Investment Strategies in Response to Canada's Three Consecutive Interest Rate Cuts
The Bank of Canada has consecutively lowered its interest rate by 25 basis points to 4.25% for the third month in a row, aligning with market expectations. This marks the third rate cut since the initial reduction in June, driven primarily by sluggish economic growth, a high unemployment rate, and easing inflationary pressures.
Inflation levels and employment figures are the key data points closely monitored by the Bank of Canada. If inflation continues to decline and the employment situation remains bleak, further rate cuts are likely. Currently, the central bank anticipates steady economic growth in the second half of the year, with inflationary pressures expected to ease further. As for employment, the unemployment rate in July stood at 6.4%, with a notable increase in unemployment among youth and new immigrant populations, indicating a relatively weak labor market.
Consequently, it is expected that the Bank of Canada will implement additional interest rate cuts later this year. In light of the ongoing expectation of continuous rate reductions, how should we strategize our investment approach?
I. Prioritize Investments in Bond ETFs and High-Dividend ETFs – Locking in High Yields
In a declining interest rate environment, newly issued bonds offer lower rates, thereby increasing the relative value of existing bonds and driving up bond prices. Bond ETFs provide a convenient way to invest in a diversified basket of bonds, potentially benefiting from rising bond prices. Additionally, as deposit rates and bond yields decrease, the relatively higher dividend yields offered by high-dividend stocks become more attractive.
1.Bond ETFs:
（1）Vanguard Canadian Short-Term Corporate Bond Index ETF
VSC $VANGUARD INVESTMENTS CANADA INC CANADIAN SHORT TERM CORP BOND IDX ETF (VSC.CA)$ is a passively managed index fund designed to provide investors with exposure to the performance of the Canadian credit bond index. This ETF primarily invests in short-term investment-grade corporate bonds in Canada and employs an index sampling strategy for management. The fund aims to closely track the performance of its benchmark index, which is the Bloomberg Global Aggregate Canadian 1-5 Year Credit Bond Index or any subsequent alternative index. This strategy implies that the ETF adjusts its portfolio based on the primary risk factors and other key characteristics of its benchmark index.
Furthermore, this ETF has a low management fee of just 0.1%, making it an ideal choice for investors in the Canadian short-term investment-grade corporate bond market. From June 5, 2024, to the present, VSC has increased by 2.18%. As of September 6, VSC's assets total CAD 909 million, with a dividend yield of 3.44%.
(2) BMO Aggregate Bond Index ETF
ZAG $BMO AGGREGATE BOND INDEX ETF UNIT (ZAG.CA)$ is an ETF listed on the Toronto Stock Exchange (TSX) that primarily invests in a variety of debt securities within the Canadian investment-grade fixed income market. These securities include federal, provincial, and corporate bonds, with maturities typically exceeding one year. ZAG offers a relatively low-cost and diversified way to participate in the Canadian investment-grade fixed income market, and although its historical returns have been somewhat volatile, its overall performance remains robust.
Additionally, ZAG has a relatively low management expense ratio of 0.08%. From June 5, 2024, to present, ZAG has increased by 2.87%. As of September 6, this ETF has assets totaling CAD 10.176 billion, with a dividend yield of 3.43%, which is essentially on par with TLT’s yield.
2. High-Dividend ETFs:
(1)Vanguard FTSE Canadian High Dividend Yield Index ETF
This ETF tracks the FTSE Canada High Dividend Yield Index. Currently, its portfolio consists of 56 high-dividend stocks from global markets, primarily concentrated in the financial sector (with a focus on banks) and the energy sector, which together account for over 80% of total holdings. The most direct impact of lower interest rates on the banking industry is the reduction in interest expenses for deposits, which has an overall positive effect. On the other hand, energy companies are less affected by macroeconomic conditions due to the nature of their industry, operating under stable conditions and willing to return profits to shareholders. Therefore, VDY $VANGUARD FTSE CDN HIGH DIVID YIELD TRUST UNIT (VDY.CA)$ is expected to benefit from the central bank's rate-cutting strategy.
VDY has a management expense ratio of 0.20%, and from June 5, 2024, to the present, VDY has increased by 6.24%. As of September 6, the ETF has risen by 31.21% over the past five years, with a current dividend yield of 4.49%.
(2)iShares Core MSCI Canadian Quality Index ETF
Similar to VDY, XDIV $ISHARES CORE MSCI CANADIAN QUALITY UNITS (XDIV.CA)$ also has a large market capitalization and is a high-quality product that combines quality, yield, and growth. It includes approximately 30 high-dividend stocks from the Canadian market, with the management team continuously adjusting the portfolio. It serves as a low-cost investment vehicle for Canadian high-dividend stocks, with a management fee of only 0.10%, the lowest among ten products, making it an excellent choice for cost-conscious investors. XDIV primarily selects stocks with strong overall financial health, including those with stable balance sheets and low income volatility.
XDIV has a management expense ratio of 0.10%. From June 5, 2024, to the present, XDIV has increased by 7.08%. As of September 6, the ETF has risen by 37.82% over the past five years, with a current dividend yield of 4.56%.
(3)iShares S&P/TSX Composite High Dividend Index ETF (XEI.CA)
This ETF tracks the S&P/TSX Composite High Dividend Index and currently holds 75 stocks, primarily concentrated in the energy sector. Its top ten holdings are each approximately 5%, indicating that XEI's portfolio is more diversified compared to the first two products, resulting in lower exposure to individual stock performance. This means a higher capacity for risk diversification.
XEI $ISHARES S&P/TSX COMPOSITE HIGH DIV UNITS (XEI.CA)$ has a management expense ratio of 0.20%, and from June 5, 2024, to the present, XEI has increased by 4.22%. As of September 6, the ETF has risen by 25.59% over the past five years, with a current dividend yield of 5.19%. This ETF aims for stable, diversified investments that are expected to achieve long-term stable profitability across various cycles, especially when interest rates decline and market volatility occurs.
II. Interest Rate Cuts Expected to Benefit the Real Estate Sector: Focus on REITs and Related ETFs
The Bank of Canada's interest rate cuts have led to further reductions in lending rates, which are expected to lower financing costs for the real estate sector and facilitate better industry expansion. Simultaneously, the decrease in rates is likely to alleviate the financial burden on tenants and homebuyers. Lower borrowing costs enhance the attractiveness of the real estate market, promoting increased transaction volumes. Moreover, a moderate economic recovery following the rate cuts is anticipated to stabilize both the retail and industrial real estate markets.
Overall, the rate cuts are conducive to driving a recovery in the real estate market. Since the Bank of Canada’s initial rate cut on June 5, the S&P/TSX Composite Real Estate (Sector) Index has risen by over 15.4%, significantly outperforming the broader S&P/TSX Composite Index, which has increased by 4.6%.
1.REITs:
(1) Canadian Apartment Properties Real Estate Investment Trust
The Canadian Apartment Properties Real Estate Investment Trust $Canadian Apartment Properties Real Estate Investment Trust (CAR.UN.CA)$ is a real estate investment trust primarily engaged in the acquisition and leasing of multi-unit residential rental properties located near major urban centers in Canada. Its portfolio mainly consists of apartments and townhouses near public amenities, targeting mid-range and luxury market segments.
As of September 6, CAR's total market capitalization is CAD 8.861 billion, with a dividend yield of 2.74%, which is below the current risk-free rate in Canada. From June 5, 2024, to the present, CAR has increased by 18.18%. The company pays dividends monthly, with the most recent dividend being CAD 1.45 per share, maintaining a solid and stable distribution record.
(2) RioCan Real Estate Investment Trust
RioCan Real Estate Investment Trust $Riocan Real Estate Investment Trust (REI.UN.CA)$ is a Canadian REIT that owns, develops, and operates a retail-focused real estate portfolio, including shopping centers and mixed-use development projects, with the majority of its properties located in Ontario. RioCan's tenants include grocery stores, supermarkets, restaurants, cinemas, pharmacies, and businesses.
As of September 6, REI's total market capitalization is CAD 5.808 billion, with a dividend yield of 5.65%, which is above the risk-free rate in Canada. From June 5, 2024, to the present, REI has increased by 13.04%. The company maintains a consistent dividend distribution frequency of twelve times a year, with the most recent dividend being CAD 1.075 per share, showing a stable upward trend since 2021.
(3) Choice Properties Real Estate Investment Trust
Choice Properties Real Estate Investment Trust $Choice Properties Real Estate Investment Trust (CHP.UN.CA)$ invests in commercial retail, industrial, mixed-use, and residential properties across Canada, primarily including shopping centers anchored by supermarkets and independent grocery stores, with most located in Ontario and Quebec. The majority of Choice Properties' income is derived from leasing properties to tenants, with the company’s primary tenant being the large retailer Loblaw Companies, which accounts for a significant portion of total rent.
As of September 6, CHP's total market capitalization is CAD 4.898 billion, with a dividend yield of 5.040%, which is above the risk-free rate in Canada. From June 5, 2024, to the present, CHP has increased by 18.53%. The most recent dividend was CAD 0.063 per share, maintaining a stable dividend distribution frequency.
2. REIT-Related ETFs:
In addition to directly investing in real estate funds, related ETFs are also a stable and secure investment option. Through a diversified portfolio of REITs, they can spread risk, enhance investment transparency, and simplify operations, allowing investors to achieve diversified investment with a single click and flexibly respond to market changes.
(1) ISHARES S&P/TSX CAPPED REIT INDEX ETF UNIT
$ISHARES S&P/TSX CAPPED REIT IND ETF UNIT (XRE.CA)$ tracks 19 REITs in the Canadian market, primarily focusing on retail, residential, and office REITs. Its aim is to achieve long-term capital growth by replicating the performance of the S&P/TSX Capped REIT Index.From June 5, 2024, to the present, XRE has increased by 14.75%.
As of September 6, the fund's assets amount to CAD 1.273 billion, with a dividend yield of 4.52%, which is significantly higher than most index funds and comparable to some high-dividend stocks. However, this ETF has a management fee of 0.61%, which means an investor would pay CAD 61 in management fees for every CAD 10,000 invested.
(2) BMO EQUAL WEIGHT REITS INDEX ETF TRUST UNIT
ZRE $BMO EQUAL WEIGHT REITS INDEX ETF TRUST UNIT (ZRE.CA)$ tracks the Solactive Equal Weight Canadian Real Estate Investment Trust Index, which allocates equal weights to its constituents. This means that each Canadian REIT in the index is assigned the same weight in the calculations, regardless of its market capitalization, helping to reduce reliance on large REITs and improve portfolio diversity.From June 5, 2024, to the present, ZRE has increased by 14.08%. As of September 6, the fund's assets amount to CAD 596 million, with a dividend yield of 4.78%. Additionally, this Canadian REIT ETF also has a management fee of 0.61%.
III. Focus on Safe-Haven Assets like Gold
The recent interest rate cuts in Canada typically lead to market expectations that other major economies will adopt similar monetary policies in response to economic slowdowns or inflationary pressures. For instance, the European Central Bank has already announced rate cuts, and the market widely anticipates that the Federal Reserve will initiate its first rate cut in September. Consequently, based on the potential acceleration of rate cuts by the Federal Reserve following Canada’s rate reductions, we expect the U.S. dollar to weaken, and we recommend considering an allocation to gold for value preservation and appreciation.
(1) SPDR Gold ETF
This is the largest physical gold ETF in the world, tracking the gold price set by the London Bullion Market Association (LBMA). Purchasing this ETF is equivalent to indirectly holding gold, allowing investors to benefit directly from the price appreciation of gold while providing an opportunity to track the spot price of gold.
From June 5, 2024, to the present, GLD $SPDR Gold ETF (GLD.US)$ has risen by 7.93%. As of September 6, GLD's assets have reached $69.583 billion. However, it has a relatively high expense ratio (0.4%), which may impact mid- to long-term investment returns.
(2) iShares Gold Trust ETF
This is also a large gold ETF in the U.S. market that tracks the gold price set by the LBMA, offering investors direct exposure to trading physical gold. Its current assets amount to $29.665 billion, which is lower than GLD. Since June 5, 2024, IAU $Gold Trust Ishares (IAU.US)$ has increased by over 8%. IAU has lower costs compared to GLD (with an expense ratio of only 0.25%), although its liquidity is relatively weaker.
(3)SPDR Gold MiniShares Trust
This is a U.S. ETF that invests in physical gold. Unlike the two aforementioned gold ETFs, GLDM $Spdr Gold Minishares Trust (GLDM.US)$ has a smaller asset size of $8.712 billion, making it more suitable for smaller investors. Additionally, it boasts a very low expense ratio of just 0.1%. From June 5, 2024, to the present, GLDM has appreciated by 8.03%, slightly outpacing GLD and roughly in line with IAU.
Summary
Given the Bank of Canada's consecutive interest rate cuts and the potential for further monetary easing in the future, investors should consider adjusting their portfolios to adapt to the low interest rate environment. Firstly, increasing exposure to bond ETFs and high-dividend ETFs can provide relatively stable sources of income. Secondly, considering the heightened economic uncertainty, safe-haven assets such as gold may offer additional safety margins. Lastly, rate cuts are generally favorable for the real estate market, making REITs and related ETFs worthwhile investment options. In conclusion, adopting a diversified investment strategy in the current economic climate can help balance risk and return.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
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