John Hood's Top Picks: Aug. 3, 2018

John Hood, president and portfolio manager at J.C. Hood Investment Counsel
Focus: Options and ETFs

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MARKET OUTLOOK

Despite the havoc wreaking impact of Trump’s trade and foreign policies, for Canada there’s a geopolitical imperative: a 5,000-mile border. In the middle of the Great Depression, Prime Minister R.B. Bennett tried to offset U.S. trade policies by emulating Roosevelt’s New Deal with high tariffs and expanding trade with the British Empire; it failed. Pierre Trudeau tried with his “third option,” that is expanding trade with Pacific Rim nations to reduce dependence on U.S. trade; it failed as well. Now, Justin Trudeau having recently announced that the “trade minister” is now the “minister of trade diversification,” is resisting U.S. pressure on NAFTA and risking the auto trade by not compromising on supply management issues with the corpulent dairy and poultry cartels (begun by his father presumably as a sop to Quebec separatists).This will not work either. Our joint military/strategic geography, culture, language, travel and personal relationships, our joint shareholdings and the sheer volume of trade and supply lines makes futile any effort to disrupt Canada-U.S. trade dependence. The fact is that foreign investment in Canada is declining and businesses are undecided whether to invest or hire, so I remain on the sideline for Canadian equities.

I continue to purchase U.S. equities, although having bought mainly large cap ETFs like SPY and VV years ago as well as sector ETFs, I’m diversifying into all-cap funds like VTI or VUS and VUN because U.S. GDP grew 4.1 per cent in the second quarter due largely to tax cuts and deregulation. I retain some developed market ETFs, but little emerging markets. I do, however, like the asset allocation ETFs of HBAL and VGO that contain small amount of those markets. We also hold a lot of cash, money market.

TOP PICKS

VANGUARD TOTAL STOCK MARKET ETF (VTI.N)

MER: 0.04 per cent. Has a very low cost. Well diversified. It includes everything from FAANGs (18 per cent) to small caps. Canadian versions (discussed on previous shows) available: VUN and VUS (hedge).

HORIZONS BALANCED TRI ETF (HBAL.TO)

Horizons’ new automatic rebalancing ETFs in the TSX, with 40 per cent U.S. equities, 10 per cent Canadian, 5 per cent European, 15 per cent developed and 30 per cent fixed U.S. and Canadian income. This ETF competes directly with Vanguard’s VGRO and VBAL, but with a couple of important differences: The Horizon product with MERs of 0.36 per cent is slightly more expensive than VBAL at 0.22 per cent, but HBAL, like many Horizon ETFs is a “total return” ETF, that is, it pays no distributions and therefore no U.S. withholding tax in non-registered or TFSA accounts. Realistically, U.S. withholding tax is not a big deal (15 per cent on dividend of 1.5 per cent), but could be significant for high-income earners who don’t want more income. HBAL doesn’t hold the securities. Rather, like HXT and HST, is swap-based. Like VGRO, HBAL is also a direct competitor with robos.

U.S. 2-YEAR TREASURIES

With rising rates, bond ETFs, whether index-based or actively managed, have been disappointing. I culled a number of these and replaced them with treasuries yielding 2.5 per cent. In bond lingo: buying the short end of the yield curve. This also achieves a hedge against a declining Canadian dollar.

PAST PICKS: AUG. 8, 2017

Past pick update: Sold XEC emerging markets in all accounts due to increased volatility, particularly in China. Bought at: $29.48. Sold at: 26.45.

I have been looking to diversify Canadian holdings away from just financials, energy and materials as these are close to 70 per cent of the TSX. I continue to hold these ETFs in client accounts, but have reduced Canadian exposure overall.

ISHARES S&P/TSX COMPLETION INDEX FUND (XMD.TO)

• Then: $24.41
• Now: $25.82
• Return: 6%
• Total return: 8%

VANGUARD FTSE CANADA ALL-CAP INDEX ETF (VCN.TO)

• Then: $30.84
• Now: $33.44      
• Return: 8%
• Total return: 11%

ISHARES S&P/TSX CAPPED INFORMATION TECHNOLOGY INDEX (XIT.TO)

• Then: $14.87
• Now: $19.19
• Return: 29%
• Total return: 29%

Total return average: 16%

WEBSITE: www.jchood.com