Portfolio Rules, Hedging Strategies, and Leveraging a Weak Loonie

[00:00:01] 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] Welcome back to The Canadian Investor Podcast. I'm here with Dan Kent. We are back for our first episode of the new year, so happy new year to everyone, to Dan as well, to you too.

[00:00:25] Yeah, happy new year.

[00:00:26] Yeah, happy new year. So we decided to do a mailbag episode today, so we had a lot of questions coming by email, Twitter, also Blossom.

[00:00:36] So some fun questions kind of all over the place. It'll be fun to discuss that, mainly because it's a bit more quiet on the investment front, on financial and use front.

[00:00:45] So we decided it was just a good opportunity to answer some questions. Of course, there's the big political news that came yesterday.

[00:00:53] We're recording this on the 7th. So yesterday with Trudeau announcing that he was stepping down.

[00:00:58] So I feel like that's what most people were probably paying attention to yesterday and probably for the next few days, what happens there.

[00:01:06] But enough of that. Anything else you want to add before we get started?

[00:01:10] No, that's what I mean. There's not much going on right now. I think we have a Ritzia in a few days, which I imagine we'll go over next week.

[00:01:17] But that's about it on the on the Canadian side of things. I think they report on January 9th. And yeah, it's it's really quiet right now.

[00:01:24] Yeah. Aside from soft choice being acquired.

[00:01:27] Oh, yeah. 31st before the day before the day before the bold predictions from last year.

[00:01:32] But Brayden and I already talked about that. So don't we don't need to discuss it.

[00:01:36] But I will tell them again, you know, props on the bold prediction. It's pretty hard to get them right. Right.

[00:01:42] So yeah. Oh, yeah. Mine, I think with the Canadian dollar might be in danger already because we're it's, you know, creeping back up to 70 cents now.

[00:01:49] We'll see. We'll see. It's there's still what? It's a long way to get and fifty eight days left to the year.

[00:01:56] So I think there's time. There's time. But let's start. We have quite a few questions.

[00:02:00] So the first one, Dan, you'll lead this one. So it's question from the bib on blossom.

[00:02:07] So would would like to know if any of you have rules for assets, sector, geography and company size.

[00:02:15] Of course, when investing, I think mostly probably referring mostly to equities, but he is saying I kind of figured so.

[00:02:24] Yeah. Well, I think. Yeah. I think when he says assets, he kind of means, you know, equity, fixed income or they kind of mean equity.

[00:02:31] Yeah. But I mean, to answer this, the one of the most important things to know from, you know, this perspective is my allocations may not be right for you.

[00:02:43] Mm hmm. And your friends allocations may not be right for you. I mean, it all depends on the individual.

[00:02:50] I mean, I know plenty of people who run large all equity portfolios and they own, you know, six to eight companies and they're completely fine with that.

[00:02:59] Yeah. And I think that while the thought of me doing that, you know, having most of my liquid assets, which would be, you know, in equities right now, tied up in six to eight companies, that would make me fairly nervous.

[00:03:09] So I do own I believe right now I own twenty five, maybe a little bit more, give or take twenty five.

[00:03:15] I mean, and just to add to what you're saying, like none of this will be financial advice or investment advice.

[00:03:21] So this is just our take on it. And of course, I mostly usually we'll kind of do it as, you know, I'll talk about after that what I do in terms of, you know, asset allocation sectors, geography and so on.

[00:03:34] And so this is more what we would do. So take this, you know, don't take this investment advice.

[00:03:40] Yeah. There's so many things from, you know, a risk tolerance perspective, a taxation perspective, things like that, that can make this, you know, everybody's individual portfolio will need to be structured, you know, towards them.

[00:03:53] So, I mean, this question is strictly focused on what Simone and I do personally.

[00:03:58] So I try to limit equity exposure, any single exposure to about five percent of my portfolio and I limit any particular sector exposure to 20 percent.

[00:04:09] So like a prime example with this, a prime example for this would be at the end of 2024, I ended up trimming back a few financial holdings because, I mean, I had a ton of financial stocks just off the top of my head.

[00:04:21] I can think Royal Bank, National, Equitable, Intact Financial, Berkshire, all that Brookfield.

[00:04:27] So my financial sector had kind of ballooned in my portfolio.

[00:04:32] So I did trim some of that back.

[00:04:34] I mean, some people don't rebalance.

[00:04:35] I tend to rebalance once a year.

[00:04:37] And then from a geographical standpoint, I own about 55 percent U.S. stocks, 45 percent Canadian.

[00:04:43] However, the bulk of my Canadian equities are primarily U.S. operators.

[00:04:47] I own very few stocks whose majority revenue is generated in Canada.

[00:04:53] I mean, right off the top of my head, I can think of probably Telus would be one of the only ones that I own that doesn't have a ton of exposure south of the border.

[00:05:00] I don't really have any sort of strict limitations on company size either.

[00:05:05] At this point in time, around 15 percent of my portfolio is small caps.

[00:05:09] I would imagine that would be on the high side of things if I were to just take a guess.

[00:05:13] However, if I found more opportunities, I would simply add them.

[00:05:16] I would be fully comfortable with a higher level of my portfolio in small caps.

[00:05:21] But I mean, the bulk of it is larger mega cap U.S. stocks or cryptocurrency.

[00:05:27] So out of my 10 largest holdings, seven of them are U.S. equities.

[00:05:32] One of them would be my Bitcoin ETF and two of them are Canadian stocks.

[00:05:35] So as someone who easily has, you know, multiple decades of accumulation left, I am all equity.

[00:05:43] And I do believe there's quite a few Canadians that are exposed heavily, you know, sometimes to their detriment to Canadian equities.

[00:05:50] I mean, obviously, you know, we account for I believe it's around 2 percent of the global economy in terms of GDP output.

[00:05:55] Yet, you know, I've seen numerous Canadians, sometimes, you know, multi six figure or even second seven figure portfolios just allocated solely to Canada.

[00:06:04] As a result, you know, they're heavily exposed to industries like financials, utilities, energy, all of which are pretty, you know, heavy cyclical and is one of the main reasons the S&P 500 has done so much, you know, so much better than the TSX over the long term.

[00:06:20] I mean, obviously, they have high level tech, whereas we don't as well, which is driven a ton of the results.

[00:06:25] But and again, you know, as you had mentioned at the start, I mean, too many people rely on generic information in this regard.

[00:06:31] Your risk tolerance, your financial goals, your time horizon, your tax situation, all that type of stuff can change this drastically.

[00:06:39] No, exactly. So I think essentially like it's it's a bit I guess for me, it's somewhat different because you primarily invest in equities.

[00:06:49] Right. For me, it's a bit more diversified if you look at kind of asset classes, although I do I do have some concentration in that one specific asset class.

[00:06:58] Yes. So I do have kind of the way I look at it, my framework without that being like rules per se.

[00:07:05] So I have like a target waiting. I have talked about this before last year.

[00:07:09] I did talk about this. So I'm looking for equities to be four to 50 percent of my portfolio.

[00:07:15] Bitcoin, 20 to 40 percent. The range is so big for Bitcoin, mainly because of the volatility.

[00:07:20] So I don't want to put, you know, I want it to be between 22 and 25 percent because then if I decide, you know what, I need to trim if it gets above that or add if it gets below.

[00:07:32] I mean, Bitcoin is so volatile that I'm going to constantly be playing with that position.

[00:07:37] That's not what I want to do.

[00:07:39] Now, I also have fixed income. I call it fixed income, but it is short term treasury bills, mostly U.S. treasury bills.

[00:07:47] So that's my cash and cash equivalent, but it does generate income.

[00:07:50] My target waiting for that is 15 to 20 percent.

[00:07:53] And now and the last two years.

[00:07:56] So precious metals, mostly gold.

[00:07:59] I've had I've had a little bit of silver as well, but it's mostly gold, five to 10 percent.

[00:08:04] And then Ethereum, which is another cryptocurrency, two to five percent.

[00:08:08] Again, Ethereum is something I've hold for a long time.

[00:08:11] I don't have the same conviction as Bitcoin.

[00:08:13] So that's why it is lower.

[00:08:15] But again, it is a pretty big range.

[00:08:17] Two to five may not sound like it, but for a smaller allocation, it's a pretty big range here.

[00:08:22] That's the reason behind it.

[00:08:24] Now, they are.

[00:08:27] I'm flexible in my approach.

[00:08:28] I don't want to be too rigid.

[00:08:30] But from a geographical perspective, I do try to limit my exposure to Canada.

[00:08:35] My main reason here is I don't I do not want to be too heavily weighted towards Canada since my income comes primarily from Canada.

[00:08:44] Same for my wife.

[00:08:45] So our household income is mostly dependent on the Canadian economy.

[00:08:48] So I wouldn't want our portfolio to be also vastly dependent on the Canadian economy.

[00:08:54] And I think that's something we talked.

[00:08:56] We actually have talked about that in the past multiple times.

[00:08:59] But I think that's something a lot of people forget is they have their income very dependent on the Canadian economy and then their portfolios like 80 percent Canadian stocks that are, you know, financials or companies that do a lot of business in Canada.

[00:09:14] Yeah, I think that the one thing that a lot of people might mix up is, you know, there's a lot of Canadian stocks that don't operate a lot in Canada.

[00:09:23] Yeah.

[00:09:24] So, I mean, it's not just Canadian stocks in general.

[00:09:27] It would be, you know, Canadian stocks that are heavily focused in Canada.

[00:09:31] Yeah.

[00:09:31] Like Canadian Tire is a good example.

[00:09:33] Yeah.

[00:09:33] Exactly.

[00:09:34] That's like a pure play Canadian stock or the telecoms, things like that.

[00:09:39] But then you look at, I'm trying to think of a company.

[00:09:42] Even the banks.

[00:09:42] I mean, even the banks.

[00:09:44] Yeah.

[00:09:44] To a certain extent.

[00:09:45] But yeah, Canadian stocks does not generally mean, you know, Canadian economy.

[00:09:50] Or on the opposite side, Shopify, right?

[00:09:53] I don't know their revenue breakdown, but I'm going to assume that Canada is quite a small portion of their revenues because they've grown so much outside of Canada.

[00:10:01] But so for that reason, I have exposure to equities outside of Canada in big part because I have 20% of my portfolio in the XAW ETF.

[00:10:11] So it's all world excluding Canada.

[00:10:14] Still heavily weighted towards the US, but not as much.

[00:10:17] Definitely a lot less than an S&P 500.

[00:10:20] So, yes, you do have the weighting towards the big names because the US is still, I think I'm just going on memory, around 60% of the holdings, maybe 70%.

[00:10:29] And the rest is the rest of the world.

[00:10:31] But the fact that it's only 20% of my portfolio on one hand also allows me to not be too concentrated in, you know, the MAG 7, for example.

[00:10:41] In terms of sector, I don't have any specific rules regarding that.

[00:10:45] I tend to be look at things on definitely on contrarian basis a lot of the time.

[00:10:51] So I like to look for sectors that are out of favor and look for some good companies in those sector.

[00:10:56] But I use individual holdings oftentimes to get more exposure to a specific sector.

[00:11:02] And those two that come to mind is oil and gas.

[00:11:05] So I own Termaline and Canadian Natural Resources.

[00:11:09] So I can probably, I'm just going on top of my head, like these two companies are probably a bigger portion of my portfolio than an Apple through my index funds, just for context here.

[00:11:19] And my rules are more quality and valuation based.

[00:11:22] So I'll be very reluctant to invest in companies that are not profitable.

[00:11:26] So that will probably remove a big chunk of the micro and small cap companies.

[00:11:31] Although I do know there's a lot of small cap companies that are profitable, but especially the micro cap, it's not as often.

[00:11:38] And definitely, you know, you don't, the level of profitability is not as common for small cap companies than larger companies.

[00:11:46] But I have no issues investing in them, whether it's small cap, mid cap, large cap, mega caps.

[00:11:51] If there are solid businesses, and I think there is a high probability of them achieving good returns going forward on a medium to long term basis.

[00:12:00] Yeah, it's well said.

[00:12:01] I mean, it's like I said at the start, I mean, you're 20 to 40 percent Bitcoin.

[00:12:06] And that's a prime example of how allocations are, you know, specific to the individual, because I personally would never be, you know, have that high allocation of Bitcoin.

[00:12:16] I know.

[00:12:17] And that's why it's so like individual specific.

[00:12:19] Like I, I would be so nervous with that.

[00:12:22] I mean, I, I have it, I think it's like 7 percent now.

[00:12:25] It was at 10 and I had to trim it back because I was like getting worried, which I mean, looks bad in hindsight, but.

[00:12:33] Yeah, yeah, exactly.

[00:12:34] Every time Bitcoin drops, you know, 10 percent Dan's Dan gets a cold.

[00:12:39] So I got to be careful.

[00:12:44] So the next one here is a listener question from Drew on Twitter.

[00:12:48] I did answer Drew kind of short form, but I thought it was a really good question because I think sometimes people will confuse that a little bit.

[00:12:55] So I kind of rephrase the question, but say someone bought VO, which is a U.S. listed S&P 500 ETF.

[00:13:03] So U.S. listed U.S. dollar.

[00:13:05] And when the conversion rate from USD to CAD favored the Canadian dollar much more than it does right now.

[00:13:13] So the Canadian dollar was much stronger than it is currently trading.

[00:13:17] Would it make sense to sell VO then put the proceeds to a CAD denominated S&P 500 ETF?

[00:13:24] So essentially, if you believe that CAD will strengthen against the U.S. dollar, it would not make sense to do this unless it is a Canadian hedge S&P 500 ETF.

[00:13:36] Something like VFV, which is not hedge, although it will be denominated in Canadian dollar, it will benefit from a weaker Canadian dollar versus USD.

[00:13:47] So your return will be boosted by that because that's because the underlying assets are still U.S. dollar based or U.S. dollar denominated assets.

[00:13:57] So essentially what VFV does versus VO is that it converts it to CAD automatically for you versus VO, you just have to do the calculation with whatever the exchange rate is right now.

[00:14:10] And then you do the calculation manually.

[00:14:12] So that's essentially the only difference.

[00:14:14] So I would say if that's what you were thinking of doing, then no, that would not make sense.

[00:14:19] That would make no sense at all.

[00:14:21] But if you're looking to take advantage of a straightening Canadian dollar and want to stay invested in the S&P 500, then what you'd have to do is look at something like a Canadian hedge version of an S&P 500, whether it's a ZUE from BMO ETF or VSP from Vanguard.

[00:14:38] I think BlackRock also has one with the hedge versions.

[00:14:42] If the Canadian dollar straightened, then you would have minimized, you would minimize the downward pressure that a stronger Canadian dollar would have on your U.S. denominated assets for your returns.

[00:14:54] I know it's a little bit confusing, but let me give an example here.

[00:14:59] So say you have $100 Canadian worth of an S&P 500 ETF.

[00:15:04] The S&P 500 ETF is flat for the year when thinking about it in U.S. dollars only.

[00:15:10] So it's traded in the U.S.

[00:15:12] You're thinking about it in U.S. dollar.

[00:15:13] Let's just say you're an American for the fun of it.

[00:15:16] Now, say $1 USD was $1.44 Canadian at the beginning of the year.

[00:15:21] And at the end of the year, the Canadian dollar strengthened significantly and went to $1 USD to $1.35 Canadian.

[00:15:31] Now, despite and I'm just, you know, when Dan talked earlier, he was just kind of talking the opposite sense.

[00:15:37] So he was converting a Canadian dollar to the U.S. dollar.

[00:15:40] So that's why people maybe get a little bit confused here with the exchange rate.

[00:15:44] Yeah.

[00:15:44] Now, despite the S&P 500 being flat for the year, in Canadian dollar, your $100 is now worth $93.75 because the U.S. dollar weakened during the year.

[00:15:55] Now, if you have the Canadian hedge version, then your $100 will be worth $100.

[00:16:01] I say about $100 because it's impossible to hedge perfectly with these types of ETFs.

[00:16:07] So keep that in mind.

[00:16:08] There is also fees usually.

[00:16:10] They'll have slightly higher fees because of the hedgings that they put in place.

[00:16:14] But yes, the hedging would allow you to kind of essentially it zeroes out or tries to zero out the currency effects.

[00:16:22] But that would be a way to do it if you're thinking that the Canadian dollar would straighten.

[00:16:29] Yeah, that would be pretty much the reasoning for doing this is if you bought it high, it's fallen now, and now you believe the Canadian dollar will rise.

[00:16:40] That's when you would want to go back and buy that hedged Canadian fund.

[00:16:45] I mean, it's pretty much a play on the currencies overall because with unhedged ETFs, you own the currency and you own the underlying holdings.

[00:16:55] Whereas with a hedged ETF, you just own the underlying holdings.

[00:16:58] They will be able to offset those currency fluctuations to a certain degree, like you said, outside of fees.

[00:17:06] And it's not perfect in every regard either.

[00:17:09] But yeah, you ultimately, if you're going unhedged, you would benefit from a falling Canadian dollar.

[00:17:15] Whereas if you were going hedged, you would technically benefit from a rising, a strengthening Canadian dollar.

[00:17:22] I mean, you wouldn't have any sort of financial benefit.

[00:17:24] You would just be prevented from the foreign exchange loss.

[00:17:28] Yeah.

[00:17:29] Yeah, and look, at the end of the day, when the underlying assets are in another currency, you're going to have currency fluctuations unless you buy the hedge version.

[00:17:41] And again, it's not perfect.

[00:17:43] And to go back to the initial question, the last thing I would be very careful.

[00:17:47] And of course, you know, this again, it's not investment advice.

[00:17:50] But the last thing I would be careful here is if you have a VOO, you know, you have it in US dollars.

[00:17:57] So if you're looking to purchase something like VFV or one of the hedge version like ZUE or VSP, well, these are all Canadian dollar denominated ETFs.

[00:18:11] So you are going to have to convert your USD to Canadian dollar depending on the fees that you pay.

[00:18:16] Like you could pay a decent amount in fees in conversion fee.

[00:18:20] So keep that in mind.

[00:18:21] If you keep going back and forth, there's Norbert's Gambit that can help you save on that.

[00:18:26] But even with that, you'll pay some small fees depending on the sums that you're doing.

[00:18:31] So, you know, it's always something to keep in mind because you will have to pay fees when you start converting.

[00:18:36] So it will eat into your return, even if you make the right call in terms of where the currency goes.

[00:18:44] Yeah, exactly.

[00:18:45] Like we have if you're with a platform like WellSimple, let's say, for example, I think it's one and a half percent that you would pay, you know, to get that US dollars into Canadian.

[00:18:54] So it all depends.

[00:18:55] I mean, I did it with the Bitcoin ETF I owned.

[00:18:59] But that's because the fees were, you know, I almost saved in a year, calendar year, the fees as it would cost me to currency convert.

[00:19:08] So, I mean, it's very hard to predict, you know, currency fluctuations.

[00:19:13] So it's the idea, the premise of it is right.

[00:19:16] If you believe that the Canadian dollar will strengthen, that is technically what you would do to benefit from that strengthening.

[00:19:23] But it's never a guarantee.

[00:19:25] Yeah.

[00:19:26] And also at that point, sometimes, too, it's just like if you want to really start trading based on currency, I mean, trading current like FX trading is not easy to do.

[00:19:37] Like, just keep that in mind.

[00:19:38] Like, there are so many variables that will impact currencies.

[00:19:41] So, anyways, just kind of, you know, just a disclaimer because it's not something I venture into.

[00:19:49] I just have my conviction is I have more conviction in the US dollar than the Canadian dollar.

[00:19:53] That's it.

[00:19:54] That's my conviction.

[00:19:54] It's worked out well for me to have more be more heavily weighted in the US dollar in general.

[00:20:00] But if the Canadian dollar goes up this year, that's fine.

[00:20:05] I'm fine with that.

[00:20:06] It's okay.

[00:20:07] Like, I don't, it's not, I'm not going to be chasing that.

[00:20:10] I prefer, I will keep my money, most of my money in what I have the most conviction in.

[00:20:15] Yeah.

[00:20:15] That's well put.

[00:20:17] Do you want to move to the CDR one?

[00:20:19] Because that actually, like, it plays in well with this type of question as well because the CDRs could become more popular if the Canadian dollar does get weaker.

[00:20:28] But this was, um, and by the way, CDRs are Canadian depository receipts for those.

[00:20:35] So, um, I'm sure you'll explain how it goes.

[00:20:37] So have at it.

[00:20:38] Yeah.

[00:20:39] Yeah.

[00:20:39] They're effectively like in a nutshell, they're a way to own US stocks and Canadian dollars.

[00:20:46] So they're, they're operated by CIBC and I believe they trade on the NIO exchange.

[00:20:50] Yeah.

[00:20:50] Or I think now it's like it got bought by something else.

[00:20:54] Um, I think it got bought by CDOE.

[00:20:57] It did.

[00:20:58] Yeah.

[00:20:59] Okay.

[00:20:59] But I think they still trade under the ticker like dot any.

[00:21:02] Oh, okay.

[00:21:03] I think.

[00:21:03] Yeah.

[00:21:03] But I'm not a hundred percent sure.

[00:21:05] It depends on your brokerage.

[00:21:06] But, um, so effectively what they'll do is they'll hold the, the stocks in trust.

[00:21:12] And then these all, they started out trading at like $20 a unit or sometime or something like that.

[00:21:18] So effectively you own, you own a fractional share or a whole share or whatever of the US stock trading in Canadian dollars.

[00:21:25] So the decision to buy them versus a US stock can, you know, come down to a combination of things.

[00:21:32] So the first one would be, again, as we talked about above would be your, your overall thoughts on the trajectory of the dollar.

[00:21:39] So ultimately these CDRs, I guess I should mention they're, they're hedged.

[00:21:44] So they don't charge any sort of fee for the CDR itself, but there is a 0.6% hedging fee, maximum hedging fee that can be charged per year.

[00:21:56] So some years you won't be charged this because it doesn't cost that much to hedge.

[00:22:00] Whereas some years you, you will be charged that point, that full 0.6% will, which will just be reflected in the total return of the fund, but they are hedged.

[00:22:08] So ultimately you hedge yourself, you hedge to protect yourself from a strengthening US dollar, uh, strengthening Canadian dollars.

[00:22:16] Sorry, because a weakening Canadian dollar only benefits you if we're talking in Canadian dollar terms.

[00:22:21] So let's say I'm just going to bring a company I know that has a CDR Starbucks.

[00:22:26] I know they have a CDR.

[00:22:27] So if you owned Starbucks in US dollars, you would benefit on a Canadian dollar basis if the dollar weakened.

[00:22:35] Whereas if you own the CDR, you would benefit if the Canadian dollar strengthened.

[00:22:41] So, I mean, it does sound like this type of hedging.

[00:22:44] It's, it's very confusing, like just trying to read this and digest it all.

[00:22:48] But ultimately, if you bought US dollars at 70 cents, you would benefit on a Canadian dollar basis if the Canadian dollar fell to 65 cents.

[00:22:57] But you'd be negatively impacted if it went to 75 cents.

[00:23:01] So with hedging, it's kind of the reverse.

[00:23:03] You would benefit if the dollar went to 75 cents because you wouldn't have that foreign exchange loss.

[00:23:09] And you'd be in a worse position if the dollar fell to 65 cents because you wouldn't realize the FX gain.

[00:23:16] So it's kind of swapped it.

[00:23:17] I mean, you wouldn't have lost any dollars on an absolute basis, just not gain the dollars as if you were on hedge.

[00:23:23] So from that standpoint, if you don't like the fluctuations of the currency, you could certainly buy a CDR.

[00:23:30] I mean, I do believe, however, though, a lot of people own these as they view it as more convenient and don't take in, you know, a lot of these factors.

[00:23:36] They either don't want to pay the currency conversion fees or they just don't like the idea of exchanging their Canadian dollars for less money.

[00:23:44] The difficulty here is...

[00:23:46] Or I guess one as well is because the price, the actual like price per share is much lower than the US shares they're representing.

[00:23:56] So for those who don't have fractional trading and have smaller amounts to invest, it can make sense there too.

[00:24:02] Yeah, I didn't even think of that.

[00:24:04] But yeah, that's another element of it.

[00:24:06] Yeah, Dan's like just, you know, flowing in money, just, you know, dollar bills everywhere.

[00:24:10] I didn't even think of that.

[00:24:11] No, I'm on fractional trading.

[00:24:13] No, no, I know.

[00:24:16] But yeah, I mean, I think a lot of people, I don't know why, but they don't like exchanging to US dollars.

[00:24:22] And there could be a valid reason for this as well.

[00:24:25] But I think like a lot of people just, you know, they don't like to pay the fees.

[00:24:28] They don't like having, you know, less dollar value, even though the currency is stronger.

[00:24:34] I mean, right now it is.

[00:24:35] Yeah.

[00:24:35] But you are paying 0.6% maximum, maximum per year to own these funds.

[00:24:43] And that does allow you to be hedged.

[00:24:46] And, you know, it does even out those currency fluctuations.

[00:24:48] But over the long term, the fluctuations have kind of, you know, effectively evened out over the long term.

[00:24:56] So if you owned one of these for the long term, you might have ended up paying that 0.6% fee every single year for effectively nothing.

[00:25:04] If you bought it today and 10 years down the line, the dollar was at 70 cents.

[00:25:09] I mean, you've paid that fee to possibly mitigate your, you know, volatility over that 10 year period.

[00:25:15] But effectively, you're at the exact same spot you were.

[00:25:17] So this would be the main downside.

[00:25:20] However, there definitely is some situations where they would provide some upside.

[00:25:24] So the first would be that, you know, if you're a Canadian retiree and one that utilizes the Canadian dollar as your main form of currency,

[00:25:31] in this case, buying U.S. stocks can be a bit of a nuisance because, I mean, if you're never using the U.S. dollars,

[00:25:38] if you're not a snowbird, you never go down to the U.S., you're constantly converting that U.S. dollar dividend.

[00:25:43] Prime example, I'll use Starbucks again.

[00:25:45] If you own the U.S. stock, you would get U.S. dollar dividends.

[00:25:48] Whereas if you own the CDR, it would be Canadian dollar dividends.

[00:25:51] So you would have to convert that back to Canadian dollars, whether, you know, it would be those dividends or sold capital gains,

[00:25:58] which that can cost you fees as well.

[00:26:00] Again, with the CDRs, the currency is Canadian.

[00:26:02] There's no need to convert and all the Canadian dividends paid out to you.

[00:26:06] So in that situation, it kind of makes sense.

[00:26:09] And as a retiree, you probably wouldn't want to be exposed to the currency fluctuations either.

[00:26:14] So hedging makes a bit more sense, in my opinion, when your time horizon is shorter.

[00:26:19] And then the second reason would be the situation where right now is the Canadian dollar is at abnormal lows.

[00:26:27] I mean, sub 70 cents is pretty, you know, it's pretty rare.

[00:26:32] With the resignation of Trudeau, obviously, we're seeing the dollar pop a bit.

[00:26:35] But when the dollar does get to abnormal lows, buying U.S. dollars at that point may not really fit in with the currency fluctuations tend to even out over the long term situation.

[00:26:45] So hedging yourself to a rising Canadian dollar can certainly make sense.

[00:26:49] I mean, if the Canadian dollar was at 65 cents, one could argue that it might not be the best opportunity to buy U.S. dollars.

[00:26:56] And you might buy these CDRs because of the Canadian dollar were to rise.

[00:27:00] You would be kind of sheltered from that.

[00:27:01] So, I mean, in a single sentence, it depends.

[00:27:06] A lot of people criticize these products because of the fees and because of, you know, it's easy to criticize these as the dollar's gone on like a, what, we're on like a two and a half year slide of the Canadian dollar.

[00:27:17] Which ultimately, if you held the CDRs throughout that period, you've lost quite a bit on FX gains.

[00:27:24] Yeah.

[00:27:24] So, it's easy to criticize them now.

[00:27:26] But if the dollar, you know, rises over the next couple of years, then they tend to, you know, look like they have some value.

[00:27:34] No, I think nothing more to add there.

[00:27:37] Now, we'll go on for a question from Matthew J.

[00:27:41] So, Matthew sent us a question saying that he's recently reduced his holdings from 60 to 30 and aims to further reduce the number of holdings to be more concentrated.

[00:27:51] He wants to know if we have any recommendation on how to approach that.

[00:27:56] Of course, again, I'll have said it a few times, but it's not investment advice.

[00:28:00] But I will go over on what I did.

[00:28:02] So, I did last year reduce some of my holdings to get that essentially closer to 10 to 15.

[00:28:09] I had over 20 holdings.

[00:28:13] And for me, it was just too much to manage.

[00:28:15] So, the thing for me is just looking at my life.

[00:28:19] I have a busy life.

[00:28:20] I mean, between my family, the podcast, my work, staying active.

[00:28:25] I just don't have massive amount of time to keep up with tons of individual companies.

[00:28:30] Of course, we'll do earnings.

[00:28:32] You know, we'll talk about companies.

[00:28:33] But, you know, it's one thing to research a company at one point in time versus trying to stay on top on a regular basis.

[00:28:41] So, for me, it made sense to do a hybrid approach between individual company and some index ETFs.

[00:28:48] Although, I'm not against having some actively managed ETFs if I find some that are reasonable in fees and kind of offer what I'm holding.

[00:28:56] Now, it's more than that.

[00:28:58] Then, I just end up following some company essentially, you know, not as closely if I end up having too many holdings.

[00:29:07] Then, I looked at the holdings by percentage of my portfolio.

[00:29:11] So, that's how I started.

[00:29:12] So, I went, you know, all my holdings.

[00:29:15] I have a spreadsheet.

[00:29:16] I joined TCI viewers.

[00:29:17] I've seen that spreadsheet where we track our portfolios.

[00:29:20] So, I went biggest to smallest holding.

[00:29:23] And then, I decided that anything below 1%, I needed to be willing to add to that name in the near future.

[00:29:29] If not, then I went ahead and sold it.

[00:29:32] So, that removed a few names from my portfolio right there.

[00:29:35] If you have 30 names, clearly, there's probably going to be some that are smaller positions than others because, you know, you probably don't have 3.05%, whatever it is, per holding, right?

[00:29:48] So, it's something to keep in mind.

[00:29:52] Now, after that, I was just reviewing the names I had and ensuring that I still had conviction in the companies that I own going forward.

[00:30:00] I reviewed them one by one and I sold a few companies because after reviewing them, I just didn't have the same conviction.

[00:30:07] So, another thing to consider here that wasn't as applicable to me since I use a hybrid approach, you know, with stocks and ETF is how much concentration you want in a single holding.

[00:30:19] So, of course, like I mentioned earlier in your question, I do have a lot of concentration in Bitcoin.

[00:30:24] But for stocks, I don't have that much concentration.

[00:30:27] The only one that I really do are the index ETFs that I have, but those are pretty well diversified.

[00:30:34] Aside from that, I have around like 4% or 5%, I think, my biggest holding if I'm going on memory here.

[00:30:41] So, that's something that you'll want to establish.

[00:30:44] And like Dan mentioned for a previous question, you know, it will depend.

[00:30:48] Some people are fine with higher concentration.

[00:30:50] Some people are not.

[00:30:51] So, it really depends on you, what you're comfortable with and just understand that the more concentrated you are, the higher the risk is.

[00:31:00] Because, you know, with all other things being equal.

[00:31:03] But, you know, a lot of people will kind of push back when I say these type of things.

[00:31:08] But, you know, take Costco, for example.

[00:31:11] I think most people can agree that Costco is a fantastic business.

[00:31:15] But if you have 100% of your worth in Costco, I don't care how good Costco is.

[00:31:22] I'm sorry, but that's super risky.

[00:31:23] That is just risky because if there's an unforeseen event that happens that impacts Costco negatively, then you are like you're all in on that name itself.

[00:31:35] So, I think it's always important to remember that because sometimes people will say, you know what, I'm fine with having like a whole lot of concentration, this one or two, one name or two names because, you know, nothing bad will ever happen to these companies.

[00:31:48] Bad things can happen.

[00:31:50] Anything can happen.

[00:31:51] Yeah, anything can happen.

[00:31:52] And the more concentrated you are, the higher the risk is.

[00:31:57] Yeah, it's well said.

[00:31:58] I mean, I think 60 is definitely something you probably need to look to reduce.

[00:32:05] Yeah, exactly.

[00:32:06] I couldn't even imagine.

[00:32:08] Like, I own around 30 holdings.

[00:32:11] But I, like, this is 99% of the holdings that I own we cover over on our platform.

[00:32:18] So, I'm covering them every single quarter, keeping tabs on them all the time.

[00:32:22] And I also do this 40, 50 hours a week.

[00:32:25] Like, and that's a lot, 30 is a lot doing it that much.

[00:32:28] So, I mean, 60 would just be, you just can't keep up with that.

[00:32:33] And they keep in mind a lot of people like this, for you, it's your job, right?

[00:32:37] But people won't be, like, it won't be their job.

[00:32:39] So, it's not going to be easy.

[00:32:42] If you have a 9 to 5, I would say it is almost impossible for you to keep up accurately and, like, you know, on 30 equities.

[00:32:53] That would be a lot.

[00:32:54] So, I mean, yeah.

[00:32:56] And I believe they did.

[00:32:57] I'd have to look up the studies.

[00:32:58] But, like, in terms of diversification, I think once you get over 20 or 25 holdings, like, statistically, it doesn't really make that much of a difference.

[00:33:06] The more you go up.

[00:33:07] I think it can actually make things worse.

[00:33:10] I mean, I would have to look up that study.

[00:33:11] Well, you almost end up, like, being close to the index, right?

[00:33:15] Like, I think that's what ends up happening.

[00:33:17] So, yeah, you divorce-ify, I think is that.

[00:33:21] I divorce-ify.

[00:33:21] Yeah.

[00:33:22] That's what they say.

[00:33:23] But, no, I think we'll move on to the next one because this will be a long one where we have both some notes and we have two more questions to go.

[00:33:31] So, this one is a question from Jason.

[00:33:34] And then we'll take the lead.

[00:33:36] So, you want me to read it?

[00:33:38] Is that easier?

[00:33:39] Sure.

[00:33:39] You read it and I'll discuss.

[00:33:41] So, okay.

[00:33:43] So, Jason says, I've been listening to the podcast for a couple months.

[00:33:46] Show suggestion are these high-yield dividend ETFs from Harvest, Hamilton, and others.

[00:33:52] How safe are these?

[00:33:54] My concern is none of these ETFs have been through a bear market.

[00:33:59] I do not see how they are sustainable in periods of weakness.

[00:34:02] I would love to hear your thoughts on this subject.

[00:34:05] So, have at it, Ben.

[00:34:08] Yeah, so I'll say the number one reason most of them haven't been through a bear market is because most fund managers are creating these funds just based on the passive income craze we've seen post-pandemic.

[00:34:20] And there hasn't really been too many bear markets outside of 2022, outside the pandemic.

[00:34:25] So, yeah, a lot of these funds you won't find.

[00:34:27] Really?

[00:34:28] That's gone up with the pandemic, huh?

[00:34:31] Oh, God.

[00:34:32] Yeah.

[00:34:32] Oh, yes.

[00:34:33] Yeah.

[00:34:34] If you look at something like Google Trends, you look at passive income, it's skyrocketed.

[00:34:40] Okay.

[00:34:40] And I mean, I think it was maybe a huge thing when a lot of people locked down mode, lost their jobs, maybe the income generation from equities or high-yielding funds.

[00:34:52] I don't exactly know the reason on it, but I can tell you right now, pre-pandemic, this type of stuff was not even close to as prevalent as it is now.

[00:35:02] If you're going to be locked down in your home, you might as well make some money while you're at it.

[00:35:05] Yeah, exactly.

[00:35:07] I mean, in terms of the safety of the funds, that would largely depend on the individual and the fund itself.

[00:35:13] I mean, volatility, again, if you look at your Bitcoin allocation, I mean, you're comfortable with that volatility, whereas somebody else might not be.

[00:35:21] So, I mean, in terms of that, it's hard to say.

[00:35:24] The one thing, again, as I mentioned, is fund managers will create funds based on where the capital is flowing right now.

[00:35:29] And with that big craze, passive income, high-yield, all that type of stuff, that is where the money is flowing.

[00:35:36] And as a result, managers, you know, they're even having to get a bit creative when it comes to how they get the yield.

[00:35:44] So, I mean, initially, it was, you know, covered calls, things like that.

[00:35:47] But now you're seeing leverage.

[00:35:50] Now you're seeing covered calls combined with leverage because many of these funds, people have been like, okay, well, the covered calls cap the upside of the fund.

[00:35:57] Well, let's just add a little leverage in there to try and offset that.

[00:36:01] So, I mean, it's crazy the amount of stuff that's coming out.

[00:36:04] But, I mean, people are, sorry, funds right now are starting to develop at-the-money call options, selling at-the-money call options in order to generate premiums.

[00:36:14] So, obviously, well, I don't want to get too big into how options work.

[00:36:17] But at-the-money is going to generate a substantially higher premium than one that is way out of the money because it has a higher chance of getting essentially executed and you losing your shares.

[00:36:27] So, I mean, in general, covered calls, they cap your upside while pretty much providing zero downside potential.

[00:36:33] However, during bear markets, they can provide some buffer because of the premiums generated.

[00:36:39] The difficulty here is most of these are actively managed.

[00:36:42] They do involve fund managers, you know, making decisions as with most humans.

[00:36:46] I mean, errors, miscalculations are common.

[00:36:48] And you can end up with fund managers completely botching the covered call selling during a bear market and making the situation even worse.

[00:36:55] The one fund I've talked about quite a bit was the Bitcoin yield ETF.

[00:36:59] It provided next to no downside protection during the drawdown in Bitcoin.

[00:37:04] And now it's underperformed quite a bit to the upside.

[00:37:09] The thing about an ETF is it can theoretically pay out whatever distribution they want.

[00:37:13] A stock can as well.

[00:37:15] But a stock situation is much more obvious when they're paying out, you know, more than they are earning.

[00:37:20] So, if they're earning $4 a share but paying out a $6 dividend, it's fairly obvious on the surface that it's unaffordable.

[00:37:28] But with a fund, it can maintain higher yields for much longer as they can pretty much pay a distribution out of the net assets of the fund itself if it can't cover it through something else.

[00:37:38] So, ultimately, you know, this will result in net asset value, the erosion of the net asset value.

[00:37:42] And can pretty much be a recipe for disastrous performance over the long term.

[00:37:47] So, if a fund is promising you a 12% yield, they're going to have to make that up, you know, through capital gains, dividends from the underlying holdings, interest income, covered call income, etc.

[00:37:57] If they don't do that, the money has to come from somewhere and it's probably going to be, you know, a return of capital, which, you know, will come out of the assets of the fund.

[00:38:05] So, not in all cases, but in most cases.

[00:38:09] So, these large distributions are often marketed by many, you know, influencers, passive income craze, gigantic post-pandemic.

[00:38:18] It's kind of a one in the hand is better than two in the bush situation.

[00:38:21] So, as in, you can get income now and don't have to worry about the unpredictable markets.

[00:38:25] But the thing is, I mean, we have, there's nothing really all that unpredictable about the markets over the long term.

[00:38:33] I mean, we have 100 plus years of proof that, you know, the markets do provide long term returns.

[00:38:39] So, as someone with a long term time horizon, if your worries are that you'll panic and make mistakes during down markets and invest in yield based funds because of this.

[00:38:48] I mean, you should consider, you know, probably seeking out the help of a professional that could maybe help you out, you know, kind of reduce that volatility, things like that.

[00:38:57] You know, avoid you from panicking.

[00:38:59] Yes, you pay fees.

[00:39:01] You do pay fees, but structuring your portfolio in a lot of these funds can end up costing you significantly more than the fees to a manager.

[00:39:09] So, one prime example of this would be XYLD.

[00:39:12] So, this is a popular S&P 500 covered call ETF that has underperformed the S&P 500 by 6.2% annually for 11 years.

[00:39:22] So, I mean, to give you an idea of how bad this is, $100,000 invested in the S&P 500 in mid-13, which would have been when XYLD was, you know, inception.

[00:39:35] It's now $470,000, whereas $100,000 in XYLD is now $246,000.

[00:39:41] So, that's a difference of around $225,000 over a 11-year time period.

[00:39:46] And it's important to keep in mind, you would have to have reinvested the dividends in order to get those returns as well.

[00:39:52] So, you wouldn't have benefited from any sort of passive income stream.

[00:39:56] If you had spent the dividends, you'd have around $106,000.

[00:40:00] So, it's appreciated $6,000 in underlying price over the course of 11 years.

[00:40:05] Well, just to add to that, right?

[00:40:07] So, I'm sharing my screen for joint TCI here.

[00:40:09] And what I'm showing is XYLD, the one you just mentioned, versus SPY, which is just a regular S&P 500 ETF.

[00:40:17] And the last five years, SPY has returned, let's just say, well, I was going to say 100%, but let's be fair, 98%.

[00:40:26] Pretty close.

[00:40:27] Yeah, exactly.

[00:40:28] And then the XYLD, 34%.

[00:40:31] So, I think just to prove your point here.

[00:40:34] Yeah, it's crazy.

[00:40:37] I mean, a lot of people, again, they buy these funds because they're scared of, you know, that's the number one thing I see is, you know,

[00:40:43] like, we don't know what the market's going to do over the next, you know, two or three years.

[00:40:48] You know, why not get the income now?

[00:40:49] I mean, yeah, you don't know what it's going to do over the next two or three years.

[00:40:53] But if you're, you know, if you're a 20 or 30-year-old with, you know, multiple decades left in your investing horizon,

[00:41:01] why do you care what the market is going to do over the next two or three years?

[00:41:05] You're buying for the long term.

[00:41:07] You know, I see plenty of people like this age structuring their portfolios to generate as much paddy, they call it,

[00:41:14] like passive annual dividend income.

[00:41:16] And I mean, I just think in a couple of decades, you know, when their portfolios have underperformed, you know,

[00:41:22] a broader benchmark by a couple percent annually, and they've kind of realized they might have costed themselves,

[00:41:27] you know, hundreds of thousands of dollars in returns.

[00:41:29] And, you know, chances are, you know, potentially years of their retirement, they will have some significant regret.

[00:41:35] And I mean, as there are some solid funds, like I know plenty of these funds that have actually done quite well,

[00:41:41] that generate income, they generate value.

[00:41:43] But the majority of them will lead to long term underperformance.

[00:41:48] For someone with a long time horizon, and I'm comparing this to just buying a broad-based index fund, something like that.

[00:41:57] Yeah.

[00:41:58] Yeah.

[00:41:58] And I mean, look, at the end of the day, fund managers, whether it's Bay Street, Wall Street, you know, not all of them,

[00:42:05] I think, you know, we're very happy to have BMO ETFs as sponsors just because we think they offer some great options for ETFs for Canadians.

[00:42:14] Their fees are very competitive, usually amongst the lowest, if not the lowest.

[00:42:19] So I think that's something that's great to see.

[00:42:21] But a lot of fund managers will actually see where the demand is, and they'll offer products to cater to that demand,

[00:42:29] whether the products are good or not.

[00:42:31] So, you know, one thing's for sure is, you know, and I'm, you know, I'm generalizing here.

[00:42:36] So again, I just want to make sure not, you know, not everyone's in that same bucket.

[00:42:41] But a lot of the time, if you, Wall Street starts seeing that certain products and high demand and generate good fees,

[00:42:49] they will create these products because they make money on fees.

[00:42:54] They don't care whether you make or not, like you make money or lose money.

[00:42:58] At the end of the day, they don't care.

[00:43:00] They still get paid.

[00:43:01] Well, look at, look at like private credit, private equity, like all that kind of stuff that's popping up now.

[00:43:06] The fees in that area are huge.

[00:43:08] Yeah, are huge.

[00:43:09] Obviously, if they have less asset under management, usually the fees are percentage of the assets.

[00:43:14] So clearly it's going to be, you know, lower on a dollar basis.

[00:43:18] But again, they won't be affected as much.

[00:43:20] Now, you know, I think a lot of people just have trouble dealing or that there's the fear of a big drawdown.

[00:43:28] I think that's what's driving a lot of this.

[00:43:30] And of course, when you start looking at just generating income at all costs,

[00:43:35] it comes with tradeoffs like you just mentioned, right?

[00:43:37] Sure, you can get the income.

[00:43:39] But at the end of the day, you're going to lack the total returns in most of the scenario and the vast majority of the scenarios like we've seen.

[00:43:49] Personally, I like to look at things from a total returns perspective.

[00:43:52] I know you're the same.

[00:43:53] And if I wanted to just invest in income generating stocks, I would focus on dividend stocks and more specifically dividend stocks that have a growing business,

[00:44:03] even if it's low growth because, you know, a lot of dividend paying companies are more mature businesses.

[00:44:09] So it's kind of typical to see slower growth.

[00:44:12] A low payout ratio, which just means a dividend that is sustainable compared to the profits,

[00:44:18] whatever profit metric you're using, whether you're losing EBITDA, net income, free cash flow, whatever it is,

[00:44:25] you want this dividend to be sustainable, manageable debt and a growing dividend.

[00:44:30] I think these would be the things that I would put a lot of emphasis on.

[00:44:34] If I wanted to just build a portfolio that provides income, this is not what I'm doing.

[00:44:39] So let's just be clear.

[00:44:40] But this is what I would do if I wanted to go that way.

[00:44:43] And I think with that approach, you have better prospect of achieving total returns that are at least pretty close to the index and still getting that income.

[00:44:52] But I think a lot of people get into the issue that, you know, a strategy like this, you know, what would it what will it give you?

[00:45:01] Like three percent yield, like something like that.

[00:45:04] Right.

[00:45:05] If you're looking for quality dividend stocks, you're not getting seven, eight, nine percent.

[00:45:10] You're probably getting three percent if you want to be diversified and not be too concentrated in certain sectors.

[00:45:19] Yeah, it's I mean, the saying goes, there's no free lunch in finance.

[00:45:24] I mean, if you want a 12 percent yield, you're probably paying something for that yield, whether or not you realize it, you know, over over the next year or two or whether you realize it after owning the fund for 10 or 15 years.

[00:45:35] Like people who have owned X, Y, L, D probably have been over the last 11 years here.

[00:45:40] You know, you have a six percent underperformance of the broader index, which is like six percent annually is gigantic.

[00:45:51] That is massive.

[00:45:53] Yeah.

[00:45:53] And one thing, too, I think to keep in mind is you can buy covered calls, too, right?

[00:45:59] With holdings that you have.

[00:46:01] I mean, the one thing you need to make sure is whenever you buy options during lots of 100.

[00:46:07] So one option contract will be for 100 shares.

[00:46:09] So keep that in mind.

[00:46:10] A lot of people may not be able to do that.

[00:46:12] But if you're later in life and you want to generate income, you could create a strategy of covered calls that you actually manage yourself.

[00:46:21] You can have it just on certain stocks.

[00:46:24] You don't have to have it on your whole portfolio.

[00:46:26] It does give you a whole lot more flexibility if you're willing to, you know, take the time.

[00:46:31] Understand how they work.

[00:46:33] Understand when options may be look be more attractive for selling a covered call option.

[00:46:40] So you get a bigger premium depending on how the market is and so on.

[00:46:43] And so that's something that you could do.

[00:46:46] Now, I think to prevent or maybe not prevent, but if big drawdowns are the primary concern, then I think what, you know, is at least for me, from my perspective, and I think for a lot of people is just thinking about potential hedges.

[00:47:01] Because the last five years, I mean, or last, I mean, since 2009, right, we've seen more and more people saying just be like 100% equity.

[00:47:10] Well, the problem with that, and I think that's kind of a result of the bull market and how well equities have done over that time period.

[00:47:18] But the problem with that is, yes, if there's a correction and 100% in equities or say 100% the S&P 500, it goes down 30%, you'll be down 30%.

[00:47:28] So if you only have the index, obviously, if you have each individual holdings, maybe you'll do better, maybe you'll be down 20%, maybe you'll do worse, you'll be down 40%, right?

[00:47:37] It really depends on what holdings you have.

[00:47:39] But a hedge, clearly, it's like, for those not familiar, we've talked about hedge quite a bit.

[00:47:45] It's almost like getting insurance against an asset that you would hold.

[00:47:48] So a hedge for, you know, the Canadian dollar is getting insurance on the Canadian dollar going one way or the other.

[00:47:54] Now, an easy hedge to have would be as simple having some fixed income in your portfolio as a percentage.

[00:48:02] Now, I talked about me.

[00:48:03] I have currently about like 13%, 12%, 13% of cash, which is in short-term treasury bills.

[00:48:10] So it qualifies as fixed income, generates about 4%.

[00:48:13] My target is 15% to 20%.

[00:48:15] And with that, it'll act as a hedge to my portfolio with the rest.

[00:48:19] So if everything else goes down, you know, the cash portion will actually stay stable.

[00:48:24] And that's going to give me a hedge and make sure my portfolio doesn't go down as much as it could have if it was all concentrated in one asset type or just Bitcoin and, you know, and equities.

[00:48:38] Another option would be to buy put options.

[00:48:40] So you talked about covered call or call options, but you could buy put option on certain stocks or ETFs.

[00:48:46] So a put gives you the right but not the obligation to sell a stock or an ETF at a predetermined price, which is a strike price for a period of time.

[00:48:57] There is a cost of those put option called the option premium.

[00:49:00] So the premium costs will vary based on the strike price, the time left on the option and the market demand for those.

[00:49:06] And like I said earlier, option contracts come in units of 100.

[00:49:10] So you need to be able to, you know, typically you do that.

[00:49:13] Let's say you have 100 shares of an S&P 500 ETF.

[00:49:17] You can buy one put option to basically fully hedge your position.

[00:49:23] Like you could do it that way.

[00:49:25] So an example here is I'll just kind of put some numbers behind it.

[00:49:31] So say the only thing you own is an S&P 500 ETF and the value of your portfolio is $100,000.

[00:49:38] The ETF you have is currently trading at $100 per share.

[00:49:41] And say you pay a dollar per share and buy a put option that gives you the right to sell your shares for $95 at any time in the next six months.

[00:49:53] So in this situation, you've put a hedge on your whole portfolio and you're essentially capping your downside at $6 a share or 6%.

[00:50:02] That's because the $95 is $5 less than the current price.

[00:50:07] But you also factor in the dollar premium that you paid because that dollar premium will eat into your return.

[00:50:12] So I think it's really important for people to remember that.

[00:50:16] Now, you're also reducing your upside here because of that $1 premium.

[00:50:20] But for a lot of people, it's a small price to pay because essentially you're capping your downside to just 6% from the current price.

[00:50:28] So essentially you're capping your downside at a share that's currently trading $100 per share to let's just say $94 if you factor in the premium.

[00:50:39] So you'll never go down below that because you'll always have the option to sell at that $95.

[00:50:44] So that is the way to put a hedge on if you're really scared of drawdowns.

[00:50:50] If you learn about put options, again, sometimes the prices for these premiums are more attractive than others.

[00:50:56] The put-call ratio is what we call.

[00:50:58] So it is something to consider if you're willing to put the time in.

[00:51:02] But there's different ways to put hedges on where you don't have to worry as much if there's a big market correction.

[00:51:10] Yeah, and I guess the one thing I'll say about put options is the difficulty is in the Canadian market.

[00:51:15] The options market kind of sucks.

[00:51:17] There's not much.

[00:51:19] I mean, there is options activity on some things.

[00:51:22] But for the most part, there's not going to be.

[00:51:25] So the spreads are going to be really wide.

[00:51:26] The prices are not going to be that good.

[00:51:27] So for U.S. holdings, I mean, obviously, you have to research it.

[00:51:33] You have to be well-versed in it.

[00:51:34] And selling covered calls is one of the safer option strategies out of all of them.

[00:51:40] Most of them are quite risky.

[00:51:42] But I mean, yeah, I sell covered calls the odd time on my holdings.

[00:51:48] Not too often because, I mean, a lot of people, you'll see a lot of people kind of market covered calls as like the guaranteed way, risk-free way to earn income.

[00:51:57] You are selling something.

[00:51:59] You're giving up something when you do sell a covered call, and that would be the upside.

[00:52:03] Right?

[00:52:03] I'm sorry.

[00:52:04] There is a cost to them.

[00:52:07] I mean, there's no, like, it doesn't seem like it costs you anything because you're collecting the premium and, you know, whatever.

[00:52:13] If you have to sell off your holdings, you have to sell them off.

[00:52:16] But I mean, you can sell them off at lower than market value.

[00:52:18] So, I mean, there is a cost to them.

[00:52:20] Anybody who tells you that it's just a free way to generate income is probably trying to sell you something.

[00:52:25] But, yeah, it's a very complex way to generate income.

[00:52:31] And a lot of people do just opt for these funds because of, you know, the complexities of it.

[00:52:37] But as I said, there's no free lunch.

[00:52:41] You're paying.

[00:52:43] You're paying for it.

[00:52:43] And, you know, if the income, if you're like, you know, if you want the income, whatever, that's completely up to you.

[00:52:51] But you do just have to understand that there is, you know, you are paying for it in some way.

[00:52:57] Yeah.

[00:52:57] And if you're not comfortable, too, with, like, put call option strategies, but you don't want to go in one of these funds, then you can look for a financial advisor that, you know, will do these things for you.

[00:53:09] Not every one of them will be able to do it.

[00:53:12] They may not have the knowledge or the experience to do so.

[00:53:15] But if you look and you find one and you ask them, look, I need I want to stay invested in equities, but I would like to put some hedges in place, like put options like I just mentioned.

[00:53:25] Or I'd like to generate more income through some covered calls.

[00:53:29] You know, can you help me do that?

[00:53:30] Obviously, they'll charge you a fee to do that to manage for you.

[00:53:33] But if they're good and they know what they're doing, that would be another way if that's not something you want to learn.

[00:53:38] But again, if you're willing to put the time, the work in, these are all things that are available to retail investors.

[00:53:44] So they're all available in your brokerage.

[00:53:46] You just have to make sure you understand what you're doing.

[00:53:49] And, you know, it's not you're not going to know it's going to take time.

[00:53:54] I'm just going to say that.

[00:53:55] But there are ways to prevent to kind of make sure that you protect the downside or cap your downside is probably the best way to do it, to say it.

[00:54:04] Yep.

[00:54:04] I got nothing else to add.

[00:54:06] So last question here, Dan, I'm sure you'll want to add a little bit to it.

[00:54:11] We're not running too long on time, so we'll we'll have time.

[00:54:15] This one won't be too long.

[00:54:17] So a question from Manohar.

[00:54:20] And I do apologize if I'm mispronouncing your name.

[00:54:23] So he's about five years away from retirement, currently has an RRSP portfolio invested in 7525 equity bond allocation.

[00:54:33] It has returned 3% per year over the last four years and wants to know if we have better ideas.

[00:54:39] Again, not investment advice.

[00:54:41] I'll just say a few things here.

[00:54:43] He didn't specify whether he's selecting investment himself or if he's working with an advisor.

[00:54:49] Having said that, there are some all in one funds that incorporate similar asset mix.

[00:54:54] There's quite a few 6040 ones and some that are closer to 8020.

[00:55:00] So probably closer to what he has here.

[00:55:03] The reality is that 3% per year over the last four years is a pretty poor performance for a 7525 portfolio.

[00:55:10] For example, ZGRO, which is the BMO growth ETF, has a 8020 allocation and has had annualized returns of 9.46% over the last five years.

[00:55:22] BlackRock's XGRO, which is also 8020, was almost identical here to ZGRO.

[00:55:29] So ZBAL from BMO, which is 6040, had annualized return of a bit more than 7%, which is better than what Manohar was saying.

[00:55:42] Without knowing what he has invested in specifically, I'd say, you know, just with the information we have, I think it's safe to say that the returns have been at least suboptimal.

[00:55:51] Any comments on that before I kind of keep going here?

[00:55:55] Yeah, I would just like if you would look at that return, you would think it would have been a 2575.

[00:56:00] Yeah.

[00:56:01] Yeah, I mean, I was surprised when I saw the figure.

[00:56:03] Yeah.

[00:56:04] Because I kind of figured like even a strictly of that portfolio was 100% Canadian, like say XIU and an aggregate bond fund like ZAG or something, it would still have returned more than 3% annually over the last four years.

[00:56:20] So, I mean, it's really hard to know without actually knowing like what is in it.

[00:56:25] No, that's it.

[00:56:27] So without more information, that's why I wanted to preface this because it was more of a, it's a general question that gets harder for us to, you know, to give an answer that's pertinent if we don't have all the information.

[00:56:37] But what's next is kind of what the next steps for you, I would say.

[00:56:42] First, I would say understand what you are invested in and why it returned only 3% per year over the last four years.

[00:56:48] Maybe there's a valid reason that we're not thinking about.

[00:56:51] I think that's the first thing I would do.

[00:56:53] Two, are you okay with continuing this approach or would you like a new approach?

[00:56:57] Three, decide what you'd like the asset mix to be.

[00:57:01] Typically, you want to have more fixed income as you get closer to retirement.

[00:57:06] So that's the kind of typical rule of thumb that because you want to have, you know, a bigger portion of your portfolio in less volatile assets.

[00:57:15] And I say fixed income.

[00:57:16] Personally, I'm not a big believer in bonds.

[00:57:18] But again, there's other fixed income like I mentioned before.

[00:57:22] You know, I have treasury bill, which are just basically short-term bonds.

[00:57:26] So that's probably the easiest way to say it.

[00:57:29] Four here, you'll have to decide if you want an all-in-one option like some of them that I just mentioned.

[00:57:35] Or if you want something where you may want to build your own with choosing between a mix of equity ETFs and bond ETFs to achieve the desired allocation.

[00:57:47] So that's something you'll have to decide for yourself as well.

[00:57:51] Ask yourself how diversified do you want to be?

[00:57:54] What percentage of equity versus bond do you want?

[00:57:56] Pick the right ETF to achieve the diversification you want.

[00:58:00] And I'm sticking to ETFs just because the question kind of makes me think that he's invested in funds of some sort, not specific companies or individual holdings.

[00:58:09] Keep in mind, an S&P 500 ETF, if that's something people are looking at, not just for this question here, more than 35% is in the top eight names.

[00:58:20] So if you're just picking the S&P 500 ETF thinking that, you know what, I want an 80-20 portfolio, 80% stocks, 20% bonds, and I'm going to put the 80% in the S&P 500.

[00:58:33] I hate to tell you, but you're not that diversified with 35% in the top eight names.

[00:58:39] A lot of people tend to forget that.

[00:58:41] Do you want more diversification from a geographical standpoint or industry standpoint?

[00:58:46] And for fixed income, like I kind of touched on earlier, do you want shorter dated fixed income, longer dated bonds, corporate bonds, government bonds, or a mix of all the above?

[00:58:57] Obviously, the longer dated they are, the more interest risk that you will have, that you will be taking on, especially when you're talking about ETFs.

[00:59:05] So these are all things that I would consider that I think are important to consider.

[00:59:10] Again, we can't answer this question for you.

[00:59:13] This is personal.

[00:59:14] That's something you'll have to decide.

[00:59:15] But these are all questions I would ask myself if I were in this situation.

[00:59:20] Yeah, like I would definitely be starting to ask questions.

[00:59:24] I mean, because if we look at inflation, I mean, that return is effectively a negative real return over the last four years.

[00:59:31] Oh, no doubt.

[00:59:31] Which is considering the S&P 500 is almost a, what, a double over the last five years here.

[00:59:39] I mean, you definitely got to start asking questions, especially if your money is with somebody else.

[00:59:43] You definitely got to ask them, you know, why is this performing like it is?

[00:59:48] Unless it was just like an error in the question and maybe it's a different asset mix.

[00:59:52] But I just find it hard to believe unless it's individual stocks and it's been a lot of poor individual stocks.

[00:59:59] Like if this is, you know, say 75.

[01:00:01] I've seen it before.

[01:00:01] Yeah.

[01:00:02] Oh, yeah.

[01:00:02] I've seen this before.

[01:00:03] Yeah.

[01:00:03] I'm not surprised.

[01:00:04] I had a friend of mine who asked me to look at their allocation.

[01:00:07] They're a couple mid-40s, so a few years older than me.

[01:00:12] And it was, I think they had probably similar return.

[01:00:16] One of the big fund companies in Canada.

[01:00:19] I won't throw them under the bus, but big mutual fund companies in Canada.

[01:00:23] And I couldn't believe on the first the asset mix that they were put in, which I don't think was really good for where they're at in their life career and how far they're like 20 years away from retirement.

[01:00:35] But they were also like paying close to 2% fees.

[01:00:40] And I think that was one of the big parts where why the returns were so low and pretty close to that.

[01:00:47] And to me, that's alarming because, again, like you mentioned, the real returns are likely negative.

[01:00:52] And for those who are new, real returns, and I think you mentioned it quickly, is just looking at the like it's basically inflation adjusted returns.

[01:01:00] That's like the best way to put it.

[01:01:02] So, after inflation, factoring inflation as your purchasing power increased, stayed the same or decreased.

[01:01:12] And this situation, it likely has decreased.

[01:01:16] Decreased.

[01:01:16] Yeah.

[01:01:17] Especially, you know, considering how much inflation there's been over the last few years.

[01:01:21] Yeah.

[01:01:21] I don't know.

[01:01:22] It's tough to say without knowing what the fund is like.

[01:01:24] But you definitely need to start asking questions.

[01:01:27] That's for sure.

[01:01:28] No, exactly.

[01:01:29] So, I think we'll leave it at this.

[01:01:31] We went a little bit longer than usual, but that's okay.

[01:01:34] We had some good questions.

[01:01:36] I think a really good question.

[01:01:38] I think it will help a lot of people.

[01:01:39] Just also like figure out what questions to ask.

[01:01:42] If you're, you know, the covered call ETF question.

[01:01:46] I think just people making sure they look at, you know, the different ETFs and not just the yield.

[01:01:52] I think that's really important.

[01:01:54] I think a lot of people just fall for the high yield, so that's important.

[01:01:57] But I think it was fun to do this.

[01:01:59] And next week, we'll be back with our regular news and earnings episode.

[01:02:03] It will be fun trying to, yeah, get back into the new year.

[01:02:08] I think it was a fun episode to do.

[01:02:11] Anything else you want to add before we let people go?

[01:02:13] No, that's it.

[01:02:14] Thanks for listening, everybody.

[01:02:15] Thanks.

[01:02:15] Thanks for listening.

[01:02:16] We'll see you next week.

[01:02:17] The Canadian Investor Podcast should not be construed as investment or financial advice.

[01:02:23] The hosts and guests featured may own securities or assets discussed on this podcast.

[01:02:29] Always do your own due diligence or consult with a financial professional before making any financial or investment decisions.