Pape’s Q&A: Green ETFs, calculating yield, U.S. Treasurys
Gordon Pape answers readers’ investment questions
Your questions keep coming, so let’s dip into the inbox and answer some of them.
Q – Can you recommend a green ETF? I currently hold Greenlane Renewables (TSX: GRN), which has done well but has a narrow focus. I am looking for an ETF that cuts across many forms of renewable technology. Thanks. – Pierre G.
A – Most green ETFs focus on energy. In the past couple of years, we’ve seen some with a broader mandate, especially from Blackrock Canada, but these haven’t been around long enough to establish a meaningful track record.
To my knowledge, the oldest sustainable ETF in Canada is the iShares Jantzy Social Index ETF (TSX: XEN). But many green investors don’t like it because it owns positions in several major fossil fuels companies, including Canadian Natural Resources and Suncor. Plus, it has an average annual compound rate of return of only 5% since it was launched in 2007.
I suggest a better choice is the awkwardly-named iShares MSCI KLD 400 Social ETF (NYSE: DSI). It holds a broad portfolio of ESG stocks and has performed well, with a 10-year average annual compound rate of return of 14.2% to the end of May.
This fund is about as far away from green energy ETFs as you’re likely to find. Less than 2% of the portfolio is in energy stocks. About a third of the assets are in technology, with Microsoft, Facebook, and Alphabet the leading positions. You’ll also get exposure to major companies like Visa, Tesla, Walt Disney, and Procter & Gamble. The MER is very low, at 0.25. – G.P.
Q – When calculating the yield of a dividend producing stock, should I base the yield using the original amount of capital invested or the current value of the stock?
For example, during the pandemic I purchased Canadian Tire at $99.75. The $4.70 annual dividend was yielding 4.7% at the time of purchase. Today the stock is trading at $175.57, the dividend is still $4.70, but at today’s price the dividend yield is only 2.7%. I know my yield should be calculated on the original purchase price, but as the share price returns to previous levels and the price appreciation flattens, should I look for a different stock if I am looking for higher yields? – Pat H.
A – This is a question that often perplexes investors. Calculating the yield based on the original price paid is called yield on cost (YOC). If a company continues to increase its dividend over time, the YOC will increase, as the cost remains constant.
For example, my Income Investor newsletter recommended Cogeco in April 2015 at $54.14. The annual dividend at the time was $1.02 for a yield of 1.9%. We projected the dividend would rise, and it did, to $1.90 per share in September 2020. At that point the YOC was a more respectable 3.5%. However, we recommended selling the stock for a capital gain of 71% and reinvesting the money in a higher yielding security.
The bottom line is that you should be aware of the YOC of your stocks but be prepared to sell if you can buy a comparable security with a higher current yield. Just be sure you are not taking on significantly more risk. – G.P.
Q – You recommended [iShares U.S. Treasury Bond ETF, NYSE: GOVT] in your newsletter. It has gone down in price. Is it time to sell? – Barry D.
A – This ETF invests in what many consider to be the world’s safest investment: U.S. government Treasury bonds. So, if Treasurys are so safe, why has the fund dropped in price? The U.S. Federal Reserve Board has not raised its key rate and continues to maintain a dovish stance.
The reason is that despite the Fed’s posture, bond yields, including Treasurys, have been gradually inching higher. And when yields rise, bond prices fall. That’s exactly what we’re seeing here, and there may be more to come.
So why own GOVT in this situation? Mainly for stability and balance. The U.S. government is not going to default on its debt, so the principal of the bonds that underlie this ETF is safe. And if the stock market takes a nosedive, you’ll be glad to have some bonds that will minimize your downside risk.
That said, as interest rates move higher, you’ll see a gradual erosion in the market price. If that is not acceptable to you, look for other options. – G.P.
If you have a money question, send it to me at email@example.com and write Fund Library Question in the subject line. I can’t guarantee a personal response, but I’ll answer the most interesting questions in this space on a regular basis.
Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.
Notes and Disclaimer
© 2021 by The Fund Library. All rights reserved. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.