grade corporate, government's and high-yield is a bit of a different space to yield which is reflective of the risk. When you start moving into an environment where you think the economy is going to slow and interest rates will come down, how do you start to do your homework on those different buckets of yield?
>> That's a good point.
If your view is that the market is going to see a downturn, then high-yield is probably not the right place to be.
If you talk to a lot of analysts on the street, they probably say the same thing: stick to investment grade right now given the risks that are in the market of a slowdown in the market. The Fed is actively trying to do that. Basically all the banks are trying to do that, trying to slow down the market.
If you see that that is something the market is moving towards, maybe high-yield is not the right vehicle. It's important to understand the current environment, not just the yield but also the environment that you're getting into and the risks of high-yield bonds.
>> We are going to affect your questions for Andres Rincon on exchange traded funds in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you can get in touch with us at any time.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
Real stocks have had a pretty good run of leads, relatively high valuations are employing considerable optimism for this year but interest rates are still sitting at 22 year highs.
Economic growth is expected to slow. Are these expectations for the rails a little too rosy? Our Anthony Okolie is joining us now, he's been digging into a TD Cowen report on this topic.
>> I think the big take away from TD Cowen is that the risk return for rail stocks looks a little bit stretched. Carload volumes were up a healthy 3% year-over-year in the fourth quarter last year.
TD Cowen attributes that mainly to a mild start to the winter this year as opposed to a meaningful uptake in freight demand.
As a result, the recent rally has driven up valuations and the groups sitting at about 21 times based on consensus and that is high versus the five-year and tenure ranges. When you compare them to the five-year average of 19.8, it's very high as well as high against the 10 year average of nearly 19 times. TD Cowen believes that the uptick in the December carload volumes should contribute to the fourth quarter results and TD Cowen's fourth-quarter earnings estimate for 2023 for Canadian railways is modestly above consensus estimates. However, TD Cowen does say the current share prices imply considerable optimism for this year as well as 2025.
TD Cowen's 2024 earnings-per-share estimates are modestly below consensus estimates for several reasons.
One, they don't see a robust restocking cycle that could contribute to increasing trade volumes this year. They also point to the continued headwinds from the effective central bank tightening which is expected to slow economic growth and weigh on labour markets in North America in 2024. In addition to that, Canadian railway companies are facing very difficult prior year comparisons in terms of grain shipments in the first quarter of this year.
Finally, contract negotiations with engineers or conductors in Canada code create potential labour disruptions in early 2024.
Looking ahead to 2025, TD Cowen is slightly more optimistic with earnings-per-share estimates that are in line with consensus. As they see earnings growth more back and gloated over a two-year period versus consensus.
>> That's the thesis for the space. What are some of the key risks they might see to those targets?
>> Some key risks include things like lower-than-expected economic growth which could further dampen real volumes. They also point to real volume pressures. If they persist, particularly with fuel prices, that could eat into margins. Other risks include competition, unfavourable regulatory environment developments, labour disruptions as well as harsh weather as some of the other key risks that they would identify for the sector.
>> Interesting stuff. Thanks.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the market.
We are having a look at TD's Advanced Dashboard, a platform designed for active traders available through TD Direct Investing. We are looking at the heat map function which gives you a view of the market movers on the TSX 60 by price and volume. Some downward momentum from some of the big financial names, including the big five banks. The energy space isn't really rallying off the price of crude being higher today but of course the price of crude was substantially lowered yesterday and it's been a bit of a bumpy ride in the space. Still some pockets of strength whether it's Cameco, uranium play, a little more than 4% or the tech stocks continuing to get a bit of a bid.
Here at home you have Shopify up almost 3% on the session. Since the the border, they are going to start getting the big Wall Street banks reporting at the end of the week. Some downward pressure here, bank of America, Wells Fargo, Morgan Stanley, all down to the tune of about 1%. Detectives are starting to pick up some momentum. It was a sluggish start to the trading day but Nvidia and other tech plays making gains. Tesla down about 2 1/2%. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back with Andres Rincon from TD Securities, talking about ETFs. Let's get to more of your questions. A viewer wants to know what are the pros and cons of ETF such as the TLT for long-term investors at this time?
TLT would be the 20 year plus US bond?
>> We are talking about the long end of the curve. I mentioned some benefits already today, the benefits obviously if you are hoping that long-term rates go lower at inflation goes lower. These are good vehicles for that. TLT, one of the good things is that it's one of the most liquid trading vehicles in the world.
>> Not just bonds but all vehicles in the world?
>> Yes, because you have a lot of fixed income traders using this as a benchmark.
TLT is a benchmark in times of volatility.
You see instead of buying bonds and having to actually get those treasuries, a lot of investors and traders actually use TLT on the board and you can see that just by trading volume. It's one of the most liquid trading products in the world. It trades like butter, even in tough times.
So what you're saying is a lot of natural buyers, natural sellers and the entire market interacting with a single product.
Because of that, the bid ask spread might be tighter than it normally would be given it's a real fair value of the underlying basket because you have so many natural buyers and sellers interacting on the board trying to transact this one vehicle.
>> I've used TLT for years as an example of what's happening in the bond market.
Interesting stuff indeed.
We have a question from the audience. They read that there is a fee war happening with the US ETFs. What's going on?
>> The fee war has never stopped. At the start, it was all in, for many years, in the passive world.
The iShares and vanguards of the world compete against each other for all of these huge assets in the US and globally by lowering fees. Just to be clear, not every single investor is fee sensitive.
Retail tends to be and some investors tend to be but traders not always.
Traders want liquidity on the board, ease of trading. It depends on the type of product that you have.
Not all products in the passive world have seen a decline in fees.
What we have seen lately as I was mentioning earlier is the growth of actively managed ETFs.
As we have a lot of big US issuers launch actively managed ETFs that were previously at mutual fund formats and a little bit more expensive or launching new actively managed strategies and ETFs, what they are doing is coming up with the strategies in a much lower cost.
And in a much more efficient way. What we are seeing now is a competition and the fee wars that your mentioning in the active space where we are seeing a lot of the big traditional active managers compete for assets through lower fees in the US.
>> Very interesting site. We have run out of time for questions bubble for let you go, I want to circle back to the top of the conversation. Despite our fears about economic slowdown in central-bank action, borrowing costs, we saw a very healthy and flows in Canadian ETFs in the last year.
What are we thinking about 2024? What do you have your eyes on?
>> I think it's going to be another excellent year for ETFs. We are sort of seeing it this year with all the entries that we have. We have a lot of interest in ETFs in general. I think fixed income will continue to be a big part of the year.
Rates are still relatively high so we are going to get a lot of people buying into the short end of the curve and as we see inflation move out, we are going to see more and more people on the long end. But still in the fixed income world, it might continue to dominate. On that note, I think actively managed strategies will be very popular this year. This year, we were at 40% of inflows. Perhaps this year we cross that barrier which we have never done and cross over 50% of inflows into Canada coming into active versus passive.
That would be a first for Canada. We look forward to that this year.
>> I look forward to more discussions about the space this year with you as well.
Our thanks Andres Rincon, head of ETF sales and strategy at TD Securities.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Ben Gossack, managing director and portfolio manager with TD Asset Management will be our guest. He wants to take your questions about global stocks.
A reminder that you get a Headstart with your questions for Ben. Just email moneytalklive@td.com.
That's all the time we have for the show today. Thanks for watching. We will see you tomorrow.
[music]
Every day, I'll be joined by guests from across TD, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today's show, we are going to talk about what areas of the ETF market have been getting attention from investors. TD Securities Andres Rincon joins us.
MoneyTalk's Anthony Okolie is going to have a look at a new TD Cowen report on the rail sector.
And in today's WebBroker education segment, Hiren Amin is going to show us how you can find information about low volatility funds on the platform.
So here's how you can get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Before we get our Guest of the day, let's get you an update on the markets. We will start your, Bay Street with the TSX Composite Index. About 107 point deficit, about half a percent.
Among most actively traded names on the TSX at this hour include Baytex energy.
You can see at 429, and not that it's a dramatic move but is just not catching the bit off the higher price of crude.
The price of crude has been volatile in recent sessions as well. One name that is moving on fairly robust trading activity is K92 mining. We don't talk a lot about it on the show. Investors seem pleased about their reports. The S&P 500, we had a firm rally led by the semiconductors yesterday. That put significant points on the table.
The NASDAQ is in negative territory. It's been flirting around the breakeven line.
There's a lot of excitement now, AI, not that this is new excitement, but now it's about AI in the home with semiconductors made for our PCs. Also Juniper Networks right now, I want to check in on the same.
They got a big jump today. 23%.
Unconfirmed reports out there that Hewlett Packard Enterprises has a bid to buy Juniper.
Juniper is up quite substantially, a little more than 37 bucks per share. And that's your market update.
There have been no shortage of concern for investors in the past year, from the economy to inflation to interest rates.
Despite all that, exchange traded funds in Canada saw one of the best years when it came to fund flows.
So where were investors putting their money to work? Joining us now to discuss is Andres Rincon, head of ETF sales and strategy at TD Security. Great to have you back.
>> Thank you for having me.
>> It feels like we've been living through a lot of news recently. In terms of fund flows, it's an interesting year for ETFs.
>> You mentioned, we had one of the best years for ETFs over the past five years and thus to the tune of $40 million in Canada. To put it into contrast, the mutual fund industry saw $50 billion in outflows so that's a big swing between ETFs and mutual funds. Obviously, a lot of investors in Canada are favouring ETFs for their investments.
Back to your point, where are they favouring and where are they putting their money? This last year was a year of active ETFs in the year of fixed income ETFs. The reason I say that is that they actually brought in quite a bit of inflows this last year to the tune of more than 50% of every dollar that was coming into Canada.
Every $0.50 that was coming into Canada was going into fixed income ETFs.
That's really a first for Canada.
We haven't seen a lot of money going into fixed income ETFs for some time. Remember, this is despite the fixed income market being only 33% of the makeup in Canada.
A lot of money going into fixed income ETFs, and active ETFs. It covered calls, we've seen money continue to pile into cover call ETFs. It's a very popular area.
Also cash management ETFs. Cash was king last year. Obviously with a higher yield but with the most recent OSFI ruling, we've seen as a less interest in those ETFs in the last few weeks or so but still very popular in the market in Canada.
>> I noticed when we put up that graphic for the audience, we talk about fixed income, because we knew that people were going into cash earlier in the year, it felt like in the last couple of months of the year, people finally said, okay, if 2024 is the year of not only rate pauses but actual rate cuts, then maybe some cash starts flowing towards traditional fixed income. Was that sort of like a late sort of ended the your story?
>> No, this happened for most of the year.
>> Because people got position early?
>> We saw a lot of people get into fixed income early with higher rates, just the need for yield. What we see in Canada and what Canadian investors like his yield and with higher rates we are seeing a lot of people pile in. As you mentioned, there is an opportunity it is believed that if we see rates going down, many of these funds would do well in this environment. But also we were seeing that in the active space. We are seeing a lot of people taking an active manager than is the fixed income space which can be a little bit more complicated than traditionally so we see a lot of money going to active fixed income.
>> Let's talk a bit about that. When we look at ETFs, if you have an active manager, as a general rule, the management expense ratio is a little bit higher because you have someone with their hands on. Despite that, investors are not simply going for the passive side, they want someone with their hands on the portfolios.
>> Good question. Canada is the leader in actively managed ETFs globally. We have one of the largest portions of active ETFs as a percentage of all ETFs that we have here in Canada. What we are seeing a lot is the transition or conversion of mutual funds to ETFs or what we see more in Canada is the launch of an ETF series of an existing mutual fund. So the traditional mutual fund that you see in Canada, we are seeing now an ETF series of that same fund. Often, they go hand in hand with lower fees so what ends up happening is a mutual fund also lowers its fees. Because of that, we are seeing a lot more active strategies in the market. What I can tell you is an example is we have pretty good insight us the pipeline for this year into what's going to launch and I can tell you that most of it is actually active.
>> Is active, that leads us into a discussion of what we might expect. We are into 2024. It's early innings.
Not halfway through January yet. But after the year that we have for ETFs in 2023, what do you expect in 2024?
>> The need for yield is going to be very important.
That plays hand-in-hand with fixed income because there is a good chance that if we see lower rates this year, so what we see is fixed income continuing to become more and more popular but also cover call big yielding strategies like high dividend paying stocks let's say might be very, very popular this year but also cover call.
What I would say is we are going to continue to see yield enhance strategies to be popular but also on the fixed income side to be popular.
>> We had discussions last year about cover call ETFs.
Remind the audience again about what the product looks like, how it structured, some of the pros and cons.
>> On the yield enhance decide?
>> On the yield enhanced side.
>> Now there is a huge variety of them. We have covered calls, we have… What they are doing is overlaying an option strategy over a normal portfolio, be it the brought S&P 500 or whatever it is. The sole goal of that is to earn more yield on that portfolio. We have a very yield starved audience here in Canada. People like the consistency of a specific yield so these are products that go, come in high demand and tend to be more tax efficient than some other income generating strategies.
>> On the other hand I believe some of these products that you will get this yield enhancement through the moves they are making but you might miss some of the upside of the underlying asset.
Or you won't capture the full upside if you do get a big run.
>> One of the cons of these products is that you are capping, on the cover call ones for example, you are capping your upside.
You are basically making an active decision to Your upside in exchange for yield. So investors that say, in this time and at this environment I prefer yield versus growth, this is a very good product for those investors that think that, that want more yield because what they are doing, as you are saying, they are capping their upside by selling calls but at the same time they are generating more yield that they can take home and maybe that's very valuable to the client in retirement.
So those stories have become very, very popular. On the put side or premium yield funds, there's a lot more selling puts and calls and it's more mixed in that scenario.
Generally speaking, cover call options are most popular. We are also seeing it now on bonds.
That's one of the biggest changes that we've seen over the last year or so where Canada, we had the first launches of bond cover call ETFs and those have been very successful and the yields are very high.
>> Interesting stuff to watch for.
Regular viewers are going to recall that my guest hosts a show called Buyside Views where he speaks of prominent members of the investment industry about the trends they are seeing.
Coming up later on today show, we are going to have a preview of his latest episode. Also coming up, we will get to your questions about exchange traded funds for Andres and a reminder that you get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Right now, let's get you updated on the top stories in the world of business and take a look at how the markets are trading.
There are rumblings of a possible multibillion dollar deal in the technology sector.
several unconfirmed reports that Hewlett Packard Enterprises is in talks by Juniper Networks in a deal that would be valued in the neighbourhood of $13 billion US. The reports have shares of Juniper on the rise. Right now Hewlett-Packard is down 7% but Juniper, we checked the top of the show, is up over 22%. Shares of online dating company Match Group in the smelly today.
There up 3%. There is a report that activist investor Elliott Management is building a stake in the name. This is the company behind tender and Hinge. While those sites enjoyed a surge in growth during the pandemic, the last several quarters have been more challenging for match and some of its online dating properties. We saw some dealmaking today in the Canadian engineering services industry. Stantec is buying engineering and management for Morrison Hirschfield and Adela says will expand its presence in Canada and the US. Financial terms of the transaction were not disclosed. Stantec is up a little less than 2%. A quick check in on the market. We will start on Bay Street with the TSX Composite Index.
The price of crude stabilizing today. It's not doing a lot for the big energy names considering some of the we saw action we have seen in prices in recent sessions.
Got the TSX down about hundred and five points or have a percent. Because of the border, the S&P 500, a big rally yesterday and a bit of a pause on that today.
Of course, it getting inflation out of the states in the US later this week and Big Bang earnings, down very modestly four points or less than 1/10 of a percent.
We are back with Andres Rincon, taking your questions about exchange traded funds. Let's get to them.
We have a question about your view on the Japanese market. They are interested in the Franklin FTSE Japan ETF, ticker FLJP.
Of course, we cannot get into buy and sell recommendations.
>> In late December, they actually raise their economic growth forecast to 1.6 from 1.3 and that's because they are seeing more external demand in autos and tourism because they have opened up now because of that they think they are going to see more economic growth.
Obviously, that is a little bit offset by internal demand within Japan which obviously they are not growing internally as fast. It is interesting. We are seeing a lot of oranges from investors in the space. In terms of FLJP, it is actually one of the cheapest ETFs in this space that covers… >> In terms of management expense ratio?
>> In terms of management extensor ratio.
There is another list in Canada that similar. Another one in this space, EW J, has been out there for my shares for many years. It's over $13 million of assets under management. It's very liquid so is used very often as a trading vehicle because it's good in the market.
If you're a long-term investor, something that has a lower management fee might be more adaptable for that investor specifically. To give you an example, the management fee or the MER in this case specifically for EW J is about 50 beeps compared to 10 or nine for the other one.
There are about four or five similar ETFs in Canada and the US they give you exposure to Japan.
>> Apart from this question about Japan, have you been noticing in your business people getting interested in the space? It seemed for the longest time that no one talked to Japan from an investment lens because of some of the things you mentioned: aging population, slowing growth. But there definitely seems to be more interest now.
>> We are seeing it on the institutional side.
A lot more institutions are getting into Japan, they are using ETS given the low cost that we mention. So we are seeing a lot more interest in Canada and Japan in that space.
>> Another question from the audience. If you are wants to get your thoughts on Taiwan and the EWT, I guess that would be… That's the iShares Taiwan ETF. What is interesting about Taiwan right now?
>> I think it's January 13 where they have elections and the incumbent is up in the polls by a small margin and China views the incumbent as a separatist. Obviously, what we might see as more taxes were duties going across the border for Taiwanese products into China which are the biggest trading partner. If that's the case that he wins again.
They have been reducing their exposure or their dependence on China, so maybe the impact is a little bit lower but there might be some negative impacts if he does in fact win. If he doesn't win, I think the impact might also be quite substantial. So in terms of ETFs that cover that space, there is only really to in the market. It's a hard market to get exposure to. EWT is by far the biggest one. It is just over $3 billion, 59 beep management fee. But once again, Franklin has a cheaper version of that same or similar exposure and they are both indexed and diversified products in general.
The Franklin one is about 19 beeps.
>> If someone asked me, because I'm not an expert on Taiwan, semiconductors always comes to mind. Has it sort of benefited from the whole interest in semis last year?
>> 100%.
That's where most of them are and that's the reason the US is trying to get their own semiconductor industry because of how important it is to the global economy.
>> Another question now, this one about the bond market. If you are wants to know if it's time to add to their position in is that LC?
This is the PMO along corporate. You're on the platform, we cannot give buy or sell recommendations but we can talk about what's been happening in fixed income and maybe with some of the expectations are for the short end and the long end of this year.
>> What we have seen is a bit of a Bärbel approach and interest in ETFs. So we have the majority of interest in short-term fixed income.
That's because we have pretty juicy deals on the short end of the curve. And we have very low volatility there. But slowly we are starting to see is a lot more money going into the long end of the curve.
That's really twofold. A lot of people expect inflation to go lower next year or this year.
>> It's getting hard to remember that we are in 2024.
>> May be late this year or next year because we are seeing a lot more interest in long-duration product. We are seeing that let's say with TLT in the US are many of the products in Canada like the Z FL and many other providers that have or will give you exposure to the long end of the curve in federal or Canadian bonds let's say but also you are seeing it in US treasuries, for example.
This product specifically looks at corporate's which obviously introduces the factor of credit which makes it a little bit more interesting I would say because if you have lower inflation and you expect maybe the markets rally so maybe that does well, but whether credit rates will move first, it's hard to say. When you look at the long end of the curve is interesting when you add more… So if you get it right, it might do quite well or you might see… Or rates go lower but can also go the other way where you see credit spreads widening and maybe interest rates don't move or stay stagnant for longer periods of time.
>> Interesting stat. As always, make sure you do your own research before making any investment decisions.
We are going to get back your questions for Andres Rincon on exchange traded funds and just moments time.
And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get our educational segment of the day.
Today show is about ETFs and one type of product that investors may consider in times of uncertainty are low volatility funds.
Hiren Amin, Senior client education instructor with TD Direct Investing joins us now. He is going to discuss how these funds work and where you can find more information about them on the platform.
First walk us through how these low volatility ETFs work.
>> Absolutely, Greg. Thanks for having me here.
Great topic to talk about because I don't know if you've ever been to a themepark but we know how roller coasters work. We love them because they last about a minute or so. We love the stomach wrenching moments and that's about it.
But we don't want to see that kind of effect happen on our stock portfolio so we don't want to go through those moments where we have these big dips in our portfolios and it causes these gutwrenching moments. That's where low volatility funds come into the picture.
Low volatility funds or ETFs I should say specifically who provide or look to provide market like returns with less volatility than the overall market. So in other words, they are providing you a smoother ride with the primary objective that the way they do this is by investing in stocks that are less volatile and some of the common sectors you're going to find that have less volatility will be healthcare, utilities, consumer staples.
One thing to note about these low volatility ETFs as well as they do have, they do generate better risk-adjusted returns over time since they do capture less on the downside of the market and that could also lead to overall stronger performance on the long-term end. Now, they don't eliminate investment risk altogether. That's important to understand. Or prevent a loss in terms of market downturns. They are defensively positioned to better protect against market drawdowns.
Now, they also do sometimes underperform or leg of the broader market when markets are doing well or undergoing big, strong growth cycles.
>> Let's talk about how investors can actually use the platform now to screen for the list of low volatility ETFs.
>> Absolutely. Let's jump into a broker.
We are going to bring up our screeners tool to be able to do that. I'm going to click on the research tab appear. Under the tool section, we are going to head over to screeners.
Within the screeners page, we want to look for ETFs specifically so we are going to click on the ETFs tab over here.
We are going to run a custom screen. I'm going to click on create custom screen right over here. Once this loads of, you can start picking and choosing your criteria. We are going to keep it broad-based today.
First of all, we have country selected.
I'm going to localize it to our Canadian ETF issuers.
Next they I'm going to choose as the fund category. Now it's important because most of these low volatility funds are equity-based ones so we are going to look for anything that's considered to be equity funds.
We will go ahead and choose our Canadian equity for example and just throw and also the US equity and you can add some other ones in there so let's go down the list and look for the US equity ones. I believe that's going to be towards the bottom there. So we will throw that in and then we will go and look at one of the criteria that we are looking to add over here.
I think I had it here. I might just have to run through my screeners tool.
I prebuilt it there. So let me just throw the Canadian equity here for a moment and we will go with that and I will just talk about the next criteria that we are going to have. The second criteria I'm going to head over to as ratings and risk and specifically we are going to look at beta.
Beta is a measure of essentially a fund or stocks volatility against its benchmark and because these are low volatility funds, let's go ahead with the beta, we want to look for the lowest, below average and average as well and find out what results we have over here. Once you populate these results, you will see your matches, Pierre. We are going to make sure we remove these mutual funds out of the page.
Then you are going to see all of your lists pop up over here of the various stocks.
There are a couple of low volatility ones that you are going to dissector here.
There are some other ones mixed in the bag but then you can go ahead and screen through these and we can run comparisons against other funds.
This is just a broad way of doing the search and looking for those low volatility funds and getting you on your way there.
>> All right. Great stuff as always.
Thanks for that.
>> Are welcome.
>> Hiren Amin, Senior client education instructor at TD Direct Investing.
And make sure to check out the learning centre in WebBroker for more educational videos, live, interactive master classes and upcoming webinars.
Before we get back to your questions about exchange traded funds for Andres Rincon, a reminder of how you can get in touch with us.
Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
All right.
We're back with Andres Rincon, head of ETF sales and strategy at TD Security. As mentioned earlier, has his own show where he speaks of industry executives about trends they are seeing. In the latest episode, he spoke with the two chief investment officers from Mackenzie Investments, they talked about the conditions they are seeing in Canada.
>> Despite the fact that we are seeing very high level of interest rates, we are only really just starting to see the impact of that on the biggest economy in the world, that being the United States.
So a lot of uncertainty comes from what happens here. I would sort of describe it as the best of times and the worst of times altogether. We are in the midst of this little spike in economic growth but every piece of data that we are seeing day-to-day now is reinforcing this view that the economic backdrop is going to have headwinds.
>> That was Lesley Marks from Mackenzie Investments.
I know Leslie well from my days at Bloomberg. I always found her comments are insightful. What else did you talk about?
>> We also had the co-CIO and we mostly focus on fixed income. And then we have Leslie who looks at the equity side. We talked a bit about what they see in this year and the challenges for this year.
Generally speaking, more challenges for equity and fixed income given the environment.
We also talked a little bit about some of the changes that they made recently at MacKenzie and the how that will build them for the future.
That was a wonderful conversation. The first time I had two guests on Buyside Views. If anybody wants to listen to the podcast of the video, they can look us up on Apple podcast, saponify and Google or on our website, TD Securities.com where all of our podcasts are.
>> Many ways to watch and listen. Let's get back to your questions now on ETFs for Andres.
I have read the passive investing in ETFs is much less popular in Canada than in the United States and other countries. Is that true and why?
>> I wouldn't say it's less popular. I would say that Canada has done a better job of allowing active strategies in the ETF market.
There are a lot of guardrails in the US to launching an actively managed strategy in an ETF and that's what we are going through right now, some of the changes in the US because it is evolving and one of the fastest-growing areas in the US is actively managed ETFs the same way that we are seeing it here. So I wouldn't say that it's less popular. I would say that the regulators have been terrific at allowing the strategy is to flourish and launch into market because of that a lot of investors have been able to invest in the strategy.
But passive investing is considerably larger than active investing here in Canada.
It's about 1/4 of the market that we have here in Canada is active.
The rest for the most part is indexed.
>> We are used to being the smaller sibling to the US, but Canada has been a leader in the space from the beginning.
>> Yes, maybe because of need. We have always needed to innovate. We were the first ones to launch a fixed income ETF, the first Argo ETF came from Canada, the first crypto ETF came from Canada. We have a long list of firsts here in Canada and once again, we are a leader in the actively managed space.
>> Interesting stuff. Here's the next question from the audience.
Just interested in a discussion on covered call ETFs, their pros and cons, particularly in the current market picture. If this isn't the environment for them, what is a good time? What kind of market conditions work for cover call ETFs?
>> I touched a little bit on this earlier so I won't go through all of that but it's important to remember the best environment for cover calls as an investor if you're trying to outperformance it is an environment where you have a flat or a down market. Why? Because what you are doing as I mentioned is you are giving up growth in exchange for yield.
You can persistently want yield instead of growth for a portion of your portfolio but if you're trying to pick and choose, then obviously you would more actively investing covered call ETFs if you thought that the market was going to go sideways or down.
Another big factor for these ETFs is volatility. The higher the volatility, the higher the yields that these ETFs get. So you're actually being paid for volatility which makes it a significant offset to having it long only portfolio that is long volatility naturally. So if you see volatility increase, sometimes it actually pays to get paid yield instead of growth because these ETFs actually pay much more when there's higher volatility.
>> Interesting stuff and things to consider for the audience. Another question.
Please expand on the benefits of ZFL for long-term and short-term investment. As EFL as the PMO along federal bond index ETF.
>> We touched on ZFL earlier because we are looking at long bonds. Z FL can be used in the short term. On the long end of curve it has more duration in Canada.
If expectations change in the short term, you will see some movement in that.
It is amongst the more volatile ones on the fixed income side. But really a lot of our investors are playing it more on the long end.
They are playing the long game of inflation coming down and these ETFs benefiting from interest rates going lower.
>> Is the wildcard here, in Canada, we have seen a substantial cooling of the labour markets and the economy but we get these data points out of the states. Last week, the jobs number in the market kept saying how can the US economy be this resilient after all these rate hikes? Is that a wildcard for this year, figuring out when the US economy finally says, borrowing costs are high, maybe we should cool it?
>> A lot of investors are using this as a long-term head, a long-term play given how stubborn some of the data has been in the US and Canada too.
>> Are any high-yield bond ETFs worth looking at?
>> There are many ETFs here in Canada that look at the high-yield market. To be clear, while they are listed in Canada, most ETFs focus almost entirely in the US market.
The high-yield market is relatively small here in Canada. There aren't many high-yield company is and the US has a ton. There's a lot more exposure there.
Most of these funds are passive. You have a variety of ETFs and just name a couple like ZHY or XHI and these ETFs really their goal is to give you a diversified basket of exposure to high-yield and why it's important by the ETF vehicle is because it's very difficult to pick and choose your high-yield bond.
Unless you are an expert in fixing, and really track these specific bonds and companies, it's very hard to pick and choose which ones are going to go bankrupt and which ones aren't, which ones are going to be good long-term. So building a diversified portfolio is quite key in investing in high-yield and this is obviously what they do. There is about four in Canada.
And HYB NPF H from Invesco that are pretty popular.
>> When you dig into the fixed income space, you can talk about investment grade corporate, government's and high-yield is a bit of a different space to yield which is reflective of the risk. When you start moving into an environment where you think the economy is going to slow and interest rates will come down, how do you start to do your homework on those different buckets of yield?
>> That's a good point.
If your view is that the market is going to see a downturn, then high-yield is probably not the right place to be.
If you talk to a lot of analysts on the street, they probably say the same thing: stick to investment grade right now given the risks that are in the market of a slowdown in the market. The Fed is actively trying to do that. Basically all the banks are trying to do that, trying to slow down the market.
If you see that that is something the market is moving towards, maybe high-yield is not the right vehicle. It's important to understand the current environment, not just the yield but also the environment that you're getting into and the risks of high-yield bonds.
>> We are going to affect your questions for Andres Rincon on exchange traded funds in just a moment's time.
As always, make sure you do your own research before making any investment decisions.
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Real stocks have had a pretty good run of leads, relatively high valuations are employing considerable optimism for this year but interest rates are still sitting at 22 year highs.
Economic growth is expected to slow. Are these expectations for the rails a little too rosy? Our Anthony Okolie is joining us now, he's been digging into a TD Cowen report on this topic.
>> I think the big take away from TD Cowen is that the risk return for rail stocks looks a little bit stretched. Carload volumes were up a healthy 3% year-over-year in the fourth quarter last year.
TD Cowen attributes that mainly to a mild start to the winter this year as opposed to a meaningful uptake in freight demand.
As a result, the recent rally has driven up valuations and the groups sitting at about 21 times based on consensus and that is high versus the five-year and tenure ranges. When you compare them to the five-year average of 19.8, it's very high as well as high against the 10 year average of nearly 19 times. TD Cowen believes that the uptick in the December carload volumes should contribute to the fourth quarter results and TD Cowen's fourth-quarter earnings estimate for 2023 for Canadian railways is modestly above consensus estimates. However, TD Cowen does say the current share prices imply considerable optimism for this year as well as 2025.
TD Cowen's 2024 earnings-per-share estimates are modestly below consensus estimates for several reasons.
One, they don't see a robust restocking cycle that could contribute to increasing trade volumes this year. They also point to the continued headwinds from the effective central bank tightening which is expected to slow economic growth and weigh on labour markets in North America in 2024. In addition to that, Canadian railway companies are facing very difficult prior year comparisons in terms of grain shipments in the first quarter of this year.
Finally, contract negotiations with engineers or conductors in Canada code create potential labour disruptions in early 2024.
Looking ahead to 2025, TD Cowen is slightly more optimistic with earnings-per-share estimates that are in line with consensus. As they see earnings growth more back and gloated over a two-year period versus consensus.
>> That's the thesis for the space. What are some of the key risks they might see to those targets?
>> Some key risks include things like lower-than-expected economic growth which could further dampen real volumes. They also point to real volume pressures. If they persist, particularly with fuel prices, that could eat into margins. Other risks include competition, unfavourable regulatory environment developments, labour disruptions as well as harsh weather as some of the other key risks that they would identify for the sector.
>> Interesting stuff. Thanks.
>> My pleasure.
>> MoneyTalk's Anthony Okolie.
Now, for an update on the market.
We are having a look at TD's Advanced Dashboard, a platform designed for active traders available through TD Direct Investing. We are looking at the heat map function which gives you a view of the market movers on the TSX 60 by price and volume. Some downward momentum from some of the big financial names, including the big five banks. The energy space isn't really rallying off the price of crude being higher today but of course the price of crude was substantially lowered yesterday and it's been a bit of a bumpy ride in the space. Still some pockets of strength whether it's Cameco, uranium play, a little more than 4% or the tech stocks continuing to get a bit of a bid.
Here at home you have Shopify up almost 3% on the session. Since the the border, they are going to start getting the big Wall Street banks reporting at the end of the week. Some downward pressure here, bank of America, Wells Fargo, Morgan Stanley, all down to the tune of about 1%. Detectives are starting to pick up some momentum. It was a sluggish start to the trading day but Nvidia and other tech plays making gains. Tesla down about 2 1/2%. You can get more information on TD Advanced Dashboard by visiting TD.com/Advanced Dashboard.
We are back with Andres Rincon from TD Securities, talking about ETFs. Let's get to more of your questions. A viewer wants to know what are the pros and cons of ETF such as the TLT for long-term investors at this time?
TLT would be the 20 year plus US bond?
>> We are talking about the long end of the curve. I mentioned some benefits already today, the benefits obviously if you are hoping that long-term rates go lower at inflation goes lower. These are good vehicles for that. TLT, one of the good things is that it's one of the most liquid trading vehicles in the world.
>> Not just bonds but all vehicles in the world?
>> Yes, because you have a lot of fixed income traders using this as a benchmark.
TLT is a benchmark in times of volatility.
You see instead of buying bonds and having to actually get those treasuries, a lot of investors and traders actually use TLT on the board and you can see that just by trading volume. It's one of the most liquid trading products in the world. It trades like butter, even in tough times.
So what you're saying is a lot of natural buyers, natural sellers and the entire market interacting with a single product.
Because of that, the bid ask spread might be tighter than it normally would be given it's a real fair value of the underlying basket because you have so many natural buyers and sellers interacting on the board trying to transact this one vehicle.
>> I've used TLT for years as an example of what's happening in the bond market.
Interesting stuff indeed.
We have a question from the audience. They read that there is a fee war happening with the US ETFs. What's going on?
>> The fee war has never stopped. At the start, it was all in, for many years, in the passive world.
The iShares and vanguards of the world compete against each other for all of these huge assets in the US and globally by lowering fees. Just to be clear, not every single investor is fee sensitive.
Retail tends to be and some investors tend to be but traders not always.
Traders want liquidity on the board, ease of trading. It depends on the type of product that you have.
Not all products in the passive world have seen a decline in fees.
What we have seen lately as I was mentioning earlier is the growth of actively managed ETFs.
As we have a lot of big US issuers launch actively managed ETFs that were previously at mutual fund formats and a little bit more expensive or launching new actively managed strategies and ETFs, what they are doing is coming up with the strategies in a much lower cost.
And in a much more efficient way. What we are seeing now is a competition and the fee wars that your mentioning in the active space where we are seeing a lot of the big traditional active managers compete for assets through lower fees in the US.
>> Very interesting site. We have run out of time for questions bubble for let you go, I want to circle back to the top of the conversation. Despite our fears about economic slowdown in central-bank action, borrowing costs, we saw a very healthy and flows in Canadian ETFs in the last year.
What are we thinking about 2024? What do you have your eyes on?
>> I think it's going to be another excellent year for ETFs. We are sort of seeing it this year with all the entries that we have. We have a lot of interest in ETFs in general. I think fixed income will continue to be a big part of the year.
Rates are still relatively high so we are going to get a lot of people buying into the short end of the curve and as we see inflation move out, we are going to see more and more people on the long end. But still in the fixed income world, it might continue to dominate. On that note, I think actively managed strategies will be very popular this year. This year, we were at 40% of inflows. Perhaps this year we cross that barrier which we have never done and cross over 50% of inflows into Canada coming into active versus passive.
That would be a first for Canada. We look forward to that this year.
>> I look forward to more discussions about the space this year with you as well.
Our thanks Andres Rincon, head of ETF sales and strategy at TD Securities.
As always, make sure you do your own research before making any investment decisions.
stay tuned for tomorrow show. Ben Gossack, managing director and portfolio manager with TD Asset Management will be our guest. He wants to take your questions about global stocks.
A reminder that you get a Headstart with your questions for Ben. Just email moneytalklive@td.com.
That's all the time we have for the show today. Thanks for watching. We will see you tomorrow.
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