David Cockfield, Markham, Ont.-based portfolio manager and managing director of Northland Wealth Management, says determining how much a security can lose is a vital part of picking investments. He recommends two top exchange-traded funds, or ETFs, that he believes not only offer a decent chance of gains but are also unlikely to suffer massive losses thanks to their diversification as well as dividends.
Northland Wealth’s David Cockfield takes a cue from the medical profession in his investing philosophy, which could begin with the preamble: “First, do no harm.” Of course, his interpretation of the medical oath applies to how investors treat themselves rather than their investments.
“This is a market that is just grim for the smaller investor,” he says, pointing out that overall, the TSX declined about eight per cent over the course of 2015, including dividends.
Mr. Cockfield stresses the importance of building a diverse portfolio made up of securities that enjoy low volatility and boast established growth records.
The portfolio manager finds exchange-traded funds (ETFs) fit his criteria well. Like mutual funds, ETFs are made up of a bundle of stocks and generally track the progress of a specific industry or market index. However, ETFs differ from mutual funds in that they are bought and sold on stock exchanges (hence their name).
This top exchange traded fund holds BCE and Metro
In the case of Mr. Cockfield’s “best buys”, BMO Low Volatility Canadian Equity ETF (TSX─ZLB) and BMO MSCI Europe High-Quality Hedged-to-CAD Index ETF (TSX─ZEQ), their fees are far lower than most mutual funds as well, at 0.3 per cent and 0.4 per cent, respectively.
“This is a very cheap way to get a diversified portfolio of quality securities,” he says.
Aside from the safety of diversification, Mr. Cockfield’s picks offer protection from losses thanks to regular dividends paid out by their varied holdings.
While the TSX in general has declined, the portfolio manager notes that “ZLB is up in price, not even including the dividend.”
This top exchange traded fund stresses stable Canadian stocks in stable industries. A little more than two-thirds of the portfolio is made up of financial, consumer staple, consumer discretionary and utility stocks. The 40 Canadian stocks that form the fund’s portfolio are all chosen from among the 100 largest market-listed companies in Canada.
Among the fund’s top-10 holdings are well-known businesses such as the telecommunications giant BCE, supermarket chain Metro, and fuel retailer and convenience-store operator Alimentation Couche-Tard.
BMO’s low-volatility offering enjoys healthy trading volume so it is “not a problem to buy and sell,” says Mr. Cockfield. In the meantime, shareholders own a stake in companies that have performed well in promising markets and have room for share price growth.
ETF buys into strong sectors and economies
Mr. Cockfield’s other recommendation is based on the Morgan Stanley Capital International (the “MSCI” in ZEQ’s full name) Europe Index. According to the analyst, BMO’s Europe-tracking exchange traded fund studiously avoids placing too many eggs in any one basket.
In particular, he holds the fund up as a straightforward, inexpensive way for smaller investors to put their money into more far-flung assets. “This ETF gives individual investors the opportunity to participate in markets outside of North America in companies in stable economies that are multinational and have strong growth profiles,” says the portfolio manager.
As of Oct. 31, 2015, the ETF was made up of 123 securities from that index, none of which made up more than five per cent of the total portfolio. Even so, Mr. Cockfield notes, “They’re all A-1 companies. Nobody is going to be hurt by these securities as far as I can see…and there’s definitely reasonable upside.”
The index’s top-10 weighted securities include major global stocks and household names such as Nestle, Roche Holding, British-American Tobacco, and Unilever.
However, Mr. Cockfield argues that where they are located is even more important than which companies the ETF owns. “The geographic diversity is 40 per cent U.K., 22.5 per cent Switzerland, and 9.9 per cent Germany, so 73.2 per cent of the portfolio is focused on the three strongest economies in Europe,” says the analyst.
Moreover, 82.7 per cent of the fund portfolio consists of consumer staple, health care, consumer discretionary, and industrial stocks, all stable sectors that Mr. Cockfield says should do well as Europe recovers in 2016.
The portfolios of both of these top-rated exchange traded funds are rebalanced near the middle and end of each calendar year. Mr. Cockfield concedes that ZEQ’s price endured a “sideways” period after a solid run in 2015 but he says the problem appears to have been resolved.
Investor’s Digest of Canada, MPL Communications Inc.
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