Page 18 - Demo

STRATEGIES
How to build a recession-proof ETF portfolio
Experts share their picks for balanced portfolios
By Michelle Schriver
Since the pandemic began, the “new normal” is characterized by economic uncertainty.
Normal business cycle dynamics don’t apply to the second half of 2020, stated New York–based BlackRock Inc. in its mid-year
outlook report. The world’s largest asset manager now tracks “known unknowns,” such as how economies are faring while
trying to control the spread of Covid-19, whether fiscal
stimulus remains sufficient and whether permanent
economic damage emerges.
Canada’s gross domestic product contracted at an
annualized rate of 38.7% in the second quarter, the country’s worst quarterly performance on record, which followed a drop of 8.2% in Q1.
Economic recovery began in May and increased in June, but the Bank of Canada forecast a 7.8% contraction for the year in its July monetary policy report. In addition, the International Monetary Fund projected in June that global economic growth will contract by 4.9% this year.
Fusing tradition with innovation
Darryl Brown, investment planner at You&Yours Financial in Toronto and director of portfolio strategies for Spring Financial Planning, con- siders which companies will respond better to pandemic headwinds and accelerating trends when he builds portfolios.
Despite the negative economic outlook, equities
climbed subsequent to March’s sell-off on the support of monetary and fiscal policy. At the end of July, the S&P 500 composite index
had returns of roughly 3% year-to-date, and the S&P/TSX composite index’s returns were in the red by only about 3.5%. Meanwhile, uncer- tainty about the economy and pandemic persists.
Given this environment, we asked two experts to create sample bal- anced, recession-proof ETF portfolios.
Brown’s 5% allocation to Nasdaq — using iShares NASDAQ 100 Index ETF (CAD-hedged; symbol: XQQ) — minimizes overlap with his 30% allocation to BMO S&P 500 Index ETF
(ZSP). The other equity ETFs capture global exposure outside the U.S., and a minimum-volatility ETF provides “a balancing effect.” (See the list of his suggested holdings on page 19.)
Balanced portfolios should continue to allocate to traditional fixed-income assets despite historically low interest rates, Brown says. His fixed-income allocation totals 35% (including a preferred
It’s a bad sign if the entire portfolio performs well at the same time
For example, Brown looks for operational and finan- cial flexibility to deploy new products and services quickly.
Brown favours large multinationals with diverse business lines and modest debt — typically, large- cap tech companies. These firms tend to be younger, more nimble and listed on Nasdaq. In the small- and mid-cap spaces, investors are better served by active management, he adds.
Brown also examines dividend payouts and how they affect a company’s ability to finance future opportunities.
18 Investment Executive’s ETF Guide 2020