B6 | RE P O RT O N BUS I N ES S G TH E GLOBE AND M AIL | FR IDAY , JAN UARY 10, 2020

GLOBE INVESTOR
CIBC stock is lagging, so you should snap it up
Among Canada’s biggest year’s worst-performing bank
stock and holding it for the cur-
banks, data show rent year delivered an average
previous year’s worst annual gain of 15 per cent (also
performer tends to not including dividends). The
strategy beat the performance of
bounce back smartly the Big Six (which gained an av-
erage of 10 per cent since 2000)
and the broad S&P/TSX Compos-
DAVID BERMAN ite Index (5 per cent).
INVESTMENT REPORTER Sometimes (as in seven out of
20 years, or 35 per cent of the
time), the previous year’s worst-
INSIDE THE MARKET performing bank stock emerged
as the current year’s top perform-
bec economy. But this stock-pick-
ing strategy wouldn’t have ex-
posed you to the stock: Yes, it’s a
Big Six stock and included in in-
dex returns, but I haven’t includ-
ed it in the strategy because it is
considerably smaller and less di-
versified than its bigger peers. In
any case, the bank wasn’t a lag-
gard in the previous year.
Still interested in the strategy?
If you invest in CIBC this year,
you’ll be getting a stock that is
curiously cheap. The shares trade
at just 9.1 times trailing per-share
en times, though, which is a
compelling 78-per-cent success
rate.
But be warned: This is a con-
trarian pick. Most analysts don’t
care for CIBC, which has just one
lonely buy recommendation
among the 15 analysts covering
the stock, according to Bloom-
berg.
Many analysts believe that the
bank’s rising expenses and provi-
sions for credit losses (money set
aside to cover bad loans) will
weigh on the share price this
underperformers. The fund re-
turned a total of 16 per cent in
2019 (including dividends), beat-
ing the 14.1-per-cent total return
for the S&P/TSX Diversified Bank
Index.
The RBC Canadian Bank Yield
Index ETF (RBNK) weights bank
stocks according to yield, and re-
balances four times each year.
Right now, high-yielding CIBC
and Bank of Nova Scotia have a
combined weighting of 48.3 per
cent, while lower-yielding RBC
and Toronto-Dominion Bank

I
f you want to buy a promising
Canadian bank stock this year,
consider Canadian Imperial
Bank of Commerce. The reason?
The stock has been under-
performing.
CIBC shares increased just 6.3
per cent in 2019 (not including
dividends), trailing the other big
banks. The reason to pounce:
Canada’s big banks tend to re-
bound from bummer years.
The numbers support this
theory over the long term.
Since 2000, following a
strategy of buying the previous
er. Most of the time (14 out of 20
years, or 70 per cent), the strate-
gy has outperformed an index of
the Big Six.
The strategy doesn’t always
work, and it certainly misfired
last year. CIBC was the top pick
for 2019 after the share price
sank 17 per cent in 2018. Al-
though the shares rebounded in
2019, they lagged peers and the
S&P/TSX.
The best performer by far was
National Bank of Canada, which
surged nearly 29 per cent in 2019
partly because of a strong Que-
profit, according to Bloomberg.
That’s by far the lowest price-to-
earnings ratio among the five
biggest banks. Royal Bank of
Canada’s P/E, for example, is 11.9.
You’ll also be getting a stock
with a hefty dividend. CIBC’s di-
vidend yield is 5.3 per cent, which
is considerably larger than the
average yield of 4.3 per cent for
its four peers.
CIBC has appeared on the lag-
gard list nine times since 2000,
which is more than any other
bank. It has gone on to beat an
index of Big Six bank stocks sev-
year.
If betting on one underper-
forming bank stock seems a bit
risky, then consider an exchange-
traded fund. There are at least
three ETFs that employ versions
of this laggard strategy, while giv-
ing investors exposure to all of
the Big Six banks.
The BMO Equal Weight Banks
Index ETF (ticker ZEB – full dis-
closure: I own units of this fund)
holds all six bank stocks and usu-
ally rebalances twice a year, en-
suring that you are selling the
outperformers and buying the
have a combined weighting of
just 16.4 per cent. The fund re-
turned a total of 17 per cent in
2019, including dividends.
The Hamilton Canadian Bank
Variable-Weight ETF (HCB) reba-
lances its portfolio monthly, in-
vesting 80 per cent of its assets in
the three underperforming bank
stocks and 20 per cent in the
three outperformers. The fund
returned a total, including divi-
dends, of 13.7 per cent in 2019.
What do all three ETFs have in
common? They’re all betting big
on CIBC.

What should you do with a windfall? Loonie

TIM
expected
CESTNICK to lose upside
OPINION
momentum
TAX MATTERS in 2020
FCPA, FCA, CPA(IL), CFP, TEP, author, and
co-founder and CEO of Our Family Office Inc. FERGAL SMITH TORONTO
He can be reached at tim@ourfamilyoffice.ca.

E
arlier this week, my friend Paul told
me he had bought tickets for the
Lotto Max lottery, which had a $70-
million prize available for Tues-
day’s draw. “Tim, if I win, all my neigh-
bours are going to be rich,” he said. “That’s
nice of you to give money away like that,”
I said. “No, they’ll be rich because I’m go-
ing to move to a wealthy neighbourhood,”
he replied. So much for altruism.
As it turns out, someone who pur-
chased a ticket in Brampton, Ont., did win
the $70-million prize in Tuesday’s draw,
and 17 others won prizes from $100,000 to
$1-million. In Canada, those prizes are tax-
free (unlike south of the border; lottery
winnings is one area where our tax law is
more favourable than that of the United
States).
This raises the question: What should
you do with a windfall? And to be sure,
not all windfalls are lottery winnings. Per-
haps you’ve inherited money, received a
gift, or have come into some cash by a tax
refund, business sale or some other
means. What will you do with the cash?
Here are some thoughts to consider.
SPEND THE MONEY
Spending some of that windfall could be a
lot of fun. In addition to buying a new
home, my friend Paul told me he was go-
ing to fly a fighter jet, race water buffalo in
Indonesia and fly in a hot air balloon in
Turkey – all life experiences that you can
pay for. Spending part of your windfall is
probably okay, provided your retirement
savings are under control and you’ve got
little or no “bad debt” (which I’ll talk
about next). As for retirement savings,
your windfall may be enough to look after
that – but not likely. Even the six people
who won $1-million this week in the Lotto
Max lottery may be surprised to learn that
a million dollars isn’t going to be enough
for most people to retire. I started a con-
versation about retirement planning last
week and will continue next time.
PAY DOWN DEBT
There’s good debt and bad debt. Good
debt arises where you’ve borrowed money
to buy an asset that will grow in value, and
it’s even better when you can deduct your
interest costs. Your home mortgage is gen-
erally a good type of debt despite not be-
ing able to deduct your mortgage interest
(unless you run a business – even part-
time – from your home, in which case part
of your mortgage interest can be deduc-
tible). Bad debt usually has three charac-
teristics: The interest rate is high (think
credit cards), the debt is for personal con-
sumption (as opposed to buying a grow-
ing asset) and the interest is not deduc-
tible. You should use a windfall to pay
down your bad debt. Paying down this
debt provides you with a guaranteed rate
of return that is equal to your interest
costs. For example, paying down a credit
card that charges 19-per-cent interest will
allow you to achieve a 19-per-cent rate of
return. Not many investments will pro-
vide the same.
INVEST THE MONEY
Although paying down debt – particularly
bad debt – is always a good idea, setting
aside some of that windfall for retirement
will be important if you’re behind in your
retirement savings. You might even con-
sider paying down some of your debt,
then reborrowing to invest. Your total
debt may not decrease in this case, but
you’ll be able to deduct your interest costs
if you’re investing outside of your regis-
GETTY IMAGES/ISTOCK
tered plans since you’ll be borrowing to
earn income. Using your windfall to maxi-
mize your registered retirement savings
plan (RRSP) and tax-free savings account
(TFSA) contributions generally makes
good sense. You might also consider con-
tributing to a registered education savings
plan (RESP) for a student in your life be-
cause this can come with grants from the
government to boot.
GIVE IT AWAY
Let’s not forget about the option of mak-
ing a donation to help others. The fact is, a
portion of your money is earmarked to
help society, whether you like it or not. If
you don’t give voluntarily, you’ll give in-
voluntarily through our tax system. Most
people find it more meaningful to “self-
direct” this social capital by making dona-
tions. Donations will not only provide you
with personal tax savings through a dona-
tion tax credit, but you’ll be helping caus-
es you believe in. For every dollar you give
away, the government will participate in
that donation by providing tax savings of
about 40 cents to 50 cents (the actual sav-
ings vary by province and income level).
If you’ve come into a windfall of signif-
icance, pause before doing anything.
Then, don’t assume the money will last
as long as you hope. Finally, seek the ad-
vice of reputable investment specialists
and tax advisers.
The Canadian dollar, last year’s
top-performing Group of 10 cur-
rency, will shift into a sideways
trading pattern this year as the
domestic economy softens and
the recent boost from easing
trade tensions fades, a Reuters
poll showed.
The currency rallied 5 per cent
against the U.S. dollar in 2019,
with about half that gain accumu-
lated in the final few weeks of the
year as signs emerged of recovery
in the global economy and as the
United States and China moved
toward an interim trade deal.
Canada is a major exporter of
oil and other commodities, so its
economy is more dependent on
trade than some other countries,
including the U.S.
“Risks decreased significantly
at the end of 2019, which helped
the loonie and several other cur-
rencies. We do not expect another
significant reduction in risks in
2020,” said Hendrix Vachon, a se-
nior economist at Desjardins. “We
prefer to bet on a fairly flat trajec-
tory for the currency for the short
term.”
The poll of more than 40 cur-
rency analysts showed they ex-
pect the loonie to weaken 0.5 per
cent to $1.31 per U.S. dollar, or
76.34 U.S. cents, in three months,
from $1.30 earlier on Thursday. It
is then expected to strengthen to
$1.30 in one year, matching the
forecast in December’s poll.
The projected loss of upside
momentum for the loonie comes
after recent data pointed to a
slowdown in the domestic econo-
my that could keep the door open
to a Bank of Canada interest rate
cut. Last year, the central bank
left its benchmark rate on hold at
1.75 per cent amid easing by some
of its major peers, including the
Federal Reserve and the Europe-
an Central Bank.
REUTERS

Three shrewd investing trends hidden in all the hype about surging ETF sales
ROB ble rose eightfold to 877 from 110
CARRICK over the decade.
Frankly, a lot of questionable
OPINION products are being released by
ETF companies in an effort to
build market share. But the NBF
better documented in the bene-
fits these funds offer in compari-
son with holding individual
bonds or bond mutual funds.
Bond ETF fees have fallen in re-
cent years, and a broad-based
FAVOURING LOW-COST
INDEX-TRACKING ETFS
While there’s been an explosion
in the number of ETFs, traditional
index-tracking funds continue to
dominate. NBF says one explana-
EMBRACING ASSET-ALLOCATION
ETFS, AKA BALANCED ETFS
Asset allocation ETFs only
appeared in early 2018, so they’re
a relative newcomer to the ETF
universe.

S
kepticism is often justified
when you see a herd of inves-
tors stampeding in a particu-
lar direction, but ETFs are a nota-
ble exception.
Exchange-traded funds have
been around for decades, but it
was only in the past 10 years that
they hit their stride.
ETFs outsold mutual funds for
the second straight year in 2019
and ended the decade with com-
bined assets of $205-billion, Na-
tional Bank Financial says in its
latest Canadian ETF Flows report.
The total number of ETFs availa-
report reveals some underlying
trends that show investors are
making excellent use of what
ETFs have to offer. Here are three
examples.
EMBRACING BOND ETFS FOR
FIXED-INCOME EXPOSURE
NBF says asset growth in bond
ETFs exceeded equity funds over
the past 10 years. Never mind the
fact that bond ETFs delivered re-
turns of 4 per cent annually, with
low volatility, in the past decade.
The soundness of bond ETFs is
product holding government and
corporate bonds can now be had
with a management expense
ratio of 0.09 per cent. Yields for
these funds are highly competi-
tive with individual bonds, which
are often sold by brokers with
high price markups. The higher
the price paid for a bond, the
lower the yield.
Bond ETFs also offer excellent
liquidity and flexibility – you can
buy a broad-based ETF or zero in
on short– or long-term bonds,
corporate bonds, high-yield
bonds and more.
tion is that markets moved higher
for most of the past decade, and
investors saw index-tracking ETFs
as an easy way to ride this trend.
But index-tracking ETFs have
other benefits that make them
ideal for all market conditions.
They have the lowest fees, and
they track stock and bond indexes
that both professionals and indi-
viduals struggle to match with
their own selection of securities.
But NBF says this category of
fund consistently scooped up
almost $100-million in assets a
month last year, which is consid-
erable. There’s now about $3-bil-
lion in these funds, which provide
a low-cost, properly diversified
portfolio in a single convenient
package.
The market for asset-allocation
ETFs is still in its infancy.
Every investor mucking
around with stocks, mutual funds
or anything else needs to ask this
question: “Would I be better off
with a balanced ETF?”