Mike Philbrick, chief executive officer, ReSolve Asset Management

FOCUS: Exchange-traded funds

MARKET OUTLOOK:

Stretched valuations in many stock and bond markets are challenging investor’s advisors and allocators to look farther afield to meet investor return targets. Many investors find themselves recommending portfolios that are uncomfortably far out along the risk curve, stretching for higher yields and increasing pro-cyclical asset exposure via asset classes like private equity, bank loans and exposure to high yield bond markets.

In addition to this there is increasing risk that the low correlation between stocks and government bonds is beginning to shift and in turn reduce the densification benefit to risk adjusted investors have enjoyed over the last 30 years in the ubiquitous 60-40 stock-bond portfolio.

Thoughtful investors, advisor and allocators are evolving their approach by replacing some of there stock and/or bond exposure with uncorrelated asset classes and alternative strategies as liquid alternative strategies have become more widely available to investors.

In practice, this approach often comes with the headwind fear of missing out (FOMO) as the returns from these portfolios are likely to deviate meaningfully from traditional portfolios. Despite an expectation that alternative exposures will introduce diversification benefits, many investors abandon diversifiers before they experience the expected pay-off. This behavior is especially common in periods when traditional portfolios have dominated for several years in a row.

In order to help investors, allocators and advisors successfully navigate this area of portfolio construction we have published a free report titled RETURN STACKING: STRATEGIES FOR OVERCOMING A LOW RETURN ENVIRONMENT where outline the issue in more detail and provide a thoughtful framework investors can use to construct a more diversified and behaviorally robust portfolio.

TOP PICKS:

The Horizons Global Uranium Index ETF (HURA TSX)

This is the first ETF in Canada to provide direct exposure to the global Uranium sector. HURA is designed to provide exposure to the performance of a basket of issuers which (a) are primarily involved in the uranium mining and exploration industry; or (b) invest and participate directly in the physical price of uranium. HURA provides exposure to companies directly responsible for the mining of uranium, with up to 25 per cent of the portfolio providing exposure to the price of the Uranium commodity. These two segments of the supply chain would likely see the most significant growth in value if global demand for uranium increases.

iShares MSCI Saudi Arabia ETF (KSA NYSE)

Saudi Arabia is the largest economy in the Middle East and seventh largest emerging market stock exchange. The FTSE indices have approved the inclusion in their indices, and MSCI EM and ACWI have brought this into their indices in 2019. This has the potential to attract billions in additional global asset flows for Saudi Arabia’s stock market. This stock market has an exceptionally low correlation to North American stocks and other EM economies, providing significant diversification including a currency as the Saudi riyal is pegged to the USD.

The 3iQ CoinShares Ether ETF (ETHQ TSX)

This seeks to provide unitholders with exposure to the digital currency ether in US dollars. Ether the second largest crypto currency by markets capitalization, second to Bitcoin. This is a very volatile, frontier asset class, so small allocations and a rebalancing regularly must be a part of the allocation thought process. Recommended on the last appearance as well. Reiterating from July 16, 2021.

PAST PICKS: Sept. 17, 2020

BMO Real Return Bond Index ETF (ZRR TSX)

Has been designed to replicate, to the extent possible, the performance of the FTSE Canada Real Return Non-Agency Bond Index. This index is largely in $CAD and the bonds are issued or guaranteed by the Government of Canada. Real Return Bonds (RRBs) are Government of Canada bonds that have been specifically designed to offset the impact of rising inflation. This is achieved by applying Inflation Compensation to the principal amount of the bond.

• Then: $19.55
• Now: $18.33
• Return: -6%
• Total Return: -4%

The Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL NYSE)

Is a fixed income ETF that seeks to hedge relative interest rate movements, whether these movements arise from falling short-term interest rates or rising long-term interest rates, and to benefit from market stress when fixed income volatility increases, while providing the potential for enhanced, inflation-protected income.

• Then: $27.40
• Now: $27.86
• Return: 2%
• Total Return: 6%

The Bitcoin Fund from 3iQ (QBTC-U TSX)

Holds Bitcoin, stored “offline”, is a closed end fund that trades on the TSX, is regulated, offered by prospectus, is CRA compliant. Mgt fee is 1.95 per cent and a unique opportunity for Canadians to own this emerging asset class via a heavily regulated investment channel.

• Then: $14.84
• Now: $45.26
• Return: 205%
• Total Return: 205%

Total Return Average: 69%