A Comment -- General Comments From an Expert (A Commentary)

US Markets. US had good solid numbers, enough to keep the economy rolling a little bit and enough to keep those earnings coming through. We know the Federal Reserve unwinding will be coming at some point, but until it actually comes, monetary conditions do remain favourable. Has been Short on the bond market for a number of years now.

US Economy. US job numbers today play into his theme that the US economy is getting better. Even though in some sectors, including government, they are letting people go. But in private industry, the payroll is really outperforming and doing very, very well. Truck sales are indicating that the economy is doing very well. Because of concerns about the US$ declining, he has been buying iShares S&P 500 Cdn Hedged (XSP-T) but for the last 6 months or so, he has been buying the Vanguard Small-Cap ETF (VB-T).

Europe. Looking to get into some Cdn ETFs and some non-North American holdings but the time is not quite right. There seems to be some fidgeting in Europe for the last few days. He would like to be looking at Europe, in the same way that he does in the US, that is, he doesn’t want to buy their economy but wants to buy good businesses. The problem with Europe is that you don’t have one federal bank or one Treasury Secretary, so there are competing and conflicting interests.

As an option becomes deeper in the money, it’s time value tends to decrease. Why? This is because options traders are not willing to pay as much for an option. The more it is in the money, it is not going to move exactly with the time value because time value is always decreasing.

Could you comment on how you handle the very wide variance between bid and ask prices on Montréal options? Do you just hit the bid when selling? It really depends on the liquidity of the option you are dealing with. He’ll often use options on the highly liquid XEG, XIU and the banks. A lot of the other options on ETFs are not terribly liquid. Yes, he will just hit the bid when selling but if you’re doing anything a little more complicated like that, a lot of people like to do various kinds of spreads but you have to be really careful.

Indices. If he wanted to purchase Calls and Puts, is there a sweet spot with regards to timeline and from a price aspect? Also, would you stay away from the triple witching months? What he really is looking at with options is the underlying volatility and what you want the strategy to achieve. As an option seller (he is almost never an option buyer) he likes to sell out 6 months in order to pick up better money in terms of time value and, therefore, more downside protection for the portfolio. If you are a purchaser, that time value can erode pretty quickly. If he were a trader in options, he would be looking at shorter terms. He is happy to have the longer-term people out there as it makes his Covered Calls look particularly attractive.

What is your opinion of the 4 iShares RAFI Fundamental ETFs (CRQ, CLU, CIE,CWO)? Do you use them? They seem to outperform the market even with a higher management fee. There is absolutely nothing wrong with these. They do have a slightly higher management fee. These are becoming more prevalent and he thinks it is a positive development.

Markets. Triple storm on the TSX: Interest rates have gone up; energy prices have been low and coal has been low; and then there were concerns about global growth. Dividend yield is comparatively still out of sight compared to a long bond. Our dividends in Canada are tax advantaged and people forget that 1 or 2% interest rates are historical anomalies. As interest rates normalize, dividends on bank stocks and so on should be okay.

REITs. Choice was a way for Loblaw’s to extract value where it wasn’t available otherwise. REITs have been hit badly (as interest rates have increased ). CAP rates fell to ridiculously low levels. We had a good excuse for people to get off these stocks. Interest rates should continue to increase. The question if cap rates adjust and they will probably move more quickly than interest rates. He thinks rising interest rates continuing to rise will just be an additional pressure on REITs. A lot of his clients own real estate – home cottage, etc. so he stays out.

ETF’s. We are at the point now where we have saturated the market. To his mind, the best products are the plain-vanilla that tracks the major benchmark or sector or a major part of the world. The more esoteric things such as leverage, covered calls, the very niche type of things, etc. are not at all necessary for building a good quality diversified portfolio.

Does the Cdn income tax department allow the 50% capital gain reduction for gold bullion ETFs or gold producing companies? A capital gain is a capital gain no matter what so the answer is Yes.

Budgeting. How does a relatively low income person budget most effectively to manage their resources well? You put the big rocks in first. There are certain things that are going to be set expenses such as mortgage/rent payments and these should be no more than a 3^rd of your total income. From that, you have taxes and food. Those are things that you have to do. If there is discretionary money left over, you put a little bit aside for a rainy day fund. If you still have money left over, that is when you can start investing.

What are the risk factors of ETFs? An investment advisor said they where riskier than Mutual Funds. For the most part, mutual funds and ETFs are both going to be following what they are benchmarked against. Their risk profiles are going to be very similar.

Is there an easy way to understand how to convert a self-directed LRIF into a self-directed RRIF? An LRIF is a locked in retirement income fund and a RRIF is just a regular retirement income fund. Not sure if this an easy way for understanding but you can move up to half of the money from a LRIF into a RRIF.

What are the pros and cons of a TFSA in a stock portfolio? If you think you’re going to be getting capital gains, then TFSA is great because whatever capital gains you earn in a TFSA do not attract any tax when you withdraw the money. The con is, relative to an investment account, if you put stocks into a TFSA and they drop in value, you lose the opportunity to claim the capital loss and, if you have capital gains elsewhere in your portfolio, you will not be able to apply those losses against this.