A recent article from The Globe and Mail’s Bob Tattersall was an eye-opener.
Not necessarily because of any of its content, which is very interesting, but because one of Canada’s more successful active portfolio managers has thrown in the towel when it comes to investing in stocks.
Tattersall writes, “An article in a recent edition of the Financial Analysts Journal (Spring 2023) suggests that positive skewness dominates market index returns and that it is extremely risky to venture away from the benchmark index weights of individual stocks unless you have some proprietary insights [Paywall].”
Translation: A low-cost index fund or ETF will do the job over the long haul. Further, if you’re at all realistic, you’ll interpret the main findings as evidence that meme stocks are some of the worst long-term bets you can make.
You can read the initial draft from 2019 here. You can read the updated version here.
But I digress.
While I’ve got some above-average chops for finding long-term winners, the authors make a strong case that positive skewness and broad market ETFs go together like peanut butter and jelly.
So, based on this premise, here are three options to consider to more easily reap the rewards of a long-term hold.
Option # 1
First, I like selling the SPDR S&P 500 ETF Trust’s (SPY) Sept. 29 $412 put with a $2.22 bid price. With 58 days to expiration, it trades at $450.84, 9.4% higher than the strike. Unless the index goes on an unexpected losing streak, there’s a better than 50% chance you won’t have the shares put to you.
So, based on the bid, you’re looking at an annualized yield of 3.1%. That’s hardly going to make you rich. However, should the SPY correct by nearly 10%, you’ll get a better entry point, paying $409.78 on a net basis.
Up 18.5% year-to-date, we’d see a 50% reduction in its 2023 gains.
Tattersall said this about the report’s conclusions and his investing strategy:
“By chance, I have come to a similar conclusion myself. A significant part of my equity portfolio is invested in index funds and ETFs with broad exposures to sectors that I believe are currently out of favour – international banks and energy at present.”
So, he might buy the SPY for broad market exposure in the U.S., complementing it with the Energy Select Sector SPDR Fund (XLE) and the iShares Global Financials ETF (IXG) for exposure to energy and international banks.
My guess would be a 70%/15%/15% split between the three ETFs, but I’ve never been a paid portfolio manager.
Option # 2
As I write this on Wednesday, there are two unusually active puts for XLE to consider selling -- the Dec. 15 $87, and March 15/2024 $85. The former’s got 135 days to expiration, while the latter is 226 days out.
The XLE represents the S&P 500 stocks from the energy sector. There are 23 with a weighted average market cap of $180 billion. That's a very large-cap ETF. Stocks held include Exxon Mobil (XOM) and Chevron (CVX). It charges just 0.10% or $10 per $10,000 invested.
XLE is up 1.5% YTD, considerably less than the 18.5% return for the S&P 500. Oil prices are moving higher at the moment. That should help with the earnings of the 23 companies in the ETF.
As for the bid price, the 2024 put is $5.65, while the December put is $5.15. I’d probably go with the latter. It would be put to you if it expired today, as it’s trading at $1.26 below the strike. However, we’ve still got about 19 weeks until expiration.
Assuming energy prices remain high, you’ll probably pocket the income without an opportunity to buy XLE. At present, that’s an annualized yield of 16.2%.
I’ll take that.
Option # 3
The last one is IXG. Because of its international nature, its management expense ratio is higher, at 0.42%. It’s not all banks -- financial services (weighting of 39.94%), banks (39.40%), insurance (19.94%), and 0.72% in cash -- but it’s got decent exposure to the global banking industry.
If Tattersall lived in the U.S., the ETF’s 55.00% U.S. weighting would probably be too high. Alas, he’s in Canada, so it’s okay. The more significant issue, if you’re a stickler for these things, is that Canada is the second-largest country by weight, with 6.97%.
He’s likely got a TSX-focused ETF, such as the S&P/TSX Composite Index or the S&P/TSX 60 Index, which focuses on 60 of the largest companies on the Toronto Stock Exchange. Four of Canada’s largest banks are in the index’s top 10 holdings accounting for 21% of the total weight.
Other than that, however, you’re good to go.
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