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

Tweaking Investment Exposure

He often gets questions about whether it's a good time to invest now, and it's usually new money coming off the sidelines. Right now, the US equity market's at all-time highs. One of the ways you can be a bit more conservative at times, or aggressive at times, is by looking at different ways to get exposure to the US large-cap area. And you can do that by using factors.

He brought along a chart of 5 different ETFs as ways to play:  SPHB, SPLV, SPHQ, SDY, and SPY. 

SPY -- low-cost MER, broad S&P 500 exposure.

SPHB -- S&P, high beta. Rebalanced a couple of times a year into the higher-volatility names. Typically exposed to ~20% of the index.

SPLV -- S&P, low volatility. About 20% of the index, typically higher yield. In the long run, similar returns to the broader market.

SPHQ -- his favourite factor. High quality. In the long run, uses filters to give you 20 names of the highest-quality companies in the S&P. Good balance sheets, less sensitive to the economic cycle. Some dividends, some growth. High-performing names. If you can handle the ride, this is the one to buy and hold.

SDY -- a way to play the S&P with a dividend basket.

Reality is that depending on what kind of investor you are, there's a different solution for everyone. Right now, with markets at all-time highs, he's not comfortable telling people to take $$ out of the bank and put it in the market. If you did right now, he'd say to go low volatility or high dividends. Because...look at his next chart.

The next chart shows that, during volatile periods over the years, when it's bad (as it was during Covid or 2015-2016) the low volatility and higher dividend options give you a better experience. They keep you invested, with more yield and less downside. But after a correction (typically about 13%), you want to pivot and shift into high-beta names for more growth, the broad S&P, or high-quality names. But do this when markets are cheap, not when they're expensive.

Learn which tools work in which environment, but there's an ETF for just about every person out there. Always stay fully invested for the long run, as it's really the best thing people can do. But tweak your exposure, so if we go through an adverse period, it's a little bit less bad. We can't time markets perfectly.

Investing 101: Have the correct investment expectations

Risks widely vary across investment markets and products. Be wary of implied rates of return that sound too good to be true, because they probably are, at best, very high risk or, at worst, complete scams. Many investors get attracted to high yields: some derivative products have current yields of 15 per cent or more. But past and current returns are not the same as future returns.

A realistic long-term return for stock investors might be in the eight-per-cent range. For a bond investor, five per cent or so. Don’t chase returns. Don’t envy someone bragging about 20-per-cent returns — they are not you, and they might be taking on huge risks.

But if things do work out for you as an investor, don’t get greedy. If one of your stocks has soared, that’s great, but it likely now represents a big portion of your net worth. As such, any future disappointment in that stock is going to be far more painful. In addition to maintaining realistic expectations, we would also maintain portfolio balance and discipline — always.
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Editor's Note: The Global Equities Description is focused on Small Caps which Greg considers to have a market cap between $500 million and $5 billion, The dispersion between between small and large caps is getting larger with some large caps reaching the trillion dollar mark and NVIDIA now having a market cap of $4 trillion.
He calls this year's volatile market ideal hunting grounds and doesn't necessarily see volatility as risk. He likes volatility and pessimism. and doesn't see pessimism in large caps. Some of the small caps don't have analyst coverage. Equities that they buy have between 0 and 6/7 analysts covering them.
He looks for a long term management track record of success. Companies should be cash generative and operate business that you can understand. He doesn't like debt.

Correct, as we've seen such an extended rally. Valuations are very high, especially in US stocks. People seem to be ignoring potential risks such as tariffs, and rhetoric has accelerated in the last week or so. If you look from January 1 to today, you have more geopolitical risk, earnings estimates coming down, US market continuing to rally. He's a little more positive on Canada.

Investors are being complacent right now, and it's time to be a little bit cautious.

The bond market's really telling us it's concerned about inflation, the US deficit, and tariffs potentially being inflationary. With today's additional tariff rhetoric we've seen bond yields moving up. That's a clear sign that the bond market has one view, and people often find that the bond market is a better gauge than the equity market of what's going on from a macro standpoint. 

Equity market's being driven by momentum, retail investors, a lot of hype around AI. AI will definitely be important, but we don't know how profitable companies are going to be from this massive capex investment. A lot of positive news is already built in, and the market's focusing on that and pushing all the negatives aside.

He doesn't typically tend to have a ton of commodities exposure. He owns a bit of gold and a bit of energy, but overall his firm is not a heavy commodity investor. It is the time for defensive businesses with good cashflow generation, and value investing should have a bit of a comeback. He favours Canada over the US right now for equities.

Market Update:

President Trump imposed 25% tariffs on goods from Japan and South Korea, starting on August 1. In addition, the copper market is currently in turmoil as President Trump announced a higher-than-expected 50% tariff on copper imports. The Canadian dollar was 73.04 cents USD. The U.S. S&P 500 ended the week up 0.4%, while the TSX was slightly down 0.1%.

A lot more greens this week than reds. Consumer discretionary and industrials gained 1.8% and 1.7%, respectively. Real estate and consumer staples added 1.5%, each, while energy edged up by 0.7%. Financials ended the week up 0.4%. Technology and materials ended the week down 1.7% and 1.6%, respectively. The most heavily traded shares by volume were TC Energy (TRP), Toronto-Dominion Bank (TD) and National Bank of Canada (NA).
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There are all sorts of strategies in the stock market, including being a moth that just wants to go to the flame. His firm's strategy is to not be the bullseye. Their idea is to find a great business that everyone's ignoring, and so to find things that are not going to be affected by tariffs. Focusing on the tariffs themselves is just too hard to figure out.

When Trump was elected in November he was already talking about tariffs, so they went through all their companies to see how they'd be affected by tariffs. So far, the one impacted the most is CP Rail. They own it for the long term, can't be replicated, monopoly. It has been hit, but has moved mostly sideways. Looking at the stock action over the last couple of days, it looks as though tariffs are all priced in and the market's looking through that.

A lot of things aren't affected by tariffs. The overall economy might get softer and it looks as though it is, and the consumer might be affected. Will auto manufacturers be affected? Yes, 100%. But they don't affect the earnings from MSFT. In Canada, earnings for a BN would be affected by interest rates and the 10-year bond yield. And the budget is way more important to the 10-year bond yield and how that affects the stock market. Those things are more important than tariffs.

That's why the market has digested tariffs so quickly. They have a specific impact on this little part of the stock market, but not the big picture.

Over the past year or so, his firm has really been trying to find higher dividend-paying stocks. Resource stocks are where he's finding opportunity right now, while his colleague is specializing in growth names. They're trying to build a high-income engine within their long-term strategy.

Off that April bottom, we've seen probably one of the most dramatic V-bottoms in history. That's telling you that things are starting to get a bit extended. If you look at the CNN Fear & Greed Index, or the NAAIM exposure of almost 100% invested right now, you can see that short-term things are extended.

Markets made a really big push to highs. Now zoom out and look at the longer term, some things have happened that indicate we're setting up for higher markets long term. But there could be chop in the short term. Depends on what type of investor you are. If you're more for the short term, you might want to look at raising some cash. If you're in it for the long haul, you'll probably just sit here and ride out the volatility.

Going back in history for almost any market, the July numbers are usually second- or third-best depending on which index you look at. So the market having positive returns so far in July makes sense.

There's so much going on right now, and we've seen a year like no other as far as geopolitical news and tariff talks. Now the focus will probably turn to earnings for Q2. After Q1, a lot of companies didn't provide much for guidance because of the tariffs. So now we'll want to see what the guidance is going forward, and that will let us get a better sense of valuation on the market.

Looking at the market from a historical, rearview perspective, it certainly is expensive right now.

One factor is the timeframe for how long you want to stay invested. You need realistic timeframes, because we saw this past March what volatility can do to markets. He tends to focus on a lot of small- to mid-cap companies, and they can be really volatile both on their stock and on their underlying business.

Know yourself and how you react to making money and to losing money. When a stock's losing money do you follow it down, buy more, or stop yourself out? Need to know that ahead of time so that you don't get emotional in the moment. When you're making money, will you hold and make a lot of money for the duration or will you harvest your gains along the way and reinvest somewhere else?

It's important to know ahead of time what you're going to do, especially with the small- and mid-caps.

When you talk to people ahead of time, most say either they can handle volatility or they don't want any volatility. If an investor doesn't want any volatility, then really the market's not the right place for them. 

If they say they can handle volatility, it comes down to how much they can handle and over what timeframe. If you look back to what happened in March/April, and now we're right back to where we were, know that it doesn't always work out that way. There have been times in history when a downturn can last for a much longer period. Think back to 2008 or 2001-2003. So investors have to understand how much downside volatility they can stomach.

If you can handle a 15-20% drop, but only for a year, then perhaps the market isn't the place for all of your money. If you can stick it out for 3-4 years, then the market is OK for you.

Also, if you have a steady cashflow and you're adding money to your portfolio all the time, you want cheaper prices. That will really help you in the long run over time.