Contact an Advisor • Victoria (250)412-3499 or Email • Salt Spring Island (250)537-9499 or Email

Articles

Meeting your Investment Return Goals with More confidence

May 28, 2020

Increase your Probability of Investment Success

If you have modest investment return goals of 4%-8% annually, consider structured notes and factor based ETFs; tools designed to achieve your return goals with a higher degree of confidence than mutual funds or index funds.

What is a Reasonable Rate of Return?

The iShares S&P/TSX Index Fund (XIU) price has increased approximately 1.66%annualized from April 27, 2006 to April 27, 2016. Including dividends, the compound rate of return is about 4.1%i. That is not spectacular for taking the risk of investing in the stock market, nor will it be sufficient to meet your return objectives and financial goals.

Achieving Your Target Rate of Return with Higher Degree of Confidence

Mutual Funds returns are all over the map, and after fees most do not outperform their benchmark consistently. How can you increase the likelihood of returns in the 6%-9% range, and decrease the likelihood of negative returns, over an investment time horizon of 4-6 years? Even if the stock market is flat, structured notes are designed to do just that.Structured notes are issued by Canadian banks, and sold by prospectus and investor information documents through Canadian brokerage firms like iA Securities.

A structured note is an obligation of the note issuer to pay the investor based on the performance of a reference portfolio. The reference portfolio is typically a stock market index, an exchange traded fund(ETF), or a basket of blue chip stocks.

The Advantage of Independence

Bank owned brokerage firms often limit the approval of other banks products. At iA Securities we offer structured notes from all the major Canadian banks. This independence enables us to recommend the notes we feel are most suitable to our clients.

Typical Structured notes for a conservative investor

The types of notes described in this section below typically have terms of 5-6 years, and will achieve good outcomes even in relatively flat markets. Please keep in mind every note has different terms, and investor documentation is available for every issue. Most notes have a $5,000 minimum investment.

Fixed ROC Notes

fixed return notes chart
Fixed ROC Notes will pay around 4% annually and return your principal at maturity if the reference portfolio return is above -40%. That is a decent return in a down market.

Auto-callable Notes

Auto callable notes chart
A typical Auto Callable Note will have an annualized return of at least 6%-7% if the reference portfolio is equal to or above the call level (usually 0%) at maturity. These notes have additional features which require the issuer to call the note and provide a higher annualized return in some circumstances.If the reference portfolio is moderately negative(typically -20% or above) at maturity, these notes will typically return 0%. Which is better than a negative result.

Boosted Return Note

boosted return note chart
Boosted Return Notes will typically pay 6%-9%annualized if the reference portfolio is 0% or more at maturity.

Factor Based ETFs and Absolute Return Funds

Of course, you would not want your entire portfolio in structured notes. Two other assets to consider are Factor Based ETFs and Absolute Return Funds.

Factor Based EFTs

A factor-based investment strategy has the potential to produce better risk-adjusted returns compared to market benchmarks. Low cost Exchange Traded Funds (ETFs) help keep the fees down. Mutual funds and managed accounts are normally more expensive than factor-based ETF strategies.Momentum and Value are two factors that have historically provided good results on a risk-adjusted basis.

Example: Factor Based ETF Fees Compared to Mutual Fund Fees

First Asset Morning star Canada Momentum Index ETF reported a management expense ratio of 0.7%.

As a comparison, a popular mutual fund in Canada, “Investors Canadian Growth Class” reported a management expense ratio of 2.8%.

Sources: SUMMARY DOCUMENT (October 29, 2015) First Asset Morningstar Canada Momentum Index ETF Investors Canadian Growth Fund -Series A I.G. Investment Management, Ltd. Fund Facts June 30, 2015

Absolute Return Funds

Absolute Return Funds typically have investment goals of 5%-7% over a medium term time horizon, even in sideways or negative markets. Absolute return funds typically have investment minimums of $25,000.

Principals of Investment Success

Goals: Create clear, appropriate investment goals.Balance: Develop a suitable asset allocation using structured notes, broadly diversified ETFs and perhaps some mutual funds. Avoid the risk of individual stocks selected by yourself or a portfolio manager.

Cost: Markets are unpredictable. Costs like mutual fund fees and taxes are forever. The lower your costs, the greater your share of an investment's return.

Discipline: Discipline and perspective can help you remain committed to along-term investment program through periods of market uncertainty.

Similar Articles

Investment Fees MER Fee-based Commission Salary

Understanding Fees on Investments

Many people invest because they believe it’s a good way to achieve their financial goals. They also know that getting professional financial advice can help them invest better. If you’re working with a financial advisor (or considering it), you should understand how advisors are compensated. The topic of fees can be complicated, but we’ll sti...

Read More
Business Owner Tax Strategies BC British Columbia

Five Ways You Can Remove Funds from Your Corporation Tax Efficiently

In all Canadian provinces, corporations enjoy a relatively low tax rate. In fact, most business owners and incorporated professionals are better off leaving their retained earnings in a ho...

Read More
Sample Corporate Structure

Using your Corporation to Fund your Retirement

The best place to save for retirement and grow your wealth may be your corporation, not an RRSP or IPP. Examples below are based on 2021 personal and corporate tax rates for BC taxpayers. Does your business earn $500,000 or less? In 2021, the tax rate on corporate income below the small business deduction threshold of...

Read More
Your next steps