Daniel Straus’ Top Picks for August 21, 2024

Daniel Straus, managing director, ETF Research,National Bank of Canada Financial markets

FOCUS: ETFs

Top Picks:

MARKET OUTLOOK:

Global financial markets experienced significant turbulence earlier this month. An unexpected rate hike by the Bank of Japan (coupled with weak U.S. job data) threatened to narrow the gap between Japan and the U.S. interest rates, triggering an unwinding of the yen carry trade and resulting in a global equity selloff on Aug. 5. Throughout this period, ETFs were among the few things people were actually buying, proving once again that they have come to act as critical stability and liquidity buffers in an increasingly complex and volatile financial system.

Emerging market equities are still feeling the aftershocks, but global markets in general have recovered as of last week. U.S. equities are on the threshold of positive month-to-date performance, supported by lower-than-expected inflation numbers. The market is now pricing in a 25 basis point (bps) cut by the U.S. Federal Reserve in September and a full one per cent cut by the end of 2024. Although our economic and strategy team expects some rate cuts this year, they do not rule out the possibility that the Fed’s policy rate could remain higher for longer into 2025 if inflation proves to be stickier—and several catalysts could drive that outcome, such as geopolitical tensions and rising prices from China.

National Bank’s economics and strategy team is comfortable maintaining an overweight in gold bullion and gold stocks. The price of gold bullion has reached a new high, driven by increased market volatility and a weakening of the U.S. dollar in anticipation of rate cuts.

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TOP PICKS:

CI Gold Bullion ETF C$ Hedged Series (VALT.B TSX)

Gold Bullion ETF: When markets are volatile and inflation rears its head, gold gets its chance to shine. It has done so in recent months, hitting new all-time highs of US$2,542 per ounce. Even as this run extends itself towards summer’s end, our economists are still constructive on its performance. But that’s not why we’re highlighting it today—it’s because in our model ETF portfolios, a small smattering of gold bullion in ETF format can work wonders for the long-term risk/reward profile of the whole portfolio. Gold’s ability to act as a non-stock, non-bond “third” asset class can deliver a wide diversification benefit.

Ishares S&P 500 3 Capped Index Hedged Units ETF (XSPC TSX)

Capped S&P 500 ETF: With the leadership of the magnificent seven and the associated AI-frenzied technology industry, the performance of the S&P 500 Index has been an unstoppable juggernaut (at least until early August). We’ve spoken with many clients and investors who consider the S&P 500 the bedrock of their U.S. equity exposure, even though other similar, passive cap-weighted indices exist. This new product from iShares addresses the top-heavy concentration risk that has been weighing on the mind of the S&P 500’s fanbase. It’s the same index but with a hard three per cent cap to the maximum weight of any one of the 500 stocks. Right now that means it has three per cent rather than six per cent weight in its largest companies, which is a small but meaningful gesture in the direction of allaying concentration fears.

RBC Target 2027 Canadian Corporate Bond Index ETF (RQP TSX)

Target Maturity Bond ETF: Fixed Income ETFs are one of the few clear-cut value propositions in all of investing—they’re liquid and transparent, ultra-efficient, and low in cost, generally offering exposure to hundreds of bonds in a single tradeable package. Most benchmark bond ETFs are “ladders” by another name, in the sense that they have no real term because bonds that mature out of the index get automatically re-invested at the long end of the curve. This is great for long-term ballast, but it lacks the reliable predictability of an actual bond position, which will pay out its principal at a specific maturation date. This target maturity bond ETF is itself a diversified basket of Canadian corporate bonds that all mature in the same year. This kind of ETF is great for portfolios that need to manage cash flows around certain dates.

PAST PICKS: MAY 19, 2023

BMO Money Market Fund ETF (ZMMK TSX)

• Then: $50.07
• Now: $50.04
• Return:0%
• Total Return: 6%

iShares Core TSX Capped ETF (XIC TSX)

• Then: $32.46
• Now: $36.86
• Return:13.5%
• Total Return: 18%

Vanguard Conservative ETF Portfolio (VCNS TSX)

• Then: $26.25
• Now: $28.80
• Return:10%
• Total Return: 14%

Total Return Average: 13%