Richard Orrell, Portfolio Manager, Croft Financial Group

Focus: ETFs

Top picks: Invesco S&P 500 Equal Weight Income Advantage ETF, BMO MSCI USA High Quality Index ETF, Vanguard Canadian Ultra-Short Government Bond Index ETF

MARKET OUTLOOK:

The market is facing significant uncertainty due to a combination of conflicting policies, executive orders, and concerns over inflation and economic growth. Investors in the financial markets and company owners looking to invest capital are becoming increasingly confused. The winners are the late-night talk show hosts. Recent reports indicate a decrease in consumer sentiment, suggesting a potential slowdown in consumer spending.

The market is also reevaluating the rise of AI investments, creating a volatile environment that could lead to a market correction. However, as Warren Buffet advised, “Be fearful when others are greedy and greedy when others are fearful.” The current market sentiment is fearful.

Considering this, many recent conversations with clients focus on current asset allocation. Short-term funding needs should be met with cash and fixed income investments, while long-term goals can focus on equities, which offer the best protection against inflation and rising living costs. The recent strong returns of balanced portfolios (such as 12.49 per cent in 2023 and 15.78 per cent in 2024 for a 60/40 portfolio) highlight the importance of staying invested and not locking in five per cent rates, as many did with GICs at the beginning of 2023.

With the current market sentiment showing fear, the next move in the market could very well be upward and now is a good time to reassess asset allocations to ensure they align with long-term objectives.

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TOP PICKS:

Invesco S&P 500 Equal Weight Income Advantage ETF (EQLI TSX)

I still believe that ETFs with a call writing component will provide a prudent approach to managing risk in the current market environment. Since I couldn’t use JEPI from the show on January 20th, EQLI is a close proxy. The underlying equity is the equal weight version of the S&P 500. The call writing strategy will provide tax efficient income in a non-registered account.

BMO MSCI USA High Quality Index ETF (ZUQ TSX)

The ETF screens large and mid-cap companies in the U.S. for high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. Individual names are capped at five per cent. It rebalances semiannually in November and May. I like companies that have the factor characteristics of this ETF, and this ETF screens out companies in the broader index that don’t qualify.

Vanguard Canadian Ultra-Short Government Bond Index ETF (VVSG TSX)

This ETF holds Canadian government treasury bills and bonds from 0 to 12 months. It’s an option for any excess cash balances in the short term. This may also be used as a component in a portfolio where retirement payments are being made to have safety and some return. The current yield is about 3.5 per cent. The MER is 0.10 per cent.

PAST PICKS: Jan. 20, 2025

Invesco S&P 500 GARP ETF (SPGP NYSERCA) -- U.S. Markets were closed on Jan. 20. Numbers are taken from Jan. 17

• Then: US$110.22
• Now: US$100.47
• Return: -9%
• Total Return: -9%

JPMorgan U.S. Equity Premium Income Active ETF (JEPI TSX)

• Then: $26.82
• Now: $26.39
• Return: -2%
• Total Return: -1%

TD U.S. Equity Index ETF (TPU TSX)

• Then: $49.17
• Now: $46.36
• Return: -6%
• Total Return: -6%

Total Return Average: -5%