Gordon Pape’s mailbag: Cashing in mutual funds, green ETFs, chasing IPOs and other investing dilemmas

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Reader questions keep coming so let’s dip into the inbox and answer some of them.

Green ETF

Can you recommend a green ETF? I currently hold Greenlane Renewables (GRN-X) which has done well but has a narrow focus. I am looking for an ETF that cuts across many forms of renewable technology.

Most green ETFs focus on energy. In the past couple of years, we’ve seen some with a broader mandate, especially from BlackRock Canada, but these haven’t been around long enough to establish a meaningful track record.

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To my knowledge, the oldest sustainable ETF in Canada is the iShares Jantzy Social Index ETF (XEN-T). But many green investors don’t like it because it owns positions in several major fossil fuels companies, including Canadian Natural Resources Ltd. and Suncor Inc.. Plus, its returns are unimpressive. It lost 1.2 per cent over the year to Jan. 31 and has an average annual compound rate of return of less than 4 per cent since it was launched in 2007.

I suggest a better choice is the awkwardly named iShares MSCI KLD 400 Social ETF (DSI-N). It holds a broad portfolio of ESG stocks and has performed well, with a 10-year average annual compound rate of return of 13.2 per cent to the end of January.

This fund is about as far away from green energy ETFs as you’re likely to find. Less than 2 per cent of the portfolio is in energy stocks. About a third of the assets are in technology, with Microsoft, Facebook, and Alphabet the leading positions. You’ll also get exposure to major companies like Visa, Tesla, Walt Disney, and Procter & Gamble. The MER is very low, at 0.25 per cent.

Calculating yield

When calculating the yield of a dividend producing stock, should I base the yield using the original amount of capital invested or the current value of the stock?

For example, during the pandemic I purchased Canadian Tire at $99.75. The $4.70 annual dividend was yielding 4.7 per cent at the time of purchase. Today, the stock is trading at $175.57 and the dividend is still $4.70, but, at today’s price, the dividend yield is only 2.7 per cent. I know my yield should be calculated on the original purchase price but as the share price returns to previous levels and the price appreciation flattens, should I look for a different stock if I am looking for higher yields?

This is a question that often perplexes investors. Calculating the yield based on the original price paid is called yield on cost (YOC). If a company continues to increase its dividend over time, the YOC will increase, as the cost remains constant.

For example, my Income Investor newsletter recommended Cogeco Inc. in April, 2015, at $54.14. The annual dividend at the time was $1.02 for a yield of 1.9 per cent. We projected the dividend would rise and it did, to $1.90 a share in September, 2020. At that point the YOC was a more respectable 3.5 per cent. However, we recommended selling the stock for a capital gain of 71 per cent and reinvesting the money in a higher yielding security.

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The bottom line is that you should be aware of the YOC of your stocks but be prepared to sell if you can buy a comparable security with a higher current yield. Just be sure you are not taking on significantly more risk.

Sell GOVT?

You recommended this bond ETF in your newsletter. It has gone down in price. Is it time to sell?

You are referring to the iShares U.S. Treasury Bond ETF (GOVT-A). It invests in what many consider to be the world’s safest investment: U.S. government Treasury bonds.

So, if Treasuries are so safe, why has the fund dropped in price? The U.S. Federal Reserve Board has not raised its key rate and continues to maintain a dovish stance.

The reason is that despite the Fed’s posture, bond yields, including Treasuries, have been gradually inching higher. And when yields rise, bond prices fall. That’s exactly what we’re seeing here, and there may be more to come.

So why own GOVT in this situation? Mainly for stability and balance. The U.S. government is not going to default on its debt, so the principal of the bonds that underlie this ETF is safe. And if the stock market takes a nosedive, you’ll be glad to have some bonds that will minimize your downside risk.

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That said, as interest rates move higher, you’ll see a gradual erosion in the market price. If that is not acceptable to you, look for other options.

Cashing in mutual funds

I have a few mutual funds in my RRSP portfolio with a total accrued value of $37,000. I have owned them for the last 15 years The MER for these funds range from 1.71 per cent – 2.71 per cent. The average for the five funds is 2.32 per cent. These funds have good returns.

Given the high MERs associated with these funds, I am considering cashing in and purchasing ETFs within my RRSP portfolio. Do you think this would a good move?

Also, I am 64 years and retired. What type of ETFs would you recommend? I do not have a company pension plan.

You are proposing to sell funds with good returns to buy cheaper ETFs. This could be a case of penny-wise, pound-foolish. You don’t say what the returns are, but you need to put them in context with what you are paying. You could end up with ETFs that cost less but don’t perform as well. I suggest you look at the returns of ETFs that may interest you and compare their returns over the long term to those of your mutual funds.

As for which ETFs to buy, if you go that route, look for those at the lower end of the risk scale. Since you have no pension plan, your RRSP may be the main source of your retirement income, so you don’t want to take unnecessary chances with it.

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Investing in IPOs

I have question from a relative newcomer to investing about buying into an IPO, in this case Telus International. I read in The Globe and Mail, prior to the stock trading, that it would be priced at $25 so I put in an order, again prior to trading, at $25. Of course, that trade did not complete, so my question is, who got the shares at their original price and how? And further, should I be smelling a rat?

Maybe not a rat, but it’s true the system of allocating initial public offerings does not favour small investors.

The best way to participate in an IPO is to deal with a full-service broker who has an allocation. Typically, the underwriters (or book-running managers as they also called) of an IPO are the conduits who bring the shares to market. There is a complicated mechanism for doing this, but for individual investors it comes down to having a broker who has received an allocation of the stock from an underwriter.

In the case of a hot IPO like Telus International, the bulk of the issue likely went to institutional investors like pension plans. Any retail allocation would go to a participating broker’s best clients.

The lead book-running managers for the Telus issue were J.P. Morgan Securities and Morgan Stanley & Co. Also participating were Barclays, B of A Securities, and CIBC Capital Markets.

Next time you hear of a new IPO you’d like to acquire, advise your broker of your interest in advance and hope that he/she gets an allocation. If you don’t have a full-service broker, the chances are slim to none.

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If you have a money question, send it to me at gpape@rogers.com and write Globe Question in the subject line. I can’t guarantee a personal response but I’ll answer the most interesting questions in this space on a regular basis.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca/subscribe

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