An ETF for nervous investors

When the markets closed with big gains Friday, investors breathed a sigh of relief and headed off to the beach or golf course in a good mood.
It was a huge contrast to Wednesday’s plunge, which left many people with churning stomachs. The Nasdaq fell 3.65 per cent that day, its worst decline since October, 2022, led down by the previously high-flying tech sector. Tesla Inc. (TSLA-Q) lost 12 per cent, while Alphabet Inc. (GOOGL-Q) was down more than 5 per cent.
As a group, the Magnificent Seven, which had led the Nasdaq and the S&P 500 higher all year, lost US$750-billion in market cap, the worst day ever for the tech giants.
Investors with long memories were left wondering if this was the start of a repeat of the dot-com bubble, which saw the Nasdaq lose 78 per cent of its value between March, 2000, and October, 2002, dragging the rest of the market down with it.
For the record, I don’t think so. The tech industry in 2000 was in its infancy. Today’s companies – Amazon.com Inc. (AMZN-Q), Apple Inc. (AAPL-Q), Microsoft Corp. (MSFT-Q), Meta Platforms Inc. (META-Q) and Alphabet – are profitable giants with growing revenue and profits. Unless the whole economy collapses, they aren’t going to implode.
What I believe we saw Wednesday was a warning shot of an overdue correction. The rapid rise of artificial intelligence has pushed tech valuations too high, too fast, especially for companies such as chip maker Nvidia Corp., which has a P/E ratio of 66.12. A pullback to more reasonable pricing is inevitable.
Despite the end-of-the-week rally, the Wednesday sell-off may have left some investors wishing their portfolios weren’t so exposed to market volatility. If you’re among them, I have a suggestion that, based on historical results, offers a safe haven when stocks come under pressure.
It’s the BMO Low Volatility Canadian Equity ETF (ZLB-T), which I first recommended in February, 2019, in my Internet Wealth Builder newsletter. Here’s an update.
Originally recommended Feb. 18, 2019, at $31.53. Closed Friday at $45.74.
Background: This ETF invests in a portfolio of large-cap Canadian stocks that have a low beta history, meaning they are less sensitive to broad market movements and, therefore, theoretically less risky. The portfolio is actively managed. It is rebalanced in June and reconstituted in December.
Performance: The fund was flat for the first five-plus months of the year but has moved steadily higher in recent weeks. As of the end of June, the ETF was showing a year-to-date gain of 4.84 per cent. The average annual compound rate of return since inception is 11.54 per cent. The fund is up 45 per cent since the original recommendation, not including distributions.
Key metrics: The fund was launched in October, 2011, and has $3.7-billion in assets under management. The MER is 0.39 per cent.
Portfolio: There are 50 positions in this equal-weight portfolio – all Canadian companies. Grocery giants Metro Inc., Loblaw Cos. Ltd. and Empire Co. Ltd. occupy the top three positions. Waste Connections Inc. and Hydro One Ltd. round out the top five.
In terms of sector breakdown, 19.36 per cent is in financials, 19.07 per cent in consumer staples, 12.92 per cent in industrials and 12.05 per cent in utilities. Energy, which is the second-largest sector in the Composite, has negligible representation, and information technology, whose stocks led Wednesday’s Nasdaq sell-off, accounts for only 5.37 per cent of the assets.
Distributions: The fund makes quarterly cash distributions, which are steady at $0.28 a unit ($1.12 a year). At that rate, the yield at the current price is 2.4 per cent.
Tax implications: In 2023, about 46 per cent of the distributions were treated as eligible dividends, meaning they qualified for the dividend tax credit if held in a non-registered account. About 53 per cent were classed as capital gains. So this is a very tax-efficient fund.
Risk: This is the big selling point for this ETF. Over the past decade, it has been down in only two calendar years, and both times the declines were minimal. The worst was a drop of 2.83 per cent in 2018. In 2022, which was a terrible year for stocks, this fund lost only a fractional 0.37 per cent.
Conclusion: This ETF has a proven history of downside protection during stock market sell-offs. It will likely underperform during bull markets, but its long-term record shows it’s a good choice for conservative investors.
Action now: Buy.
Gordon Pape is the editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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