3 Under the Radar Canadian ETFs

[00:00:01] [SPEAKER_00]: This is The Canadian Investor, where you take control of your own portfolio and gain the confidence you need to succeed in the markets. Hosted by Braden Dennis and Simon Belanger

[00:00:14] [SPEAKER_02]: Welcome back to the Canadian Investor Podcast. I'm here with Dan Kent. It's a little bit different than our normal Thursdays episode where we do news and earnings nod because there's not enough news and earnings to talk about, but it's just because we're recording this one a bit.

[00:00:31] [SPEAKER_02]: In advance, I'll be on vacation for a couple of weeks at the end of August. So we're trying to make sure that we don't miss an episode here. So we tried to mix it up a little bit. So the content is still pretty up to date when you do listen to this.

[00:00:45] [SPEAKER_02]: Before we get started, Dan, how's it going?

[00:00:47] [SPEAKER_01]: Pretty good. Yeah, it's gonna be an interesting episode talking about some ETFs, some craziness in the market.

[00:00:53] [SPEAKER_01]: Yeah, we had a gigantic hail storm here last night, one of the worst storms I've seen in quite some time.

[00:01:01] [SPEAKER_01]: Oh wow.

[00:01:01] [SPEAKER_01]: I thought my windows were gonna blow out.

[00:01:04] [SPEAKER_01]: I don't know, everybody in Calgary, my sister who's just outside of town, like vehicles wrecked, windows blown out, like it was crazy.

[00:01:13] [SPEAKER_02]: Well, I guess, yeah, insurance costs will go up. And I thought when you said the crazy storm, I thought you were gonna be talking about what happened yesterday with the market.

[00:01:23] [SPEAKER_02]: So we're recording this on August 6th. And then on August 5th, we had the US markets and world markets minus Canada because everyone was on holiday, kind of blowing out a little bit entering into I think the NASDAQ hit correction territory, falling more than 10% since its peaks.

[00:01:42] [SPEAKER_02]: Obviously, when you listen to this, it could be worse, could be much better. We don't know. It's kind of recovering a little bit today.

[00:01:48] [SPEAKER_02]: But just wanted to give some people a little bit of context here when they hear this if it's a bit different.

[00:01:55] [SPEAKER_02]: But having said that, there is one thing that has been plastered all around. I'm sure you've seen it, the Japanese carry trade.

[00:02:02] [SPEAKER_01]: Yeah.

[00:02:03] [SPEAKER_02]: A lot of people are saying that it was one of the reasons why we saw the markets sharply down yesterday.

[00:02:10] [SPEAKER_02]: So I wanted to explain what it is because a lot of people, mainstream financial media have noticed they're kind of plastering that all over the place, but not really explaining all that much how it works.

[00:02:22] [SPEAKER_02]: So I'll talk about that. And by the time you hear this, this will still be something that will be valuable.

[00:02:28] [SPEAKER_02]: So the Japanese yen carry trade. First of all, a carry trade is essentially you borrow funds in another currency, typically at a lower rate,

[00:02:37] [SPEAKER_02]: and then you invest it somewhere else to be able to get higher returns, get some cheap financing.

[00:02:45] [SPEAKER_02]: The Japanese carry trade specifically is where an investor will borrow money in Japanese yen and then turn around and convert that USD and invest in US assets.

[00:02:55] [SPEAKER_02]: Like I said, this is typically done with these two currencies right now.

[00:03:00] [SPEAKER_02]: There could be other currencies that are used there for the Japanese yen carry trade, but most investors will do that, that use this strategy.

[00:03:09] [SPEAKER_02]: And there are definitely some risk. The first one I'm sure Dan, you know, that comes to mind to you, but it is a leverage play because you are borrowing money to invest.

[00:03:19] [SPEAKER_02]: So that's one of the big risks here. And there are three variables that will impact your returns, either positively or negatively.

[00:03:28] [SPEAKER_02]: And I'll go into detail for each first, the interest rates in Japan, the straight of the strength of the Japanese yen.

[00:03:35] [SPEAKER_02]: And third, the return on the investment. And the first one, the low, I will say low interest rates in Japan.

[00:03:42] [SPEAKER_02]: And it is, it has a correlation with US rates as well. So the lower the rates, the lower is the cost of borrowing for investor who want to do the carry trade.

[00:03:53] [SPEAKER_02]: It's important that the rates stay low. What really matters, however, is the interest rate differential between the rates in Japan and in the US,

[00:04:01] [SPEAKER_02]: because that will put downward pressure on the Japanese yen. In theory, the bigger the gap, the weaker the yen will be compared to the US dollar.

[00:04:11] [SPEAKER_02]: That's because investors in general will have more of an incentive to go towards the US dollars since they can get higher yield on US treasuries than they would on Japanese bonds.

[00:04:22] [SPEAKER_02]: Therefore, it increases demand for the US dollars and increases the value of the US dollar against the yen.

[00:04:28] [SPEAKER_02]: The second thing here is the strength of the Japanese yen. So one of the key like I kind of alluded to is to the trade to be successful is a weakening Japanese yen.

[00:04:38] [SPEAKER_02]: That's because when investors borrow in yen, they convert it to USD. So when they repay their loan, they have to do the opposite and convert US dollars to yen.

[00:04:48] [SPEAKER_02]: If the yen is weaker than when they had borrowed it, it means that they have to use less US dollars to repay their loan, which will boost their return.

[00:04:58] [SPEAKER_02]: On the flip side, which is kind of what we saw happen, and I'll recap that on what actually happened,

[00:05:05] [SPEAKER_02]: is that if the Japanese yen is that if the Japanese yen is straightened, it will negatively impact their returns because it will make it will take more US dollars to repay their loan in yen than when they had originally borrowed the money.

[00:05:19] [SPEAKER_02]: And obviously you tack on the interest that they're paying on the loan as well.

[00:05:23] [SPEAKER_02]: The last thing here, the last component is the returns on investment.

[00:05:28] [SPEAKER_02]: So what returns the investors get on the money that was borrowed in yen, converted in US dollars and then invested will obviously have a big impact on the trade.

[00:05:38] [SPEAKER_02]: I haven't found the data, but I think it's safe to assume that a decent portion of the investors or funds that were doing this strategy were betting on US equities and more specifically tech stock.

[00:05:50] [SPEAKER_02]: I mean, I don't know about you, Dan, but you can probably make the case that, you know, there were probably investors doing that trade and investing in Bitcoin, for example.

[00:05:59] [SPEAKER_02]: So it doesn't. Yeah, they're probably that.

[00:06:02] [SPEAKER_02]: Yeah, because Bitcoin saw a big drop as well. So I wouldn't be surprised if that was the case as well.

[00:06:07] [SPEAKER_02]: Now, it's easy to see how the trade got trush in the last few weeks, also known as the reverse carry trade.

[00:06:15] [SPEAKER_02]: So you had the Japanese yen getting weaker for pretty much like the whole year.

[00:06:21] [SPEAKER_02]: If so, if you pull up a chart of USD Japanese yen, you'll see that essentially since the start of the year, it appreciated and pretty much consistently until the year.

[00:06:34] [SPEAKER_02]: So this week is a little bit of time that we had the same price.

[00:06:34] [SPEAKER_02]: So this is the price of the month, and then we'll see it up until I'm going to come up to you and that's the end of this year.

[00:06:35] [SPEAKER_02]: And for those that are watching on JoinTCI, you'll see here what I'm talking about.

[00:06:41] [SPEAKER_02]: So you'll see the kind of bottom, which is literally at the end of 2024.

[00:06:45] [SPEAKER_02]: I think it bottomed right around Christmas of 2023.

[00:06:49] [SPEAKER_02]: And then at the beginning of 2024 up until early mid-July, it kind of peaked and then

[00:06:55] [SPEAKER_02]: has been on a downward spiral since.

[00:06:57] [SPEAKER_02]: But it's picked up a little bit since the lows of a couple days ago.

[00:07:02] [SPEAKER_02]: Now, it's down to put that in context.

[00:07:05] [SPEAKER_02]: In the past month, the yen has strengthened about 11%.

[00:07:09] [SPEAKER_02]: So that's a big hit if you borrowed yen around the peak.

[00:07:12] [SPEAKER_02]: And now you're looking at 11% already negative returns just based on the value of the yen.

[00:07:20] [SPEAKER_01]: The one thing I'll say is that if you look back to late December 2020,

[00:07:28] [SPEAKER_01]: the yen has fallen relative to the US dollar by 36%.

[00:07:33] [SPEAKER_01]: So if you've been doing this...

[00:07:35] [SPEAKER_01]: And I would say this is the vast majority of people doing this are going to be institutions.

[00:07:41] [SPEAKER_01]: I don't really think too many retail investors are going to be pulling this off.

[00:07:47] [SPEAKER_01]: But there's been huge...

[00:07:48] [SPEAKER_02]: You'd have to get some pretty decent sums of money to be able to get the loans and so on.

[00:07:53] [SPEAKER_02]: It's probably...

[00:07:54] [SPEAKER_02]: I'm sure it's possible, but you'd have to probably do a lot of digging and research on how to

[00:07:59] [SPEAKER_02]: be able to do it.

[00:08:01] Yeah.

[00:08:01] [SPEAKER_01]: Yeah.

[00:08:02] [SPEAKER_01]: So this is mostly going to be at an institutional level.

[00:08:05] [SPEAKER_01]: And I mean, from late December 2020 to up until the 11% jump, you had made a bunch of money

[00:08:13] [SPEAKER_01]: off this from just an overall declining yen.

[00:08:17] [SPEAKER_01]: But then it really turned around quickly because like you're going to say, it's up...

[00:08:22] [SPEAKER_01]: What is it?

[00:08:23] [SPEAKER_01]: Up 11%?

[00:08:24] [SPEAKER_02]: 11%.

[00:08:25] [SPEAKER_02]: Yeah.

[00:08:25] [SPEAKER_02]: It's up 11% in the past month.

[00:08:28] [SPEAKER_02]: So pretty much since its peak.

[00:08:29] [SPEAKER_02]: So that's a big...

[00:08:31] [SPEAKER_02]: Yeah.

[00:08:32] [SPEAKER_02]: That's something pretty big to deal with, right?

[00:08:34] [SPEAKER_02]: If you're...

[00:08:35] [SPEAKER_02]: You know, you have to essentially convert your US dollars to yen and the US dollar has depreciated

[00:08:41] [SPEAKER_02]: 11% compared to the yen.

[00:08:43] [SPEAKER_02]: And then you add that to the fact that the S&P 500 is down around 7% in the last month and

[00:08:49] [SPEAKER_02]: then ASAC 12%, give or take 1% or 2% just based on when I did my notes earlier this morning

[00:08:55] [SPEAKER_02]: and how the markets are doing.

[00:08:57] [SPEAKER_02]: So then you get investors that panic and want to cover their loans.

[00:09:01] [SPEAKER_02]: So they sell US equities to repay those loans to cap their losses.

[00:09:06] [SPEAKER_02]: The sell pressure then pulls down the US market.

[00:09:10] [SPEAKER_02]: So you can see how all these things are a bit intertwined.

[00:09:13] [SPEAKER_02]: Obviously, you add in, like we talked a couple of weeks ago with the jobs data, the weak job

[00:09:18] [SPEAKER_02]: data that came in right after the Fed meeting that was already showing signs of the US economy

[00:09:24] [SPEAKER_02]: slowing down.

[00:09:25] [SPEAKER_02]: So that kind of, you know, adds into all of that.

[00:09:27] [SPEAKER_02]: So it's not the only reason, but I just wanted to provide that context here.

[00:09:31] [SPEAKER_02]: And then you have the same investors now who must exchange US dollars for yen, which increases

[00:09:38] [SPEAKER_02]: demand for Japanese yen and makes it stronger.

[00:09:41] [SPEAKER_02]: That in turn likely led to other investors that were doing this trades panicking and essentially

[00:09:48] [SPEAKER_02]: selling their assets to be able to close out that yen carry trade.

[00:09:52] [SPEAKER_02]: So that's how you end up with the reverse carry trade and a market pullback probably led in

[00:10:00] [SPEAKER_02]: part by that.

[00:10:00] [SPEAKER_02]: Obviously, there's other components to it.

[00:10:03] [SPEAKER_02]: But people, you know, all these things are kind of intertwined and people sometimes are

[00:10:07] [SPEAKER_02]: trying to understand what's happening.

[00:10:09] [SPEAKER_02]: And then one last thing that could have an impact here is, you know, the CME Fed watch tool is

[00:10:16] [SPEAKER_02]: now pretty much pricing in a rate cut no matter what in September.

[00:10:19] [SPEAKER_02]: And even a lot of people are talking to rate cuts.

[00:10:23] [SPEAKER_02]: So if that happens, you have the interest rate differential that would narrow between the

[00:10:28] [SPEAKER_02]: Japanese yen and US dollar could put some more potential pressure on the on the yen carry

[00:10:36] [SPEAKER_02]: trade because it could have a potential tailwind effect and strengthen the Japanese yen.

[00:10:41] [SPEAKER_02]: And again, I say I could because there's other things that will impact the value of the currency.

[00:10:47] [SPEAKER_02]: And then you had the Bank of Japan who increased the not too long ago, I think it was last week,

[00:10:53] [SPEAKER_02]: they increased their policy rate from like 10 basis point to 25 basis point.

[00:10:57] [SPEAKER_02]: So yes, you heard that correctly.

[00:10:59] [SPEAKER_02]: It was negative at some point earlier this year or late last year.

[00:11:03] [SPEAKER_02]: So it's not a big move, but it just shows that yes, that interest rate differential is kind

[00:11:08] [SPEAKER_02]: of narrowing potentially a little bit more.

[00:11:11] [SPEAKER_02]: And it could put some more pressure on the trade if it essentially strengthened the Japanese

[00:11:16] [SPEAKER_02]: yen.

[00:11:17] [SPEAKER_02]: It might it might not.

[00:11:18] [SPEAKER_02]: But we may be seeing that carry trade unwind in the next couple of months, the continued

[00:11:25] [SPEAKER_02]: unwind of it.

[00:11:26] [SPEAKER_02]: Maybe not, but it'll be interesting to watch.

[00:11:29] [SPEAKER_02]: That's for sure.

[00:11:29] [SPEAKER_01]: Yeah, because this was Japan's first.

[00:11:32] [SPEAKER_01]: I think I was saying it was their first interest rate hike in 15 years or something like that.

[00:11:37] [SPEAKER_02]: Well, this year, yeah, earlier this year, it was the first rate hike in a very long time.

[00:11:43] [SPEAKER_02]: And then it was the second one that happened.

[00:11:45] [SPEAKER_02]: I think it was on July 31st.

[00:11:47] [SPEAKER_02]: I don't have it in front of me.

[00:11:48] [SPEAKER_02]: I thought I put in my notes, but I guess I dreamt about it or so.

[00:11:53] [SPEAKER_01]: So I mean, if they keep if they keep going up in the US keeps going down, I mean, it just adds

[00:11:57] [SPEAKER_01]: more pressure to that.

[00:11:59] [SPEAKER_01]: And I was actually reading.

[00:12:01] [SPEAKER_01]: It was an article posted this morning.

[00:12:04] [SPEAKER_01]: Just they did some information on like net inflows and outflows yesterday.

[00:12:08] [SPEAKER_01]: And it was mostly retail investors that were dumping stocks while institutions were buying

[00:12:14] [SPEAKER_01]: them.

[00:12:14] [SPEAKER_01]: Yeah.

[00:12:15] [SPEAKER_01]: I mean, the panic is and then there was a lot of because I know a lot of people were locked

[00:12:20] [SPEAKER_01]: out of their accounts as well.

[00:12:22] [SPEAKER_02]: Yeah.

[00:12:22] [SPEAKER_01]: I think Charles Schwab, he couldn't get in and all that type of stuff.

[00:12:25] [SPEAKER_01]: But yeah, it says the retail order imbalance ended at negative one billion, whereas the institutional

[00:12:33] [SPEAKER_01]: balance was plus 14 billion in net buying.

[00:12:37] [SPEAKER_01]: So it's pretty interesting.

[00:12:38] [SPEAKER_02]: I think I'm going to have to get my tinfoil hat and, you know, say that they were preventing

[00:12:43] [SPEAKER_02]: people from logging in.

[00:12:45] [SPEAKER_01]: But yeah, no, I think that's all over the place.

[00:12:47] [SPEAKER_01]: Yeah.

[00:12:48] [SPEAKER_01]: That they were preventing retail investors from logging in.

[00:12:51] [SPEAKER_01]: I mean, it's probably a good thing because the markets are up, what, three percent.

[00:12:55] [SPEAKER_01]: The Nasdaq's up two and a half percent as we're talking about.

[00:12:58] [SPEAKER_02]: So yeah, if you were going to panic sell.

[00:13:01] [SPEAKER_02]: Yeah.

[00:13:01] [SPEAKER_02]: Maybe not be the good time.

[00:13:03] [SPEAKER_02]: But again, I think it's going to be especially if we start continue seeing some weaker economic

[00:13:08] [SPEAKER_02]: data in the US.

[00:13:10] [SPEAKER_02]: Yeah.

[00:13:10] [SPEAKER_02]: I think it's going to be a very volatile fall.

[00:13:13] [SPEAKER_02]: So by volatile, I think it's exactly what we're seeing as we're recording.

[00:13:17] [SPEAKER_02]: Maybe one day it's down a couple percentage point.

[00:13:20] [SPEAKER_02]: The next day it's up a percent or two.

[00:13:22] [SPEAKER_02]: I think the markets don't really know where to go.

[00:13:25] [SPEAKER_02]: The valuations are still sky high for especially big tech.

[00:13:29] [SPEAKER_02]: And big tech is such a large portion of the markets right now in terms of market capitalization

[00:13:35] [SPEAKER_02]: that when they go down, when they sneeze, the market catches a cold.

[00:13:40] [SPEAKER_02]: Let's just say that.

[00:13:41] [SPEAKER_02]: Yeah, definitely.

[00:13:43] [SPEAKER_01]: And I mean, even like look at the volatility in the Japanese market.

[00:13:47] [SPEAKER_01]: They went minus 12 and then plus 10 or something.

[00:13:50] [SPEAKER_01]: Yeah.

[00:13:51] [SPEAKER_02]: Crazy.

[00:13:51] [SPEAKER_02]: Which people think it's like all fine and dandy.

[00:13:54] [SPEAKER_02]: But remember, you were going down at a higher base at a higher percentage.

[00:13:59] [SPEAKER_02]: So the 10 percent up is not making up.

[00:14:01] [SPEAKER_02]: Yeah.

[00:14:01] [SPEAKER_02]: Even if it was even if it was 10, 12 percent down, 12 percent up.

[00:14:06] [SPEAKER_02]: The math behind it means that the 12 percent up is actually less than the 12 percent down.

[00:14:11] [SPEAKER_02]: So a lot of people sometimes will see that and they'll be like or even sometimes CNBC

[00:14:14] [SPEAKER_02]: headlines.

[00:14:15] [SPEAKER_02]: They'll be like, oh, markets rebound like for the same percentage point.

[00:14:20] [SPEAKER_02]: Well, they actually know in terms of actual value, it still lost value over the two days.

[00:14:25] [SPEAKER_01]: Yeah.

[00:14:26] [SPEAKER_01]: The simplest way there is, you know, if you have a stock that falls 50 percent, you need

[00:14:30] [SPEAKER_01]: a double.

[00:14:30] [SPEAKER_01]: Exactly.

[00:14:31] [SPEAKER_01]: To get back to where you were at.

[00:14:32] [SPEAKER_01]: Right.

[00:14:32] [SPEAKER_01]: So it's never it's never the same in that regard.

[00:14:34] [SPEAKER_00]: Mm hmm.

[00:14:36] [SPEAKER_02]: Now, let's move on to.

[00:14:38] [SPEAKER_02]: So what we'll do here then we'll talk about three ETFs that it has on his radar.

[00:14:44] [SPEAKER_02]: I think it's good because you're you know, you're into the ETF quite a bit, a lot more

[00:14:50] [SPEAKER_02]: than I am.

[00:14:50] [SPEAKER_02]: So I think you'll you'll give people some ideas.

[00:14:53] [SPEAKER_02]: And obviously, this is not investment advice.

[00:14:55] [SPEAKER_02]: Make sure you do your due diligence.

[00:14:57] [SPEAKER_02]: And I will talk about afterwards the Ethereum ETFs that were launched a couple of weeks

[00:15:03] [SPEAKER_02]: ago by the time that you hear this and what we're seeing in terms of the inflows and outflows

[00:15:09] [SPEAKER_02]: for those ETFs as well.

[00:15:10] [SPEAKER_01]: Yeah.

[00:15:11] [SPEAKER_01]: So I decided to just pick, you know, three ETFs that I think, you know, they aren't they're

[00:15:16] [SPEAKER_01]: not necessarily under the radar, but they're definitely like interesting options that,

[00:15:21] [SPEAKER_01]: you know, a lot of people might not know about.

[00:15:23] [SPEAKER_01]: And the first one would be HXS.

[00:15:27] [SPEAKER_01]: So this is a this is a Global X corporate class S&P 500 ETF.

[00:15:33] [SPEAKER_01]: They like to call these total return ETFs.

[00:15:36] [SPEAKER_01]: They're unique in a way that they're designed to be very tax efficient.

[00:15:40] [SPEAKER_01]: And they're kind of called total return ETFs because they don't pay out any distribution.

[00:15:45] [SPEAKER_01]: So this is, in essence, a S&P 500 ETF.

[00:15:50] [SPEAKER_01]: And for the most part, you're going to see, you know, funds like VOO or VFV.

[00:15:53] [SPEAKER_01]: They're going to pay out.

[00:15:54] [SPEAKER_01]: I don't know what the S&P 500 pays out.

[00:15:56] [SPEAKER_01]: It's somewhere along the lines of like 1.2 to 1.5 percent distribution.

[00:16:00] [SPEAKER_01]: But HXS will pay out nothing, which means you do have a bit more flexibility in regards

[00:16:07] [SPEAKER_01]: to being able to defer taxes to later dates via sales.

[00:16:12] [SPEAKER_01]: Whereas with a normal ETF, let's say like VOO or VFV, your distributions will be taxable

[00:16:17] [SPEAKER_01]: in the year you receive them.

[00:16:19] [SPEAKER_01]: And that's obviously inside of a taxable account in, you know, in your tax sheltered accounts.

[00:16:26] [SPEAKER_01]: It's not necessarily the case.

[00:16:28] [SPEAKER_01]: This isn't going to provide any sort of benefit on that front, but it will provide a bit of

[00:16:33] [SPEAKER_01]: benefit on the withholding tax front, which I'll talk about in a bit.

[00:16:37] [SPEAKER_01]: But, you know, in my interactions with a lot of investors over the years, I find, you

[00:16:44] [SPEAKER_01]: know, a lot of people own this thing, but they don't actually know what it is.

[00:16:48] [SPEAKER_01]: So the fund is, it utilizes a total return swap contract with a financial institution or

[00:16:57] [SPEAKER_01]: multiple financial institutions.

[00:16:58] [SPEAKER_01]: And without going in too in depth, because I mean, they're very complex funds.

[00:17:05] [SPEAKER_01]: A swap contract in general is essentially two parties agreeing to exchange the returns

[00:17:10] [SPEAKER_01]: or cash flows of different assets for a set period of time.

[00:17:14] [SPEAKER_01]: So this is a synthetic ETF, meaning that it will give you exposure to the S&P 500 without

[00:17:22] [SPEAKER_01]: actually owning the S&P 500.

[00:17:24] [SPEAKER_01]: And it does so through derivatives.

[00:17:27] [SPEAKER_01]: So in HXS's case, Global X will enter into an agreement with a major institution, or as

[00:17:34] [SPEAKER_01]: I mentioned, multiple institutions and say, you pay me the returns of the S&P 500 and in

[00:17:40] [SPEAKER_01]: exchange, the total returns of the S&P 500, sorry.

[00:17:44] [SPEAKER_01]: And in exchange, I'll pay you a fee.

[00:17:46] [SPEAKER_01]: So again, just spitballing numbers here.

[00:17:48] [SPEAKER_01]: Let's say the S&P 500 one year returns 8% and pays a 2% dividend for, you know, a 10%

[00:17:55] [SPEAKER_01]: return.

[00:17:56] [SPEAKER_01]: Someone owning a fund like VFV in a taxable account would have to pay tax on that 2% distribution

[00:18:03] [SPEAKER_01]: along with a withholding tax on a portion of that distribution.

[00:18:06] [SPEAKER_01]: In HXS's case, the investor would pay no tax until they sell the fund because like in a

[00:18:15] [SPEAKER_01]: generic sense, you can have deviances a bit in terms of returns, but HXS is just going

[00:18:19] [SPEAKER_01]: to gain 10% in terms of its total share price.

[00:18:23] [SPEAKER_01]: So you don't have any taxable distributions paid out to you.

[00:18:26] [SPEAKER_01]: So this is exactly why if you were to look to just a price-based return chart for something

[00:18:32] [SPEAKER_01]: like VFV and HXS, you'll notice that HXS has returned more.

[00:18:37] [SPEAKER_01]: It looks like the fund has outperformed VFV quite a bit, but when you do a total return chart,

[00:18:43] [SPEAKER_01]: they're almost identical in returns.

[00:18:45] [SPEAKER_01]: And that's because VFV is obviously going to pay out that distribution where HXS is just

[00:18:49] [SPEAKER_01]: represented in the total price.

[00:18:52] [SPEAKER_01]: And when we look to the tax cost ratio on a fund like HXS versus VFV or VU, it sits at

[00:18:58] [SPEAKER_01]: zero because there's no, you know, you don't pay taxes until you sell.

[00:19:03] [SPEAKER_01]: Whereas VFV, VOO sits at 0.44 and VFV 0.07.

[00:19:08] [SPEAKER_01]: And the tax cost ratio is, it's just a very simple ratio that measures how much in percent

[00:19:13] [SPEAKER_01]: of funds annualized return is reduced by taxes.

[00:19:17] [SPEAKER_01]: So obviously with HXS paying out all like paying out no distribution, it's just going

[00:19:23] [SPEAKER_01]: to be that capital gain, which you can pretty much pick and choose when you're going to sell

[00:19:27] [SPEAKER_01]: and pay that tax.

[00:19:28] [SPEAKER_01]: And for a lot of people, it would look like a no brainer, but it is important to consider

[00:19:32] [SPEAKER_01]: that there are additional risks when it comes to total return ETFs.

[00:19:36] [SPEAKER_01]: And the main one of them, and the one I'll talk about today would be counterparty risk.

[00:19:40] [SPEAKER_01]: So a fund like VOO simply holds the underlying equities in the S&P 500.

[00:19:44] [SPEAKER_01]: It owns the stocks.

[00:19:46] [SPEAKER_01]: Whereas a fund like HXS is relying on, you know, a third party to pay them the returns of

[00:19:51] [SPEAKER_01]: the S&P 500.

[00:19:52] [SPEAKER_01]: So although it's very unlikely, I mean, these institutions typically work with, you know,

[00:19:58] [SPEAKER_01]: banks with billions and billions of dollars of assets under management.

[00:20:02] [SPEAKER_01]: They're very large banks.

[00:20:04] [SPEAKER_01]: There still is the possibility.

[00:20:06] [SPEAKER_01]: It's not zero that the institution might not be able to pay Global X the returns of the

[00:20:14] [SPEAKER_01]: S&P 500.

[00:20:14] [SPEAKER_01]: So that's obviously a risk that you just wouldn't get in regards to something like, you know,

[00:20:20] [SPEAKER_01]: VOO or VFE.

[00:20:21] [SPEAKER_01]: And from the tax sheltered account side of things, if someone is insistent on keeping their currency

[00:20:27] [SPEAKER_01]: in Canadian dollars, HXS actually provides a bit of an advantage over VFE because even

[00:20:34] [SPEAKER_01]: in an RRSP for VFE, you are subject to withholding tax on a portion of the distribution.

[00:20:39] [SPEAKER_01]: So many investors don't realize this.

[00:20:42] [SPEAKER_01]: They always think, you know, if you put US stocks in an RRSP, they'll be sheltered from

[00:20:46] [SPEAKER_01]: that withholding tax.

[00:20:47] [SPEAKER_01]: But because it's actually Vanguard in the case of VFE that owns those underlying US ETFs and

[00:20:54] [SPEAKER_01]: not the individual investor, you still actually pay a withholding tax on VFE.

[00:21:00] [SPEAKER_01]: The general rule of thumb is if you own a Canadian domicile fund that contains US domiciled ETFs

[00:21:07] [SPEAKER_01]: or stocks, you will pay a withholding tax on that even inside of an RRSP.

[00:21:12] [SPEAKER_01]: And then finally, I've noticed a lot of investors mentioning the fees on a fund like this being

[00:21:17] [SPEAKER_01]: quite high and they are quite a bit higher.

[00:21:20] [SPEAKER_01]: So in that event, they've kind of like immediately disregarded.

[00:21:24] [SPEAKER_01]: And what I'll say is you need to be looking at returns net of fees, not fees first.

[00:21:27] [SPEAKER_01]: So the higher fee on HXS has caused it to underperform VFV or VOO, but it's by like a relatively

[00:21:36] [SPEAKER_01]: minuscule amount.

[00:21:37] [SPEAKER_01]: So 0.07% annualized since 2015.

[00:21:41] [SPEAKER_01]: So in the event of, you know, any particular tax savings, which are obviously highly dependent

[00:21:47] [SPEAKER_01]: on the individual, like how much you're going to save, whether this is efficient for you,

[00:21:50] [SPEAKER_01]: but that small of an annualized return, you know, ultimately could be beneficial to somebody

[00:21:56] [SPEAKER_01]: who, you know, can tax shelter, essentially defer their tax.

[00:22:01] [SPEAKER_01]: Maybe capital gains are actually more tax friendly than dividends, depending on your particular

[00:22:06] [SPEAKER_01]: income situation.

[00:22:07] [SPEAKER_01]: So it's definitely an interesting fund that a lot of people haven't necessarily heard of.

[00:22:13] [SPEAKER_01]: And if they've heard of it, maybe, you know, they're a bit scared about, you know, the whole

[00:22:18] [SPEAKER_01]: total return, the swap contract type of thing.

[00:22:20] [SPEAKER_01]: So I figured it would be a pretty good one to talk about.

[00:22:23] [SPEAKER_01]: And then I have the, the chart of returns here.

[00:22:26] [SPEAKER_01]: So you're looking at, you know, since mid 2015, HXS has returned about 15.09%, whereas

[00:22:33] [SPEAKER_01]: VFV is 15.16.

[00:22:37] [SPEAKER_01]: So very small changes in, you know, total returns for a pretty tax efficient ETF.

[00:22:43] [SPEAKER_02]: Yeah, no, I think that was a good overview, Dan.

[00:22:46] [SPEAKER_02]: I will be honest, I wasn't familiar with that fund.

[00:22:49] [SPEAKER_02]: So yeah, a lot of people aren't.

[00:22:51] [SPEAKER_02]: Yeah, exactly.

[00:22:52] [SPEAKER_02]: Yeah.

[00:22:52] [SPEAKER_02]: Because I tend to focus on, yeah, just the more normal ETFs, if you'd like to, yeah, to

[00:22:58] [SPEAKER_02]: qualify them that way.

[00:22:59] [SPEAKER_02]: But I think it's an interesting vehicle for people to look at, especially I would say

[00:23:03] [SPEAKER_02]: even more.

[00:23:04] [SPEAKER_02]: So if they have it in a taxable account, yeah.

[00:23:07] [SPEAKER_02]: May it worth a look, but understand the risk because yes, counterparty risk is real and

[00:23:12] [SPEAKER_02]: maybe not a huge risk, but it can happen.

[00:23:15] [SPEAKER_01]: Yeah, definitely.

[00:23:16] [SPEAKER_01]: I mean, there's added risks there that don't exist with owning just, you know, a fund like

[00:23:23] [SPEAKER_01]: VOO or something like that.

[00:23:24] [SPEAKER_02]: No, exactly.

[00:23:25] [SPEAKER_02]: So now we'll move on.

[00:23:27] [SPEAKER_02]: So I'll talk about the spot Ethereum ETF that launched.

[00:23:30] [SPEAKER_02]: So we're a little bit behind, but I think that's good because it just launched on July

[00:23:34] [SPEAKER_02]: 23rd.

[00:23:35] [SPEAKER_02]: So by the time you hear this, probably won't have been launched for close to a month.

[00:23:39] [SPEAKER_02]: For those new to Ethereum, Ethereum is a decentralized blockchain platform that enables the creation

[00:23:45] [SPEAKER_02]: and execution of smart contracts and decentralized application.

[00:23:49] [SPEAKER_02]: I won't go into detail.

[00:23:50] [SPEAKER_02]: Feel free to, you know, research and learn more about Ethereum if that's something that's

[00:23:54] [SPEAKER_02]: interesting to you.

[00:23:55] [SPEAKER_02]: Now, this was formally, this was a formality after the SEC had approved the 19B4 order

[00:24:03] [SPEAKER_02]: that was submitted by ETFs provider to change the rules to allow for a spot Ethereum ETF

[00:24:09] [SPEAKER_02]: to be approved.

[00:24:10] [SPEAKER_02]: The ETF were approved without the ability for staking, which essentially would provide a

[00:24:16] [SPEAKER_02]: yield for investors.

[00:24:18] [SPEAKER_02]: The way that the Ethereum network actually secures itself.

[00:24:21] [SPEAKER_02]: And there were nine ETFs that were launched on July 23rd.

[00:24:25] [SPEAKER_02]: So you had the 21 shares, Bitwise, Fidelity, Franklin, Grayscale, Ethereum Trust.

[00:24:32] [SPEAKER_02]: And I'll talk a bit more on that one.

[00:24:34] [SPEAKER_02]: The Grayscale Ethereum Mini Trust, Invesco, iShares, and then Vanet.

[00:24:40] [SPEAKER_02]: And is it a success or not?

[00:24:43] [SPEAKER_02]: I think that will be a lot of people's question here.

[00:24:47] [SPEAKER_02]: Well, if you're looking on the total AUM, so assets under management, it has gone down

[00:24:54] [SPEAKER_02]: for the spot Ethereum ETF since the launch.

[00:24:57] [SPEAKER_02]: At launch, it was just shy of 10 billion in asset under management.

[00:25:01] [SPEAKER_02]: And the latest data that I got, it was about 8.4 billion.

[00:25:06] [SPEAKER_02]: Now, people may wonder like, oh, well, how did that happen?

[00:25:10] [SPEAKER_02]: First of all, how did it get assets like 10 billion worth of asset when it launched?

[00:25:15] [SPEAKER_02]: That's because similar to the spot Bitcoin ETF is there was the Grayscale Trust that was

[00:25:22] [SPEAKER_02]: converted over to an ETF.

[00:25:25] [SPEAKER_02]: So here for joint TCI listeners, you'll see the blog.co has great data about the spot and

[00:25:32] [SPEAKER_02]: Bitcoin ETFs.

[00:25:33] [SPEAKER_02]: And then you can see here at the launch.

[00:25:35] [SPEAKER_02]: So this, the asset under management were primarily all from the Ethereum Trust with Grayscale.

[00:25:44] [SPEAKER_02]: And then you see that it's a bit of a downward trend ever since.

[00:25:48] [SPEAKER_02]: Now, it's not unusual.

[00:25:50] [SPEAKER_02]: The drop in AUM was to be expected because the same thing happened with the Bitcoin, the

[00:25:56] [SPEAKER_02]: Spot Bitcoin ETF when it was converted from Grayscale to the ETF format.

[00:26:02] [SPEAKER_02]: In both cases, the ETF had billions in asset under management in AUM and was charging a

[00:26:09] [SPEAKER_02]: fee of 2.5%.

[00:26:10] [SPEAKER_02]: It also had a lockup period.

[00:26:13] [SPEAKER_02]: So the Grayscale ETF for institutional investors that got removed when the fund got converted

[00:26:18] [SPEAKER_02]: to the ETF structure.

[00:26:20] [SPEAKER_02]: So the high fees and the removal of the lockup period was likely the cause of the drop in

[00:26:26] [SPEAKER_02]: asset under management for all the ETFs.

[00:26:29] [SPEAKER_02]: Since the new inflows couldn't outweigh the outflows from the Grayscale Ethereum Trust.

[00:26:35] [SPEAKER_02]: This is something that we have looked at, like that we can have a look probably in a couple

[00:26:41] [SPEAKER_02]: months or by the end of the year to see if the trend actually reversed.

[00:26:45] [SPEAKER_02]: But it is something to keep in mind.

[00:26:46] [SPEAKER_02]: It's not unusual.

[00:26:48] [SPEAKER_02]: And the last thing I'll mention here, people may have caught on.

[00:26:51] [SPEAKER_02]: So Grayscale has two.

[00:26:52] [SPEAKER_02]: So they have the Grayscale Ethereum Trust, which is what I just talked about, converting

[00:26:57] [SPEAKER_02]: that to the ETF.

[00:26:59] [SPEAKER_02]: And then they also launched a Grayscale Ethereum Mini Trust, which has 15 basis point of fees.

[00:27:06] [SPEAKER_02]: And actually, if you look at the fees, they are the lowest of the nine ETFs that were launched.

[00:27:13] [SPEAKER_02]: So it's kind of funny because they know that a lot of people will flee their actual 2.5%

[00:27:20] [SPEAKER_02]: Ethereum Trust ETF now that had asset under management.

[00:27:25] [SPEAKER_02]: But I think they learned their lesson from when the Bitcoin spot ETFs were approved.

[00:27:31] [SPEAKER_02]: And they actually created this mini trust, which has competitive fees.

[00:27:36] [SPEAKER_02]: The question I would ask is, has the trust been eroded a little bit with Grayscale?

[00:27:41] [SPEAKER_02]: Because clearly they're trying to, they know that a lot of people are sitting or a lot of

[00:27:46] [SPEAKER_02]: investors are sitting on massive gains with their Grayscale Ethereum Trust.

[00:27:50] [SPEAKER_02]: And that would be taxable in most jurisdictions.

[00:27:54] [SPEAKER_02]: So they know that they can keep the fees pretty high and that people will have to think twice

[00:28:00] [SPEAKER_02]: about selling for tax reasons.

[00:28:02] [SPEAKER_02]: So it's just an interesting play.

[00:28:05] [SPEAKER_02]: They're kind of taking advantage of their investors, most of them being institutional

[00:28:09] [SPEAKER_02]: investors that were in this fund beforehand.

[00:28:12] [SPEAKER_02]: And they are keeping the fees high, but then they're offering another option, which has

[00:28:17] [SPEAKER_02]: the lowest fees of all the funds.

[00:28:19] [SPEAKER_02]: So I personally wouldn't touch Grayscale.

[00:28:21] [SPEAKER_02]: I just find their management a little bit, not fishy, but they take advantage of investors.

[00:28:26] [SPEAKER_02]: And then that's a clear example.

[00:28:28] [SPEAKER_02]: I'd rather pay a few basis points more and go with one of the other competitors to just

[00:28:33] [SPEAKER_02]: not encourage Grayscale.

[00:28:35] [SPEAKER_01]: Yeah.

[00:28:35] [SPEAKER_01]: Yeah.

[00:28:35] [SPEAKER_01]: Like, why wouldn't you just lower the fees on your main fund?

[00:28:40] [SPEAKER_01]: You know what I mean?

[00:28:40] [SPEAKER_01]: Like, I mean, you know exactly why they're doing it.

[00:28:43] [SPEAKER_02]: I know that's why, because they're trying to make money on it.

[00:28:46] [SPEAKER_02]: And they don't.

[00:28:47] [SPEAKER_02]: I mean, at the end of the day, I think it's probably a short term positive move for them,

[00:28:53] [SPEAKER_02]: but it can definitely hurt their reputation longer term.

[00:28:56] [SPEAKER_02]: Yeah.

[00:28:57] [SPEAKER_02]: And especially if investors feel slighted, they probably won't go to their mini trust ETF.

[00:29:02] [SPEAKER_02]: They'll go for a competitor, even if it's a few basis point, if they got screwed over

[00:29:07] [SPEAKER_02]: because they were holding the actual trust before it converted.

[00:29:10] [SPEAKER_01]: Yeah, exactly.

[00:29:11] [SPEAKER_01]: I mean, it's not really a good look.

[00:29:13] [SPEAKER_01]: I mean, there are a lot of these funds are, they're much cheaper than the Canadian options.

[00:29:19] [SPEAKER_01]: I mean, I know, I can't remember the fund manager, but they have like a 70, 30 Bitcoin

[00:29:25] [SPEAKER_01]: Ethereum ETF.

[00:29:27] [SPEAKER_01]: I can't remember what it is.

[00:29:29] [SPEAKER_01]: Purpose maybe, but it might not be purpose.

[00:29:31] [SPEAKER_01]: But that's like one point something percent.

[00:29:35] [SPEAKER_01]: And now, I mean, you can just buy these two individual ETFs and save quite a bit of money.

[00:29:41] [SPEAKER_02]: Yeah, I'm not sure which one it is.

[00:29:43] [SPEAKER_02]: I feel, I think it could be Valkyrie that had an Ether and both, but I'm not 100% sure.

[00:29:51] [SPEAKER_02]: Anyways, it's just an interesting one for those who want exposure to Ethereum in like a registered

[00:29:58] [SPEAKER_02]: account.

[00:29:58] [SPEAKER_02]: This would be a good option.

[00:30:00] [SPEAKER_02]: And like you said, cheaper than the Canadian options that were already available.

[00:30:04] [SPEAKER_02]: Think enough about the Ethereum spot ETF.

[00:30:08] [SPEAKER_02]: Do you want, we'll move on.

[00:30:09] [SPEAKER_02]: And if you want to tell us about FEQT, which is a all-in-one ETF that's offered by actually

[00:30:16] [SPEAKER_02]: one of our current sponsored Fidelity.

[00:30:20] [SPEAKER_01]: Yeah.

[00:30:21] [SPEAKER_01]: So all-in-one ETFs are definitely like catching on in a big way, but I mean, a lot of the people

[00:30:27] [SPEAKER_01]: that, you know, I've talked to kind of believe they're all the same, but they're actually like

[00:30:31] [SPEAKER_01]: every single one of these funds is very, very different.

[00:30:34] [SPEAKER_01]: I mean, we, we put out a newsletter over at StockTrades about these all-in-one ETFs.

[00:30:39] [SPEAKER_01]: And like, I had to kind of stop myself at, you know, like 2,500 words because I was like,

[00:30:45] [SPEAKER_01]: okay, people are just going to stop reading this because it's too long.

[00:30:48] [SPEAKER_01]: But I could have went on for a very long time because each one of these funds, you know,

[00:30:54] [SPEAKER_01]: relative to geographical exposure, like how they get their exposure, what funds they own,

[00:30:59] [SPEAKER_01]: how they go about it is so different.

[00:31:01] [SPEAKER_01]: So, I mean, you, if you're, if you're looking at one of these, it's definitely worth your time

[00:31:05] [SPEAKER_01]: to actually dive in deep on each one of these. In terms of Fidelity, it's definitely one that

[00:31:12] [SPEAKER_01]: flies under the radar. So it's only, it's only got about 350 million in AUM, which is less than 10%

[00:31:18] [SPEAKER_01]: of the size of something like XEQT, which is the iShares one, which is probably like the most,

[00:31:24] [SPEAKER_01]: the iShares one is probably the most like plain Jane, you know, all-in-one ETF.

[00:31:29] [SPEAKER_01]: But since FEQT's inception, which I believe was in 2021, it's actually outperformed

[00:31:35] [SPEAKER_01]: XEQT by 3% annually. There's a few reasons for this. For one, this is the only all-in-one ETF that

[00:31:44] [SPEAKER_01]: I know of that contains exposure to Bitcoin. None of the other ones have cryptocurrency

[00:31:49] [SPEAKER_01]: exposure. It's nothing crazy. It typically hovers from 3.5 to 4%, which is probably what a lot of

[00:31:55] [SPEAKER_01]: investors, you know, if they do own Bitcoin, this is my allocation. I know it got up quite a bit

[00:31:59] [SPEAKER_01]: during the Bitcoin run-up, but I ended up, you know, selling it down to four or 5%. So it's kind of

[00:32:05] [SPEAKER_01]: just a core holding inside of the fund. And, you know, it's obviously been one of the drivers of

[00:32:09] [SPEAKER_01]: the outperformance just because Bitcoin has done so well over the last bit. But the bulk of the

[00:32:16] [SPEAKER_01]: difference and the huge difference between FEQT and any of the other all-in-one ETFs is the fact

[00:32:22] [SPEAKER_01]: that it utilizes factor investing. So factor-based investing, it's been around forever, but, you know,

[00:32:27] [SPEAKER_01]: more and more funds are starting to come out in the last, you know, half decade as a strategy.

[00:32:31] [SPEAKER_01]: It does gain some popularity. And in a nutshell, factor investing pretty much aims to target

[00:32:37] [SPEAKER_01]: particular attributes of securities that have often been associated with higher returns.

[00:32:43] [SPEAKER_01]: So one of the prime examples you're seeing a ton of these these days are high-quality ETFs.

[00:32:48] [SPEAKER_01]: So a basic example of a high-quality ETF would be an S&P 500 ETF that filters out, you know,

[00:32:54] [SPEAKER_01]: a subset of companies based on their returns on equity, returns on invested capital or debt levels.

[00:32:59] [SPEAKER_01]: So they have to hit a particular set of criteria to be included and everything else would be excluded.

[00:33:06] [SPEAKER_01]: They typically have maximum holdings. So if 200 stocks on a particular index meet that criteria,

[00:33:13] [SPEAKER_01]: they'll trim it down to say, you know, if they have 100 max holdings, then they'll, you know,

[00:33:17] [SPEAKER_01]: go further. Another example could be value. That one's generally straightforward, low volatility,

[00:33:23] [SPEAKER_01]: which will aim to target, you know, low beta stocks or momentum, which pretty much target

[00:33:28] [SPEAKER_01]: stocks that have strong momentum indicators.

[00:33:30] [SPEAKER_02]: Or there's a good one I thought about, like a dividend cutter ETF. So dividend paying stocks

[00:33:36] [SPEAKER_02]: that pay above the...

[00:33:38] [SPEAKER_02]: That's interesting.

[00:33:38] [SPEAKER_02]: Yeah, whatever free cash flow they produce or earnings, you choose whichever metric you want

[00:33:43] [SPEAKER_02]: to use. So BCE would be right in there.

[00:33:46] [SPEAKER_01]: Yeah, BCE, 3M, like dividend cutter ETF. That's interesting. Should reach out to one of them.

[00:33:52] [SPEAKER_02]: So yeah, maybe I would be like a short dividend cutter ETF. Maybe that would be the play.

[00:33:59] [SPEAKER_01]: The, I mean, I guess in a way, a high yielding ETF would be a factor ETF as well. A generally

[00:34:06] [SPEAKER_01]: poor performing factor ETF, whereas, you know, a lot of these, especially momentum, like momentum

[00:34:14] [SPEAKER_01]: investing has done very well in the past. Obviously, it's never a guarantee that'll do well in the future,

[00:34:19] [SPEAKER_01]: but momentum has been one of the strongest factor indicators in the past. I mean, over my time of

[00:34:25] [SPEAKER_01]: researching, you know, a boatload of ETFs, I have become a huge fan of factor-based funds. I do like

[00:34:31] [SPEAKER_01]: the approach of what Fidelity has done rather than just, you know, push out another generic all-in-one

[00:34:38] [SPEAKER_01]: ETF that's, you know, relatively the same as, say, the Vanguard fund or the iShares fund. They, you know,

[00:34:45] [SPEAKER_01]: the fact that they're different, you know, might get them a bit more attention. Whereas if they just

[00:34:49] [SPEAKER_01]: push out another fund, that's exactly the same, you know, people, the major, major fund managers,

[00:34:54] [SPEAKER_01]: you know, it might be a little tough to compete in that regard. And I mean, the factor-based

[00:35:00] [SPEAKER_01]: element of it has driven much stronger returns. Most of their, uh, U.S. holdings are, uh,

[00:35:07] [SPEAKER_01]: momentum-based ETFs. So they'll have, you know, that momentum factor element to it. Uh,

[00:35:12] [SPEAKER_01]: they have some low volatility options. They have small cap, high quality elements in there too. So

[00:35:18] [SPEAKER_01]: it's definitely, uh, it's a much different ETF than all the, all of the rest. And the one thing

[00:35:23] [SPEAKER_01]: I have noticed is, is also people, you know, not necessarily afraid, but uncertain about purchasing

[00:35:27] [SPEAKER_01]: the fund because it does trade on the NIO. Uh, the NIO is a senior exchange. It's the second one in

[00:35:32] [SPEAKER_01]: Canada, uh, next to the TSX. I mean, there really shouldn't be any worries there. The NIO is a,

[00:35:38] [SPEAKER_01]: is a, is a perfectly fine exchange. I just think a lot of people don't know about it. So they kind

[00:35:42] [SPEAKER_01]: of, they see that FEQT.NO or NE or whatever it trades at on, you know, the brokerage you're part

[00:35:48] [SPEAKER_01]: of, and they might get a little uneasy about that, but, uh, there's, there's not too many issues

[00:35:53] [SPEAKER_01]: there. Um, the last thing I guess I'll say about FEQT is although the fund has driven much higher

[00:36:00] [SPEAKER_01]: returns than any other all-in-one fund, the crypto exposure and the momentum factor ETFs are likely to

[00:36:06] [SPEAKER_01]: lead to higher volatility because it hasn't really been around all that long. I couldn't really get any

[00:36:11] [SPEAKER_01]: reliable, uh, volatility past volatility data, but it's, I would imagine it's going to be a bit

[00:36:19] [SPEAKER_01]: more volatile than, uh, the, the standard all-in-ones just because of that different makeup.

[00:36:23] [SPEAKER_02]: Yeah. And just a quick note on the NIO exchange. So it's owned by the CBOE, uh, by CBOE, which is a

[00:36:30] [SPEAKER_02]: large company that owns like multiple exchanges. I don't think that should be a concern in itself.

[00:36:35] [SPEAKER_02]: I think, you know, the reason you want to buy or not buy this ETF should be based on the actual ETF,

[00:36:40] [SPEAKER_02]: not, uh, where it's listed. So I'll just kind of echo what you were saying here.

[00:36:45] [SPEAKER_01]: Yeah. It's just, you know, a lot of people kind of wonder like what the NIO is. It's been around

[00:36:50] [SPEAKER_01]: for quite a while, I believe 2015. And I think it got bought up during the pandemic by, uh,

[00:36:56] [SPEAKER_02]: that's where the Canadian depository receipts are trading. So I know, um, we had, uh, someone from

[00:37:04] [SPEAKER_02]: the NIO exchange maybe a couple of years ago when those CDRs kind of started training.

[00:37:08] [SPEAKER_02]: Yeah. So definitely, I think, you know, I don't think it's an issue per se. No,

[00:37:13] [SPEAKER_02]: obviously the investment can go sideways like any other investment, but the fact that it's

[00:37:17] [SPEAKER_02]: listed on that, but so you want to finish here with your last name and then we'll wrap it up.

[00:37:24] [SPEAKER_01]: So ZLB, which is a BMO ETF. Yeah. So this is actually a BMO factor ETF. Uh, I figured I would

[00:37:33] [SPEAKER_01]: go over a Canadian ETF. These other ones have been all in ones in the U S so, uh, anyone who has

[00:37:39] [SPEAKER_01]: followed me for a meaningful amount of time probably knows I'm not a huge fan of Canadian

[00:37:44] [SPEAKER_01]: indexing. I mean, most people kind of make the assumption that when I say this, I'm suggesting

[00:37:48] [SPEAKER_01]: that people build out like an entire portfolio of individual stocks.

[00:37:52] [SPEAKER_02]: Yeah. Just, uh, you know, not supporting the Canadian indices, but, uh, we've been chill.

[00:37:59] [SPEAKER_02]: Yeah. We've been pretty critical of the Canadian indices as well, just because I think you'll talk

[00:38:04] [SPEAKER_02]: about that. It's so heavily weighted and essentially three, three sectors. And I mean, I think it's fine

[00:38:11] [SPEAKER_02]: if people want to have a Canadian bias, invest in Canada, that's fine. That's her prerogative.

[00:38:14] [SPEAKER_02]: I prefer not to invest too much in Canada, but based on, you know, the investable market globally,

[00:38:21] [SPEAKER_02]: I also have a strong Canadian bias. I'll just say that. So people wondering, but it's probably

[00:38:27] [SPEAKER_02]: not as strong as us, a lot of people investing. No, I think a lot of Canadians are very, very heavy

[00:38:34] [SPEAKER_01]: into Canadian stocks. I mean, from the case of the Canadian element side of things, like again,

[00:38:43] [SPEAKER_01]: a lot of people, when I say that indexing is not the best in Canada, which if you want to index again,

[00:38:48] [SPEAKER_01]: that's perfectly fine. I'm not going to tell you how to invest, but a lot of people assume that I'm

[00:38:53] [SPEAKER_01]: telling people to chase individual stocks, but there is a ton of funds in Canada that are not broad

[00:38:59] [SPEAKER_01]: based index funds that have performed quite well. And I do think that ZLB is one of them.

[00:39:04] [SPEAKER_01]: When you look at something like XIC, which is, it's a gigantic, I think it's got 13 billion in AUM,

[00:39:12] [SPEAKER_01]: but this is like a broad TSX composite ETF from iShares. When you buy this, you're getting 20%

[00:39:19] [SPEAKER_01]: energy exposure, 13% basic material exposure and 31% exposure to financials. So I mean,

[00:39:26] [SPEAKER_01]: nearly 65, 65 to 70% of the fund is what I would say is pretty cyclical. That's why I personally like

[00:39:35] [SPEAKER_01]: a factor fund like ZLB and it's, it's a low volatility fund. So pretty much it aims to target

[00:39:41] [SPEAKER_01]: low volatility stocks with low beta on the Canadian market, which is for the most part,

[00:39:47] [SPEAKER_01]: most part, the bulk of Canadian blue chip stocks are typically lower volatility. In my opinion,

[00:39:53] [SPEAKER_01]: the fund is more well-rounded, contains a basket of Canadian stocks that are, there's 0% energy

[00:40:01] [SPEAKER_01]: exposure, 6% basic material exposure and under 20% financial exposure. The one thing, again, a lot of

[00:40:07] [SPEAKER_01]: Canadian index funds are absolutely loaded with these three sectors just because that's what the

[00:40:12] [SPEAKER_01]: bulk of our index is made up. It's not exactly the funds exposure, it's just how the index is built.

[00:40:17] [SPEAKER_01]: And when we look to the 10 year returns on ZLB, ZLB has been around for a long time. I believe 2010

[00:40:23] [SPEAKER_01]: or 2011, it came out. It has outperformed XIC by more than 3% annualized. There was a short period of

[00:40:30] [SPEAKER_01]: time in 2021, 2022, where XIC did quite well relative to ZLB just because of the energy boom. But for the

[00:40:37] [SPEAKER_01]: most part, it's been, you know, the better fund to own since its inception. I mean, even if we go back to

[00:40:43] [SPEAKER_01]: its 2011 inception, it's outperformed XIC by about 3%. And 3% annualized returns over the period of 15

[00:40:52] [SPEAKER_01]: years is, it's quite a bit. Again, much like HXS and even FEQT, I do get a lot of, well, the fees are

[00:40:59] [SPEAKER_01]: way higher. And again, it's really important you look at fees net of performance. I mean, I find a bit

[00:41:05] [SPEAKER_01]: of a similar situation where people do absolutely everything they can to mitigate taxes, sometimes

[00:41:10] [SPEAKER_01]: to the point where they even, you know, they're paying less, but they have less money overall in

[00:41:14] [SPEAKER_01]: their pocket. In the end, fees net of performance is optimally the best way you want to look at things.

[00:41:19] [SPEAKER_01]: And, you know, despite having six times the fees of something like XIC, I believe ZLB is 0.35 to 0.4

[00:41:28] [SPEAKER_01]: basis points, whereas XIC is like 0.05 or five or six basis points. It has outperformed it by,

[00:41:37] [SPEAKER_01]: you know, quite a wide margin. And again, I mean, because of its low volatility nature,

[00:41:42] [SPEAKER_01]: it doesn't have any energy and it doesn't have a lot of top-end Canadian technology options. I mean,

[00:41:50] [SPEAKER_01]: when you look to Constellation Software and Shopify, it wouldn't contain these two options just because

[00:41:56] [SPEAKER_02]: they're not low volatility. How could you damn? Energy, you know? And now Burden, not like,

[00:42:03] [SPEAKER_02]: you know, talking about an ETF that has no energy exposure. I think they'll probably get you out of

[00:42:11] [SPEAKER_01]: Alberta with pitchfork. Yeah, the energy sector has, you know, it's well loved here, but I mean,

[00:42:19] [SPEAKER_01]: in terms of investment returns, there's been very few years where it's ever turned out to be

[00:42:23] [SPEAKER_01]: a strong investment, which is, you know, that's probably like a huge driver of ZLB over

[00:42:28] [SPEAKER_01]: a broader based index fund is the struggles of like Canadian energy and material stocks to a certain

[00:42:35] [SPEAKER_01]: extent. I mean, right now gold is doing quite well, but historically it hasn't really done all

[00:42:40] [SPEAKER_01]: that well. I mean, the one thing about this fund is it's pretty easy if you do want energy and

[00:42:46] [SPEAKER_01]: technology exposure. I mean, there's plenty of ETFs in Canada that, you know, while we have one,

[00:42:51] [SPEAKER_01]: I believe it's one tech ETF. And I think that's XIT, which is pretty much a Shopify and Constellation

[00:42:57] [SPEAKER_02]: ETF. Exactly. I think that's just, I'll be honest, like just that's stupid to buy that ETF. I'll just

[00:43:03] [SPEAKER_02]: say it. Like you're better off just buying the hand, like two, three names that are part of the ETF. If

[00:43:09] [SPEAKER_02]: you wanted that kind of exposure, I think you're just paying for the fees at that point. Yeah.

[00:43:13] [SPEAKER_01]: And the one, I guess the one benefit of XIT prior to something like WellSimple, or I believe

[00:43:19] [SPEAKER_01]: even interactive brokers is before fractional shares. I mean, I think even before Shopify

[00:43:26] [SPEAKER_01]: split, it was quite expensive. So like if you were an individual investor and you didn't want to pay,

[00:43:31] [SPEAKER_01]: you know, whatever it was pre fractional trading, $1,500 for a share of Constellation or whatever,

[00:43:37] [SPEAKER_01]: you could, you could buy XIT, which again is like, it's got to be 50 or 60% towards those two

[00:43:43] [SPEAKER_01]: companies. Cause I think it, I think it is market cap weighted. So obviously those are probably two of

[00:43:49] [SPEAKER_01]: the only sizable tech companies in Canada, besides maybe like CGI or something like that. But

[00:43:54] [SPEAKER_01]: I mean, there's ways to, if you do want energy or technology, I mean, there's ways to own ZLB and

[00:44:01] [SPEAKER_01]: pretty easily get that, that exposure. But yeah, I mean, obviously future returns are never guaranteed,

[00:44:07] [SPEAKER_01]: but this is an actively managed factor fund with, you know, nearly 15 years of, of outperforming

[00:44:15] [SPEAKER_01]: the index. So I definitely think it's one that a lot of people could put on their radar if they want.

[00:44:20] [SPEAKER_02]: No, I think that's a good overview. Again, those are not funds I was super familiar with. Well, not

[00:44:25] [SPEAKER_02]: the first, not the first couple of them. And then while the, I was familiar with the Fidelity one,

[00:44:31] [SPEAKER_02]: but not the first one, that's for sure. And then the ZLB not very familiar with it either,

[00:44:37] [SPEAKER_02]: but I think it's some interesting funds for people to look into if they're looking for that

[00:44:41] [SPEAKER_02]: kind of exposure. Definitely in Canada, I think you have to be a bit more selective when you

[00:44:46] [SPEAKER_02]: look at index funds. I mean, if you like what the index has, by all means, and that's one of the

[00:44:52] [SPEAKER_02]: things where we've been critical are fees, you know, on this podcast, Brayden and I, and I think

[00:44:57] [SPEAKER_02]: you as well, you know, we're pretty critical of fees. And I think listeners have to remember that

[00:45:02] [SPEAKER_02]: oftentimes we're also talking about closet indexing, especially what's being offered by the big banks

[00:45:09] [SPEAKER_02]: through their mutual funds that will often charge above a percent in terms of fees when you can have

[00:45:15] [SPEAKER_02]: almost the exact same fund through an index ETF for a few basis points in terms of fees. And that's

[00:45:23] [SPEAKER_02]: where I think it's really important to focus on fees. But if you have something, you know, 35, 40%

[00:45:29] [SPEAKER_02]: fees, ZLB, for example, those are pretty reasonable fees. I don't think it's overly high, especially when

[00:45:36] [SPEAKER_02]: you look at the overall total returns for the performance over the last 10 years, then you can say,

[00:45:40] [SPEAKER_02]: okay, I think the fees are justified here. And I think it's, I just wanted to mention that because I

[00:45:46] [SPEAKER_02]: think we do harp on fees a whole lot, I think for good reasons, but it's not the only thing you should

[00:45:52] [SPEAKER_02]: be looking at. It's one part of it. But what, you know, again, our biggest criticism is those mutual funds

[00:45:59] [SPEAKER_02]: that are being sold as, you know, super high fees and not providing much value versus what the index

[00:46:06] [SPEAKER_01]: would at a much lower cost. Yeah, pretty much. I mean, you have to weigh the overall performance of

[00:46:12] [SPEAKER_01]: those funds and see if, you know, saving, you know, going to an ETF can, can save you some money.

[00:46:18] [SPEAKER_01]: I mean, in terms of the one thing I'll mention in terms of returns for ZLB, because I know a lot of

[00:46:22] [SPEAKER_01]: people would be like, oh, well, the, you know, it's outperformed the index, but the returns,

[00:46:26] [SPEAKER_01]: you know, it's a Canadian market. I mean, it has put up nearly 12% annualized since, since 2011.

[00:46:32] [SPEAKER_01]: So it's not, uh, it's, it's a pretty strong performing fund. I mean, obviously not as good

[00:46:38] [SPEAKER_01]: as the S&P, but some could argue that will the S&P continue to put up the returns? It has been,

[00:46:45] [SPEAKER_01]: especially with the concentration right now in big tech and the run-up in them. So,

[00:46:49] [SPEAKER_01]: I mean, it's, I like it. I think it's one of the, uh, the better Canadian ETFs out there.

[00:46:54] [SPEAKER_02]: Oh, well, that's, um, that was good, Dan. I appreciate that. I know you do a lot of

[00:46:58] [SPEAKER_02]: research for ETFs, so I think our listeners will appreciate that as well. I think that's, uh,

[00:47:04] [SPEAKER_02]: that's a great point to wrap it up. I hope people enjoyed the episode. Um, like, uh, we always try

[00:47:11] [SPEAKER_02]: to say and remind you, if you can take the time, if you haven't done so, give us a review, a five-star

[00:47:16] [SPEAKER_02]: review on Apple Podcasts or Spotify, talk to a friend or family member that's interested in learning

[00:47:22] [SPEAKER_02]: about, uh, investing a bit more. That's how we grow the podcast. And lastly, you can find me at

[00:47:29] [SPEAKER_02]: fiat underscore iceberg on X slash Twitter, and then at stock trades underscore CA. Perfect. I

[00:47:37] [SPEAKER_02]: remembered, but it's, it's better when you say it. So, um, so yeah, thanks again, everyone for

[00:47:42] [SPEAKER_02]: listening. We'll see you soon. The Canadian investor podcast should not be construed as investment or

[00:47:48] [SPEAKER_02]: financial advice. The hosts and guests featured may own securities or assets discussed on this podcast.

[00:47:55] [SPEAKER_02]: Always do your own due diligence or consult with a financial professional before making any financial

[00:48:02] [SPEAKER_02]: or investment decisions.