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

That's what he's seeing. All the new ETFs coming out are leveraged plays on NVDA, leveraged bitcoin, leveraged this and that. Lots of speculation in the marketplace right now, which doesn't happen at a market bottom; it happens much closer to a euphoric stage of investor enthusiasm.

When you buy any bond fund or ETF, you have persistent rate risk. Very different from buying a bond that matures. If you want to take advantage of falling yields, you have to own long-term bonds that don't mature for a long, long time. So if interest rates fall, you get the advantage of that.

For a bet on falling interest rates, long bonds are the way to do it. ZFL contains long-term federal government bonds in Canada. In the US, use TLT. Best bang for your buck, but highly volatile and highly risky. Long bonds right now are facing a tremendous wall of supply, and he's not sure they're going to fall that much in price. He's quite cautious on long bonds right now.

Another way is to use a target-dated ETF, where the ETF owns a bunch of bonds in the same maturity bucket. Would have more price sensitivity.

BMO has a series a bond ETFs that break things down by short-, medium-, and long-term bonds. BMO has the best universe of bond ETFs that are broken down into different categories. Look at those.

Lesson for Boomers
Going forward for as long as you want to look into the future, the bond market is not going to protect investors the way it has for the last 40 years. Investors need to really rethink portfolio construction in retirement years. In financial planning school, they tell students that the older you get, the more safety and bonds you should have in your portfolio. When interest rates got very low a number of years ago, that didn't give the protection needed.

In a bond fund, you earn yield to maturity plus the interest rate risk. If interest rates are falling, you get the current yield plus the change in rates. But if rates go up, you get the current yield MINUS the change in rates. With inflation being stickier, bonds will be challenged. Higher inflation is a problem for bonds.

Looking at a chart, in 2018 the yield to maturity was 3.25%. Today, it's 3.70%. Long-term average inflation is about 2%, + or -, for decades. We didn't have to worry about it, and now we do. If inflation's back down to 2%, he's not sure it's going to stay there.

You need a higher return than a bond is going to give you today to keep up with inflation and grow your savings. Alternative ETFs such as ZWU, VCNS, ZWB, ZWC, and PJAN are what's needed to protect your portfolio, rather than conventional bonds. These are what you need to generate the income you'll need for retirement, to get a real return on your investment, more than just protection of principal.

Sunlife vs. Manulife

Manulife (MFC)

Manulife Financial (MFC) is a Canadian multinational financial services company that operates under ‘Manulife’ in Canada and Asia, and through its John Hancock division in the US. It offers services include life insurance, wealth management, and investment services to individuals and businesses. 

Sun Life (SLF)

Sun Life Financial (SLF) is a financial services company that offers savings, retireent, and pension products globally. Its operations include five business segments: Asset Management, Canada, US, Asia, and Corporate. Its services include life insurance, health insurance, and investment management. 

Looking at valuation, we can see that both names are trading at similar levels (SLF at 11X forward earnings and MFC at 10X forward earnings). Although, SLF has been trading at a premium valuation relative to MFC over the past few years, and we think that MFC’s recent strong execution has caused it to re-rate. Both names have similar dividend yields (around the low 4% level). We can see how since early 2024, MFCs returns have begun to take off, and this is largely attributable to a combination of a previously cheap valuation and execution in cost management. 

Both names have performed well over the years and have sustainable dividend policies, but recent performance has begun to shift from prior years. We think with declining rates, that both of these names have certain tailwinds, particularly in the asset management space, but MFC has shown strong execution in its recent earnings results. We think that investors looking for a strong momentum play and a larger name might prefer MFC today, however, for a more conservative play, we give SLF the edge due to its longer track record of success in margin expansion, causing it to trade at a premium to MFC, and its generally lower levels of volatility. 
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He is a trader first and investor second.The stock market is at a different all time high than the highs in June and July. The market is rotating with money kind of re-allocating itself from the Great Eight into more boring names in the overall market. There is an opportunity with the big dips and some names are not as exciting as others. He questions the 50 basis point cut in the U.S. which can cause investors to wonder what's going on. The Fed will continue to keep banks updated as to anticipated actions. If you don't think inflation is under wraps, gold is an interesting investment. There is a place for it in everyone's portfolio, but not a huge position. It provides an opportunity if the market is fully valued.

The question was on option trades. Options are volatile. As a floor trader he didn't have preferences on buying or selling options. It depends on the market. There are times when options are incredibly expensive. There are general trends, example S&P, that can work to our advantage. A huge trend now is in options that expire today which is depressing options that expire in 7 to 10 days, so they are consistently underpriced

The question was on shorting. Generally when going short he likes to play directly in the VIX, or ETP's, etc. As a rule he likes long strangles, 7 to 10 days out, cheaper than the S&P, and then shorten. The best way to express short volatility options is though the Volatility Index itself.

Regarding interest rates and options, higher interest rates are generally good for call options and bad for put options. Covered calls are a way to generate income. They still work in a falling interest rate environment but you take less premium on it. You have to be careful with some of the covered call ETF's

The question was on how to neutralize a short call that keeps going up. You're taking on unlimited risk especially on the upside. You can buy a couple of way out of the money upside calls. You can create a 1 by 2 call spread and can participate in the upside if the stock keeps going up. Strangles are generally for Indexes.

The question was on option strategy. For stock replacement buy in the money calls for big companies. This is less capital intense for a long position.

The VIX is overpricing the U.S. elections. There is a lift in volatility in October and November before the election but even just a week after the election the volatility pulls back. You can go to short duration contracts that expire in October and November and go long in volatility in January

Believes recent interest rate announcements are separate from task of finding quality companies to invest in. High quality businesses are the goal of every investor, and interest rates are irrelevant. Inflation also doesn't impact high quality companies (asset light) - with ability to compound earnings. Companies that have pricing power (Apple etc.) are another example of high quality businesses - as opposed to oil producers who can't control pricing.

Company Highlight: South Bow

South Bow is a liquids pipeline company that was recently spun off from TC Energy Corporation.

Natural gas pipelines are evidently TRP’s largest source of revenue and earnings. Liquid pipelines would be the next largest source, which is part of the reason this split is so significant.

TRP outlined the value proposition of each stand-alone entity as further outlined. TC Energy will be focused on the natural gas and energy solutions side of the business. This is the more established side of the company, given the large portfolio of natural gas infrastructure which is ‘utility like.’ The energy solutions component of TC Energy will focus on nuclear, pumped hydro energy storage and new energy opportunities. TC Energy is responsible for supplying approximately 30% of the natural gas demand in North America. Company forecasts project a 3%-5% sustainable dividend growth rate and a targeted EBITDA CAGR of ~6% from 2023-2026.

South Bow is going to be an oil infrastructure company focussed on liquids transportation and storage. Being a stand-alone entity will give South Bow more capital flexibility to pursue growth initiatives. This particularly relates to the pipeline infrastructure connecting WCSB crude oil to the U.S. Midwest and Gulf Coast. South Bow’s forecast for long-term comparable EBITDA growth is 2% to 3%.

Current TRP shareholders will receive, in exchange for each TRP share they hold, one new TC Energy share and 0.2 of a South Bow common share. TRP is well-known for paying a high yield currently at around 7%. Under the split agreements, the dividend is expected to be divided approximately 86% to TC Energy shareholders and 14% to South Bow shareholders. Making this split as tax efficient as possible was of utmost importance for TRP’s management team, and it will be tax-free for resident shareholders outside of special circumstances.
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Those are the outperformers this quarter. Even with the big day today in the NASDAQ, the utility sector has actually outperformed technology in this quarter.