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

Indexed based ETF’s or sector-based ETF’s? He buys both. You have to look through the name and what they hold, and decide where you want to focus. If you really feel strongly about a particular sector, that is the one that you go to.

The difference between mutual funds and ETF’s? Mutual funds are fully managed portfolios, and fees are higher because of that. They are selling to a lot of small investors and there is a fair amount of administrative costs. ETF’s are much simpler in that you have just a straight portfolio that is usually focused in a particular area and there is not a lot of investment management going on, and a lot less administrative costs. Fees on ETF’s are significantly less.

Markets. He sees a fairly strong economic backdrop. There are checks in every box he is looking for. There are technicals shorter-term that have deteriorated. He is primarily Canadian. Banks and oil have pulled back. There are a lot of other sectors that have picked up and the TSX has done well. He would like to see the technicals improve before going full into the market. The HCG-T financing adds more stability to the Canadian financials. Investors have taken some money off the table in energy and banks. HMMJ-T (Cannabis) was launched during a very feverous pitch in the Marijuana sector and about the time legislation was tabled. There has now not been a lot of news. We will not expect any news through the summer and then get some news in the area of regulation.

Market. We are getting global economic growth, but not at a significant clip. A year ago, the whole world was not growing. Europe was down, Canada was having trouble and the US was growing at 2%. Looking at some of the numbers now, you are seeing good global growth. It’s not going to be 3% or 4%, it’s going to be something like 2%. The world growing at 2% is much better than a part of the world going at 2% and the rest of the world growing at negative numbers. You are seeing low rates, low inflation and good global growth, which adds up to a stock market that continues to do well.

Individual stocks or an ETF in the European market? If you are going to be putting money into Europe, the best way to deal with that is probably through an ETF. Europe is going to do well. It is a much more cyclical economy, so you tend to have a lot less tech there, and more utilities. Dividend yields are quite high there, so he would look for more of a dividend paying ETF.

Market. He still likes the look of the US market, but is seeing opportunities elsewhere. If he had to characterize the 1^st half of this year, he would sum it up by saying less is more. There has been less likelihood of fiscal reform in the US, which has been overshadowed by an improvement in corporate profitability that has helped US equities. In Europe, political risks have diminished, and there has been an improvement in fundamentals, which has probably helped European equities. The decline in interest rates and low volatility this just screams for diversification. As the year progresses, there is likelihood that volatility increases, and you’ll start to see the correlation between some asset classes deteriorate, which means you want more broad-based exposure. He is overweight equities relative to fixed income, and is seeing some opportunities in the US, but there is probably more capital appreciation potential in continental Europe, where things are getting a lot better.

Which pipelines should be held, and which should be sold? Not knowing which ones you own, he would suggest keeping the Kinder IPO along with TransCanada (TRP-T) and Enbridge (ENB-T). He wouldn’t hesitate to add to Pembina (PPL-T) and Alta gas (ALA-T).

Market. The average investor tends to concentrate on the P of the P/E. They are really interested in price and believe that if the price goes up it is good, but if it goes down it is bad. That is not the way real life works. People tend to judge the company, but are not equipped to analyse the depths that the professionals do. They spend too much time looking at macro issues, trying to figure out whether politics or policy is going to have a bad effect on their holdings. Politicians come and go. Companies and stock prices are driven by the abilities of companies and management to drive earnings, revenues and cash flow.

Currency? Canada has a slightly lower growth rate than what they are seeing in the US. Also, the Cdn$ gets impacted by energy. The Cdn$ is likely to remain weak, and even weaken further from where it is. He has no problem buying US$ with our Cdn$, because we could be buying less a year from now.

Market. We are in a very strong global economy with very little inflationary pressures. Productivity gains are offsetting wage increases. We are still in a period where we can see valuations on equities continue to rise, just as it did in the nifty-50s period. From the late 60s into the early 70s the great companies just became “one decision” stocks and managers just had to “buy and hold” and they did very, very well. That got hammered in the correction of the 70s and by 1998 you are back to breakeven, if you had bought those stocks at their very peak. The FAANG stocks are going to be the ones that survive. They have profit margins that are rarely seen in history. This is a business model where distribution is just the Internet and everyone knows the brand names.

Tech stocks? Fully believes in the Internet technology stocks. Alphabet (GOOGL-Q), Facebook (FB-Q) and Amazon (AMZN-Q) are in a good position and will continue to grow. There is not going to be any dividend yield on these and the volatility is going to be high. Watch for opportunities to enter, on days when the market is down for no reason.

Markets. They de-stressed the stress test for the banks by taking the qualitative aspects out of it. This week the stress tests will not have much impact. He thinks we will see negative interest rates in the future. He does not think the Fed will be able to unwind the balance sheet of the US much. The equity markets are breaking out to new highs today. There is a recession sometime in the future that will be hard on the markets. He is nibbling away at energy producers, mainly through ETFs such as XEG-T, XLE-N, OIH-N.

ETF similar to ROBO but in Canada. There aren’t any. You will have foreign currency risk with all of these. But even if there was a Canadian one it would have to hold international equities.

Canadian vs. US $ ETF. He believes the US stock markets have never been more expensive. A high quality ETF could fall 25% or more in a bear market. You would still get a yield throughout, however. BMO is the best at covered call strategies so you might go that way.

Buy US$ now? He likes to scale into a position. If you have years to wait, then the CAD$ might get higher. For the foreseeable future you are looking at $0.78 as the maximum, if that.