It’s been a while, so let’s take a look at the Q&A inbox and see what questions are on readers’ minds.
Which rail stock?
Q – Which rail stock – CN or CP – do you recommend now and for future growth 5 to 10 years out? – Ray V.
A – Both are excellent companies, with a strong history of growth. If we focus only on the share price, CN Rail (CNR-T) has seen its stock increase by 1,203 per cent since Sept. 1, 2001. CP Rail, now known as Canadian Pacific Kansas City Ltd. (CP-T) has done better, with growth of 1,932 per cent in the same period.
CP’s US$31-billion acquisition of Kansas City Southern in December 2021 greatly increased the company’s footprint in the southern U.S. and Mexico. The company operates 20,000 miles of track, providing connectivity to Canada’s Atlantic and Pacific coasts, the Gulf of Mexico, and a port on Mexico’s Pacific Coast. Since the deal closed, CP stock is up 9.5 per cent while CN is down 5.5 per cent. With the integration of the two railroads continuing, it appears that CP has more upside, at least that’s what the market is telling us. – G.P.
TFSA contribution
Q – I am trying to figure out how I can put $6,000 into my TFSA ... Is it a worthwhile idea to transfer some of my stocks from another investing account into my TFSA instead of using cash? – Kathie S.
A – Stock transfers to a Tax-Free Savings Account are permitted by law. If your account allows you to hold stocks (some don’t) it won’t be a problem. But there are two factors to consider before you decide.
First, you should never transfer losing stocks into a TFSA, or any registered plan. The Canada Revenue Agency will not allow you to claim any capital losses in that situation. You should sell the losers into the market, thereby legitimizing any capital losses. Then contribute the cash.
If you have winning stocks, transferring them to a TFSA is deemed as a sale and will trigger a capital gain. You must decide if you want to incur that tax liability now. The shares will be valued at their current price when they go into the TFSA and future capital gains will be tax sheltered. – G.P.
Rate resets
Q - When reading about rate reset preferred shares, it seems that on their reset date some investors are given the option to convert to a new floating rate preferred. But some are simply redeemed. Is there any way to know ahead of time if the institution is going to redeem the rate reset (as the new rate will be too high for their liking), or if they will offer the option to convert? – Nathan S.
A – There is no way to know in advance what an issuer will do. Investors must wait until an announcement is made. As for an option to convert at the reset date, check the issue’s prospectus. If such a choice is available, it may be explained there. – G.P.
Transferring funds
Q - I am considering transferring my mutual funds to ETFs that are held within my RRSP as they have a lower MER. I am using the TD Easy Trade app, which has no trading fees (first 50 are free).
My question is when would be a good time to cash these out? As they are going up, going down, or does it matter? Should I even be concerned about the timing? I have mutual funds with Manulife, and AGF. The AGF ones are through an advisor that does not charge me, but I know they do get a cut through MER fees. The Manulife ones are self-directed. Through the TD Easy Trade app one can only buy TD ETFs which is a bit limiting, but I am okay with an equity index ETF if the MERs are lower by a lot.
If there are any questions you think I should consider I would appreciate it. - Myles D.
A – Since all this is happening within your RRSP, there are no tax consequences to consider. But you should investigate the potential performance consequences before you act.
It’s easy to get hung up on MER differentials. But that’s only a small part of the story. You’re planned to swap funds from AGF and Manulife for TD ETFs. The question you need to ask is how well will the new funds perform compared to the ones you’re selling? Of course, no one can foresee the future, but look at the past history of all the funds involved. The performance numbers are net of fees, so you’re comparing apples with apples. See if those you’re considering buying have better track records than those you own now. If yes, then go ahead. If no, perhaps a rethink is in order. – G.P.
What to do with losing ETFs
Q – I would like to get your opinion on two ETFs I have had for years and are down badly. They are CBO and XRB. Thanks for your help. – Joe F.
A – CBO (CBO-T) is the trading symbol for the iShares 1-5 Years Laddered Corporate Bond Index ETF, which trades on the TSX. It invests in a portfolio of short-term bonds, with maturities staggered so that about a fifth of the portfolio matures each year.
A fund such as this is normally very low risk. But the last couple of years have been anything but normal in the bond market, with rising interest rates and an inverted yield curve disrupting investors’ calculations.
Still, the losses haven’t been as bad as you imply. CBO was down 4.6 per cent in 2022 and 1.1 per cent the year before. Prior to that, it was modestly profitable most years, and it is ahead 1.39 per cent this year (to Oct. 5). The average annual compound rate of return since the fund was launched in February 2009 was 2.41 per cent, as of Sept. 30.
I think the worst is behind us for this fund. But don’t expect big profits from it. This type of ETF is viewed as a low-risk parking place for money, not a capital gains grower.
As for XRB (XRB-T), this is at the other end of the bond spectrum. The full name is the iShares Canadian Real Return Bond Index ETF. It invests in long-term inflation indexed bonds (effective duration 12.82 years). This is high-risk territory, and the results show it. The fund lost 14.7 per cent last year and is off 8.82 per cent year to date. Over the past decade, the fund shows an average annual compound rate of return of only 1.12 per cent.
I normally don’t recommend long-term bond funds because of the risk, although a fund like XLB (iShares Core Canadian Long Term Bond Index ETF) should do well when the interest rate cycle turns back down. A universe bond fund like XBB (XBB-T) (iShares Core Canadian Universe Bond Index ETF) is a good middle-ground choice. That said, there is probably more downside to come in the bond market before things start to improve. – G.P.
If you have a money question you’d like answered, send it to gordonpape@hotmail.com and write Globe Question on the subject line. Sorry, but I can’t promise a personal response but I’ll answer as many questions as possible in this space.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters.
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Gordon Pape