Yahoo Finance Canadian ETFs That Shine Bright Even When Markets Are Dim
Written by Tony Dong, MSc, CETF® at The Motley Fool Canada
The year 2023 may have brought some relief to investors, but the shadow of the 2022 bear market lingers in the background — a stark reminder of the inherent uncertainties in the investment world.
Such periods of volatility and prolonged losses can be unsettling, to say the least. As an investor, it’s natural to feel wary of market downturns and their impact on your portfolio.
It’s important to recognize that volatility and risk are integral parts of the investing journey, akin to the price of admission to the carnival. Without these elements, the potential for returns would be significantly diminished — if you want risk-free returns, the only true option is a low-yielding savings account.
The key, however, lies in managing risk to a level that aligns with your personal comfort zone. This means finding a balance where you can stay invested without succumbing to panic selling or excessive stress.
Understanding that not every investor has the same appetite for risk, especially in the wake of market downturns, it’s crucial to have strategies in place to navigate these choppy waters.
For those looking to reduce their risk exposure and seek some semblance of stability when markets are less than favourable, certain exchange-traded funds (ETFs) can serve as a beacon of light. Here are my top two picks.
A word of caution
Before delving into the specifics of these ETFs, it’s important to address a common misconception about their use. I do not advocate for using these ETFs as tools to time the market.
This means avoiding tactics like panic selling your stocks to buy these ETFs during a bear market or holding 100% of your portfolio in them in anticipation of market downturns.
Such strategies can be counterproductive, primarily because they risk missing out on the market’s key growth days. Remember, it’s often a handful of strong trading days that contribute significantly to the long-term returns of the market.
By attempting to time the market, you might inadvertently exit the market before these crucial days, thereby hindering your portfolio’s potential for long-term growth.
A more prudent approach is to integrate these safer ETFs into your portfolio as part of a varied long-term allocation strategy. For example, instead of having a portfolio composed entirely of stocks, consider a mix like 80% stocks and 20% in these safer ETFs.
This strategy allows you to dial back overall portfolio risk while still maintaining exposure to the growth potential of the stock market.
Additionally, regular rebalancing is key. Over time, market movements can shift your asset allocation away from your target mix.
Periodic rebalancing helps in maintaining your desired risk level by adjusting the proportions back to your preferred allocation, such as the 80/20 mix mentioned earlier.
My ETFs of choice
For those looking to add an element of stability and lower risk to their portfolios, my selections are centred on money market ETFs.
These ETFs typically invest in ultra-short-term, highly liquid, and high-quality, fixed-income securities. This includes treasury bills, bankers’ acceptances, and commercial paper.
These types of securities are generally considered to be among the safest and most stable investment options available. They are short-term in nature, usually maturing in less than a year, which contributes to their low-risk profile both in terms of default and interest rate sensitivity.
By buying these ETFs, investors benefit from a share price that rarely fluctuates, along with the potential for monthly interest income. Thanks to higher interest rates, many money market ETFs are paying out competitive yields. Here are my two picks, along with their metrics:
BMO Money Market Fund ETF Series (TSX:ZMMK): 4.93% annualized distribution yield as of December 1, 2023, with a 0.14% management expense ratio.
iShares Premium Money Market ETF (TSX:CMR): 4.48% annualized distribution yield as of December 7, 2023, with a 0.14% management expense ratio.
The post Canadian ETFs That Shine Bright Even When Markets Are Dim appeared first on The Motley Fool Canada.
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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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