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I received an email from a young reader last week. He wrote as follows:
“How do you believe the current state of the market would affect someone looking to purchase long-term securities? I have some extra money I’m looking to invest and not to touch for the long term. Would now be a good time to buy at a discount? Or would you advise waiting?”
It’s a good question, and well-timed. Monday Aug. 5 was a terrible day for stock markets. The tech sector was ravaged as three separate bombs exploded at the same time: the popping of the AI bubble; the sudden fear of a U.S. recession; and a landmark anti-trust ruling against Alphabet’s Google search engine domination.
The carnage among The Magnificent Seven, which had been leading the markets higher all year, was brutal. Microsoft lost $13.34. Meta Platforms fell $12.41. Apple dropped $10.59, after it was announced that Berkshire Hathaway had sold half its position. Tesla gave back $8.79. Alphabet tumbled $7.42. Amazon was down $6.88. Nvidia lost $6.82.
The tech-heavy Nasdaq lost 576 points (3.43%). The S&P 500 was down 160 points (3%). The Dow lost just over 1,000 points (2.6%).
Although information technology bore the brunt of the selloff, the effects were felt across all sectors. Even the bond market took a hit.
The consensus among analysts was that this was a plain, old-fashioned correction. The rally that followed seemed to confirm that. But it should be noted that even with the big rebound, the S&P 500 still ended that week in early August slightly down and well off its all-time high of 5,669.67 reached in mid-July.
The point is that day-to-day movements don’t mean a lot, dramatic though they may be. What’s important is the mid- to long-range trend pattern. The S&P chart had been rising since October, 2023, and set a new record in July. Despite rallies, some of which were significant, the downward pattern since is clear.
Does this mean a bear market is looming? Possibly. We’ve seen what’s happened to technology in recent weeks. Commodities have also been weak as demand has slowed for key metals like copper. Jobs have become hard to find, especially for young people, indicating a slowing economy. We may yet have the proverbially soft landing but a hard one – a recession – can’t be ruled out.
So, back to the young reader’s question. History has shown that no one is able to successfully time the markets for an extended period. Storms sometimes appear in cloudless skies, catching investors by surprise and breeding panic. At the other extreme, huge market rallies usually start when everyone has lost hope. Despondency spawns success.
So, here’s what I advise.
iShares Core S&P U.S. Total Market ETF (TSX: XUU) tracks the entire U.S. market, including small, medium, and large cap stocks. It comes in both a hedged version (XUH) and an unhedged version (XUU). The unhedged version is your best bet. The fund was launched in February 2015 and has $2.9 billion in assets under management. The MER is a very low 0.07% so almost all your money is working for you.
Despite the market plunge, the fund is ahead 20.6%% year-to-date to Aug. 30. The five-year average annual compound rate of return is 15.13%. The fund is vulnerable in down markets – it lost over 13% in 2022 – but over the long term that was merely a blip.
This is a fund of funds. It invests in four U.S. ETFs, the largest of which are the iShares Core S&P 500 (47.53% of total assets) and the iShares Core S&P Total U.S. Stock (46.06%). The rest of the portfolio consists of small positions in small- and mid- cap ETFs and a limited amount of cash.
In sector terms, the fund has a 28.84% exposure to information technology. Other large positions are financials (13.52%), healthcare (12.05%), and consumer discretionary (9.77%). The sector breakdown has remained reasonably consistent for several years.
Distributions are made quarterly and may vary considerably. Over the past 12 months, distributions have totaled about $0.58 per unit, for a trailing yield of 1.1% at the current price. This is not a fund to own if you need steady cash flow, but for long-term growth it works fine.
This is an all-stock ETF, so returns will reflect what is happening in the U.S. equity markets. Right now, the outlook can only be described as uncertain. Long-term, this is a core holding for anyone who wants exposure to the broad U.S. market.
iShares Core S&P/TSX Capped Composite Index ETF (TSX: XIC) is designed to replicate the performance of the Capped S&P/TSX Composite Index, net of expenses. In other words, in invests in a broad portfolio of Canadian stocks. The fund was launched in February 2001 and has $12.6 billion in assets under management. The management expense ratio is very low at 0.06%.
The fund touched an all-time high of $37.03 in late July but pulled back after the TSX suffered a big drop on Aug. 6. It’s ahead about 13.6% year-to-date to Aug. 30.
The fund holds 227 positions. Royal Bank is number one at 6.62% of the assets. Other top five holdings are TD Bank (4.32%), Shopify (3.57%), Enbridge (3.55%), and Canadian Natural Resources (3.18%). Financials at 30.65% are the top sector in the portfolio, followed by energy (17.64%), industrials (13.53%), and materials (11.9%).
Distributions are made quarterly. The most recent distribution, in June, was $0.266 per unit. Over the past year, distributions have totaled $0.981 per unit, for a trailing yield of 2.6%.
As with all these funds, the short-term outlook is uncertain but long term, this ETF is a good choice for a diversified position in the broad Canadian economy.
iShares MSCI EAFE Index (CAD-Hedged) (TSX: XIN) is the Canadian dollar hedged version of a U.S. fund (NYSE: EFA) that tracks the MSCI EAFE Index. That index covers Europe, Australasia, and the Far East. Most of the assets are invested in the U.S. version of this ETF. The fund was launched in September 2001 and has about $1.3 billion in assets under management. The MER is 0.51%.
The fund is having a decent year, up 13.5% to date to Aug. 30. its 10-year average annual compound rate of return is 7.83%.
This ETF is highly diversified with 744 underlying positions and is more-or-less equally weighted. Japanese stocks make up about 22% of the assets, with about 15% in the U.K.
Distributions are paid semiannually, in June and December. The June payment this year was $0.526 per unit.
Again, uncertain short-term, positive long-term.
Finally, in terms of mix I suggest our young reader diversify holdings. An appropriate mix to start with might be 60% in XUU, 30% in XIC, and 10% in XIN. As always, check with your advisor before investing, to ensure the investments match your risk tolerance and financial objectives.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Follow Gordon Pape on X at X.com/GPUpdates and on Facebook at www.facebook.com/GordonPapeMoney.
Notes and Disclaimer
Content © 2024 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.
Image: iStock.com/Valeriy_G
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