Dec 4, 2018

John Hood's Top Picks: Dec. 4, 2018

BNN Bloomberg

John Hood , BNN Bloomberg

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

MARKET OUTLOOK

Warren Buffet once remarked that only in the investment business, if you hang out a sign that says “on sale,” everyone dashes out the door. My market strategy for years has been persistently overweight the U.S. market, with reduced Canadian exposure and very little exposure in emerging markets or the EU. The reason for this is that the Trump administration is very pro-business, particularly with respect to tax cuts and deregulation. Now that there has been a normal correction, which was overdue, prices are looking more reasonable. That is, “on sale.”

There have been two major overhangs in the market: the U.S. mid-term election, which strengthened Trump’s position in the Senate despite Republicans not keeping the House; and the trade wars with China, which appeared to have been mollified somewhat, but the major issues are just being kicked 90 days down the road. The trade war is not just about swapping soybeans for reduced tariffs and electronic trinkets, but it has to do with structural changes when it comes to cybersecurity and theft, and geopolitical issues like the South China Sea.

Regarding Canada, Bill Morneau’s rosy optimism on the country’s economy lasted about 48 hours until General Motors announced the shutdown of its plant in Oshawa, 2,500 direct job losses and the ripple effect of thousands more. Morneau did give some business concessions such as enhanced depreciation, but capital is leaving Canada and new foreign capital is in retreat.

TOP PICKS

INVESCO QQQ TRUST (QQQ.OQ)

This is an aggressive choice and not for everyone. Given the bashing that tech stocks have taken in recent weeks, this could be a good entry point. QQQ is largely tech stocks, with a heavy concentration of 10 per cent each in Microsoft, Amazon and Apple. It is 43 per cent communications, 22 per cent consumer discretionary and health care. The price to earnings ratio is down to 23. The management expense ratios (MER) are 0.20.

VANGUARD DIVIDEND APPRECIATION ETF (VGG.TO)

This is a more conservative value approach to the U.S. market. VGG only includes U.S. stocks that have increased their dividend every year for 10 years. MERs are 0.30. The ETF is dominated by industrials, consumer services, healthcare, Microsoft, Johnson & Johnson, Walmart, Pepsico, McDonald’s and Abbott.

ISHARES FLOATING RATE INDEX ETF (XFR.TO)

Use this ETF to protect yourself against interest rate volatility. There’s a problem with any index-based bond fund in a rising rate environment: while the yield may look good the total return, the price declines combined with distributions equal zero returns, if not worse. Actively managed bond ETFs have fared a little better but not by much. In fact, several bond ETFs only have positive results because they’re in riskier markets like high-yield junk bonds or emerging markets, whose risks may not be recognized by the average investor. Our approach has been to either buy bonds directly, which is often awkward for investors, or buy bond ETFs that are cheap, have a short maturity or duration under one year, and are only investment grade. XFR’s average investment grade is A. with mostly Canadian and provincial fixed income. There are similar ETFs with in floating rate corporates with higher yields. Use BMO’s ZST, and Horizons’ HFR for U.S. dollar corporate exposure.