John Hood's Top Picks
FOCUS: Options and ETFs
Market analysts have been mesmerized in recent weeks by Putin’s aggression against Ukraine and the dynamic between raising interest rates and inflation - and with good reason as both can lead to queasy markets and volatility.
Reading through military analysis, Putin is not going to unleash a shooting war with the U.S. and NATO, nor can he afford to occupy Kiev. However, having amassed many battle groups along the border including artillery, tanks and mechanized infantry, he cannot just pull back without losing face.
To provide context, there are more Russian troops, 190,000, on Ukraine’s border now than allied forces during the Normandy invasion. So the most likely response will be to grasp another portion of Ukraine, likely close to Crimea to further protect access for Russia’s Black Sea fleet to the Mediterranean.
Putin could be more aggressive, attacking Kiev directly, which would affect volatility but geopolitical events do not last long in markets, so any market jitters should be a reason to buy the dips. Energy prices will be impacted.
Regarding interest rates, everyone agrees they need to be raised to smother the inflation spiral, but without raising too hard or too fast to tilt the economy into recession as was the case in the 1980’s.
Quantitative tightening will hopefully become the U.S. Feds new mantra at some point over the next couple of years. These rate concerns have led many to opine that markets are overvalued and bound to crash. But everyone says this all the time!
I do expect a correction of about a further 15 per cent and hope for it as this allows me to buy good assets cheaply. Meanwhile, as Brain Ashbury at First Trust describes, industrial production was up 1.4 per cent in January.
With COVID declining, retail sales are also up strongly although auto production is hampered by a shortage of semiconductors; restaurants and bars remain constrained. Ashbury said there is a mismatch between supply and demand, which is the reason for hot inflation numbers so recovery will be uneven. I continue to like the S&P 500 and the TSX.
Vanguard FTSE Canada All Cap Index ETF (VCN TSX)
CDN all cap 42.56 2.5 yld, MER .05, P/E 15.70.
Despite being all cap it is concentrated app 70 per cent in large caps. Very similar to other ETFs with financials 25 per cent and energy 15 per cent. Main reason for purchase is tax in cash accounts: we already have large gains in similar ETFs like XIC. Not currently held in any accounts. Recommended this week by Globe’s Rob Carrick, along with several other CDN index ETFs.
Vanguard S&P 500 Index ETF (CAD-Hedged) (VSP TSX)
$72.73, MER .09, P/E 23, P/B 4.4 CAD hedged S&P500.
10 per cent off 2022 highs. Not held in any accounts but have large positions in similar ETFs like XSP Again selection based on tax in cash accounts.
BMO Canadian Bank Income Index ETF (ZBI TSX)
$29.84. For investors gasping for yield app 3 per cent, This ETF, which just started trading, is based on CDN banks; it is 60 per cent bank bonds, 22 per cent preferred shares and 16.5 per cent LRCNs, which are paid as income but with risk closer to preferred with similar yields. Normally only available to institutions.
PAST PICKS: February 11, 2020
VANGUARD VALUE ETF (VTV NYSE)
- Then: $120.94
- Now: $143.55
- Return: 19%
- Total Return: 24%
ISHARES TSX CAPPED ENERGY ETF (XEG TSX)
- Then: $8.33
- Now: $12.75
- Return: 53%
- Total Return: 57%
BMO AGGREGATE BOND ETF (ZAG TSX)
- Then: $16.26
- Now: $14.95
- Return: -8%
- Total Return: -2%
Total Return Average: 26%