Unlocking Opportunities: Investment Strategies Post 50bp Rate Cut by BoC | Moomoo Research

The Bank of Canada announced a 50 basis points rate cut to 3.75%, marking the fourth consecutive rate cut since the first reduction in June. The significant 50 basis points reduction was primarily due to the unexpected slowdown in September's inflation data to 1.6%, reflecting the risks of an economic downturn in Canada. The Bank of Canada's goal is to maintain inflation around 2% and promote economic growth in the country.

In the third quarter, Canada's economic growth slowed, continuing to face an oversupply situation, with insufficient demand for goods and services produced, and a still weak labor market, where population growth outpaced job growth. Therefore, it is expected that the Bank of Canada will continue to lower rates. Given this expectation of ongoing rate cuts by the Bank of Canada, how should we adjust our investment strategy？

In a rate-cutting environment, newly issued bonds offer lower rates, which increases the relative value of existing bonds and drives up bond prices. Bond ETFs provide a convenient way to invest in a basket of bonds, potentially benefiting from rising bond prices. Meanwhile, as deposit rates and bond yields decline, the relatively higher yields offered by high-dividend stocks become more attractive.

VSC is a passively managed index fund aimed at providing investors with investment opportunities by replicating the performance of the Canadian credit bond index. This ETF primarily invests in short-term investment-grade corporate bonds in Canada and is managed using an index sampling strategy. The goal of this ETF is to track the performance of its benchmark index, the Bloomberg Global Aggregate Canadian 1-5 Year Credit Bond Index, as accurately as possible. This strategy means the ETF adjusts its portfolio based on the primary risk factors and other key characteristics of its benchmark index.

Furthermore, the ETF has a low management fee of only 0.11%, making it an ideal choice for the Canadian short-term investment-grade corporate bond market. Since June 5, 2024, VSC has risen by 2.26%. As of October 24, VSC's assets reached CAD 921 million, with a dividend yield of 3.45%.

ZAG is an ETF listed on the Toronto Stock Exchange (TSX) that primarily invests in various debt securities within the Canadian investment-grade fixed income market. These securities include federal, provincial, and corporate bonds, typically with maturities of over one year. It provides a relatively low-cost and diversified way to participate in the Canadian investment-grade fixed income market, and although its historical returns have been somewhat volatile, its overall performance remains robust.

Additionally, ZAG has a relatively low management expense ratio of 0.09%. Since June 5, 2024, ZAG has risen by 1.54%. As of October 24, this ETF's assets reached CAD 10.142 billion, with a dividend yield of 3.47%.

This ETF tracks the FTSE Canada High Dividend Yield Index. Currently, it holds a portfolio of 56 high-dividend stocks from global markets, mainly concentrated in the financial (focused on banks) and energy sectors, which collectively account for over 80% of total holdings. The most direct impact of lower interest rates on the banking sector is a reduction in interest expenses on deposits, which has an overall positive effect. On the other hand, energy companies are less affected by macroeconomic conditions due to the nature of their industry, maintaining stable operating conditions and a willingness to return capital to shareholders. Therefore, VDY is expected to benefit from the central bank's rate-cutting strategy.

VDY has a management expense ratio of 0.20%, rising 11.86% since June 5, 2024. As of October 24, this ETF has increased by 43.69% over the past five years, with a current dividend yield of 4.32%.

Similar to VDY, XDIV also has a large market capitalization and is a high-quality product that combines quality, yield, and growth. It includes approximately 30 high-dividend stocks in the Canadian market, with the management team continuously adjusting the portfolio. It serves as a low-cost portfolio for high-dividend Canadian stocks, with a management fee of only 0.10%, the lowest among ten products, making it an excellent choice for cost-conscious investors. XDIV primarily selects stocks with strong overall financial health, including those with stable balance sheets and low income volatility.

XDIV has a management expense ratio of 0.10%. Since June 5, 2024, XDIV has risen by 11.60%. As of October 24, this ETF has increased by 39.19% over the past five years, with a current dividend yield of 4.05%.

This ETF tracks the S&P/TSX Composite High Dividend Index and currently holds 75 stocks, primarily concentrated in the energy sector. The top ten holdings each account for around 5%, indicating that XEI's portfolio is more diversified compared to the previous two products and is less affected by individual stocks. This results in higher risk diversification.

XEI has a management expense ratio of 0.20%. Since June 5, 2024, XEI has risen by 9.56%. As of October 24, this ETF has increased by 30.89% over the past five years, with a current dividend yield of 4.54%. This ETF aims for a stable and diversified investment portfolio, which is expected to achieve long-term stable profitability across various cycles when interest rates decline and market volatility occurs.

The Bank of Canada's rate cuts have further lowered loan interest rates, potentially reducing financing costs for the real estate sector and enabling better industry expansion. At the same time, lower interest rates are expected to alleviate the financial burden on tenants and homebuyers. Reduced loan rates increase the attractiveness of the real estate market, promoting an increase in market transactions. Additionally, a moderate economic recovery following the rate cuts may stabilize the retail and industrial real estate markets.

Overall, rate cuts are beneficial for driving the recovery of the real estate market. Since the first rate cut by the Bank of Canada on June 5, the S&P/TSX Composite Real Estate (Sector) Index has risen by over 17.77%, significantly outperforming the broader S&P/TSX Composite Index, which has increased by 10.87%.

Canadian Apartment Properties REIT (CAPREIT) is a real estate investment trust primarily engaged in acquiring and leasing multi-unit residential rental properties located near major urban centers in Canada. Its portfolio mainly consists of apartments and townhouses near public amenities, targeting the mid-range and luxury market segments.

As of October 24, CAR has a total market capitalization of CAD 8.248 billion, with a dividend yield of 2.94%, below the current risk-free rate in Canada. Since June 5, 2024, CAR has risen by 9.00%. The company pays dividends monthly, with the most recent dividend calculated annually at CAD 1.50 per share, maintaining a good and stable dividend payout.

RioCan Real Estate Investment Trust is a Canadian real estate investment trust that owns, develops, and operates a retail-focused real estate portfolio, including shopping centers and mixed-use development projects, with most properties located in Ontario, Canada. RioCan's tenants include grocery stores, supermarkets, restaurants, cinemas, pharmacies, and businesses.

As of October 24, REI has a total market capitalization of CAD 5.912 billion, with a dividend yield of 5.55%, above the risk-free rate in Canada. Since June 5, 2024, REI has risen by 14.47%. The company maintains a frequency of 12 dividend payments per year, with the most recent dividend calculated annually at CAD 1.11 per share, showing a stable upward trend since 2021.

Choice Properties Real Estate Investment Trust (CHP.UN) invests in commercial retail, industrial, mixed-use, and residential properties across Canada, primarily focusing on shopping centers dominated by supermarkets and independent grocery stores, with most properties located in Ontario and Quebec. The majority of Choice Properties' income comes from leasing properties to tenants, with its main tenant being the large retailer Loblaw Companies, which accounts for a substantial portion of the total rent.

As of October 24, CHP has a total market capitalization of CAD 4.78 billion, with a dividend yield of 5.160%, above the risk-free rate in Canada. Since June 5, 2024, CHP has risen by 14.64%. The company’s most recent dividend was CAD 0.063 per share, maintaining a stable dividend payout frequency.

In addition to directly investing in real estate funds, related ETFs also represent a robust and secure investment choice. Through a diversified REITs portfolio, these ETFs can spread risk, enhance investment transparency, and simplify operations, allowing investors to achieve diversified investments with a single click and respond flexibly to market changes.

This ETF tracks 19 REITs in the Canadian market, with underlying assets primarily focused on retail, residential, and office-type REITs. It aims to achieve long-term capital growth by replicating the performance of the S&P/TSX Capped REIT Index.

Since June 5, 2024, XRE has risen by 11.46%. As of October 24, the fund's assets reached CAD 1.33 billion, with a dividend yield of 4.19%, significantly higher than most index funds, comparable to some high-dividend stocks. However, this ETF has a management expense ratio of 0.61%, which is relatively high, meaning an investor would pay CAD 61 in management fees for every CAD 10,000 invested.

ZRE tracks the Solactive Equal Weight Canadian Real Estate Investment Trust Index, which allocates equal weights to its constituent stocks. This means each Canadian real estate investment trust in the index is assigned the same weight in calculations, regardless of market capitalization, helping to reduce dependence on large REITs and improve portfolio diversity.

Since June 5, 2024, ZRE has risen by 12.75%. As of October 24, the fund's assets amounted to CAD 608 million, with a dividend yield of 4.73%. This Canadian REIT ETF also has a management expense ratio of 0.61%.

The rate-cutting environment created by the Bank of Canada is beneficial for equity assets. Lower interest rates typically lead to increased market liquidity, and large publicly listed companies that hold significant positions in major indices may benefit from easier access to low-cost capital, often resulting in strong performance for these indices. In terms of sectors, the financial and technology industries tend to perform particularly well during rate-cutting cycles, exhibiting greater resilience. The financial sector often directly benefits from rate cuts, as lower borrowing costs can increase loan demand, boosting the performance of banks and financial institutions. Meanwhile, the technology sector, sensitive to innovation and growth, may also demonstrate strong vitality under accommodative monetary policies.

Therefore, during a rate-cutting cycle, it would be prudent to prioritize investments in large cap indices, as well as financial and technology sector ETFs.

The iShares S&P/TSX 60 Index ETF (XIU.CA) aims to provide investors with exposure to the performance of the 60 largest companies in Canada by market capitalization. This ETF primarily invests in large-cap blue-chip stocks across various sectors and is managed using a full replication strategy. XIU's objective is to track the performance of its benchmark index, the S&P/TSX 60 Index, as accurately as possible.

Additionally, XIU has low management fees, with a management fee rate of 0.15% and a total expense ratio (MER) of 0.18%, making it an ideal choice for the Canadian large-cap stock market. As of October 24, XIU's assets reached CAD 14.649 billion, with a dividend yield of 2.77%. Since June 5, 2024, XIU has increased by 11.37%.

HXT.CA aims to replicate the returns of the S&P/TSX 60 Index in a low-cost and tax-efficient manner using an innovative investment structure known as a Total Return Swap. This structure means that HXT does not directly purchase the underlying index securities but instead enters into total return swap agreements with one or more counterparties (usually large financial institutions) to achieve the total return of the index. In exchange, HXT pays the interest earned on the cash held. Therefore, HXT captures the index's total return before fees, which is reflected in the ETF's price, and investors are not expected to receive any taxable distributions.

HXT's management expense ratio (MER) is 0.07%, making it an ideal option for investors seeking low-cost, high-efficiency investment tools. As of October 24, HXT's assets reached CAD 4.091 billion; since June 5, 2024, HXT has increased by 12.29%.

The BMO Equal Weight Banks Index ETF Trust Unit (ZEB.CA) is an ETF that tracks the performance of the Canadian banking sector, investing in Canada's six major banks. It aims to provide a simple and easy-to-understand way for investors to gain exposure to the Canadian banking industry. By employing an equal-weight investment strategy, ZEB.CA ensures that each bank holds the same weight in the portfolio, reducing reliance on any single bank's performance.

Since June 5, 2024, ZEB has risen by 14.25%. As of October 24, ZEB's assets amounted to CAD 3.597 billion, with a dividend yield of 4.08%. This Canadian financial ETF has a management fee rate of 0.28%.

The iShares S&P/TSX Capped Financials Index ETF (XFN.CA) is designed to track the performance of the Canadian financial sector, aiming for long-term capital growth by replicating the performance of the S&P/TSX Capped Financials Index. XFN.CA's top holdings include major Canadian banks and insurance companies, such as Royal Bank, Toronto-Dominion Bank, and Bank of Montreal.

XFN.CA has a management fee of 0.55%, with a management expense ratio (MER) of 0.61%, which is relatively high. As of June 5, 2024, XFN has increased by 15.83%. As of October 24, this ETF's assets totaled CAD 1.688 billion, with a dividend yield of 3.10%.

XIT.CA aims to provide long-term capital growth by replicating the performance of the S&P/TSX Capped Information Technology Index, which consists of companies in the Canadian information technology sector. The weight of individual components is capped at 25%.

XIT's management expense ratio (MER) is relatively high at 0.60, which investors should consider. Since June 5, 2024, XIT has risen by 17.66%, and over the past five years, it has increased by 129.78%. As of October 24, XIT's assets reached CAD 653 million.

TEC.CA aims to track the performance of global technology leaders by investing in mid- and large-cap technology companies worldwide, seeking to closely follow the performance of the Solactive Global Technology Leaders Index. The ETF holds shares of companies such as Apple, Microsoft, NVIDIA, and Amazon.

TEC has a management expense ratio (MER) of 0.40%. Since June 5, 2024, it has increased by 9.09%, and over the past five years, it has cumulatively risen by 172.11%. As of October 24, TEC's assets totaled CAD 3.01 billion, with a dividend yield of 0.090% and a quarterly dividend policy.

In addition to countries like Canada, the Federal Reserve has also begun to cut rates. Against the backdrop of global rate cuts, a weakening US dollar is expected, compounded by increasing geopolitical risks. It is advisable to consider holding gold for value appreciation and preservation.

This is the world's largest physical gold ETF, tracking the gold prices from the London Bullion Market Association (LBMA). Purchasing this ETF is equivalent to indirectly holding gold, allowing investors to benefit directly from increases in gold prices and providing an opportunity to track the spot price of gold.

Since June 5, 2024, GLD has risen by 16.06%. As of October 24, GLD's assets have reached USD 78.617 billion. However, it has a relatively high expense ratio of 0.4%, which may affect long-term investment returns.

This is another large gold ETF in the US market that tracks the gold prices from LBMA, providing investors with direct access to trading physical gold. Currently, its assets total USD 33.402 billion, which is lower than GLD. Since June 5, 2024, IAU has also increased by over 16%. IAU has a lower cost compared to GLD (with an expense ratio of only 0.25%), but its liquidity is relatively weaker.

This is a US ETF that invests in physical gold. Unlike the previous two physical gold ETFs, GLDM has a smaller asset size of USD 9.601 billion, making it more suitable for smaller investors. Additionally, it has a very low expense ratio of just 0.1%. Since June 5, 2024, GLDM has risen by 16.16%, slightly outperforming GLD and roughly equal to IAU.

In the context of the ongoing rate cuts by the Bank of Canada, investors should carefully formulate their investment strategies. Rate cuts not only create a favorable market environment for bond ETFs and high-dividend ETFs but also present new growth opportunities for the real estate sector and related REITs. Additionally, equity assets, particularly large-cap indices, as well as financial and technology sector ETFs, are likely to benefit from a more accommodative monetary policy environment. At the same time, considering the global trend of rate cuts and geopolitical uncertainties, safe-haven assets like gold also represent a prudent choice.

By diversifying investments across the various ETFs mentioned, investors can capture opportunities during the rate-cutting cycle while also mitigating potential market volatility risks. However, it is essential to recognize that every investment has its specific risk and return characteristics. Therefore, understanding one's risk tolerance and investment objectives is crucial before making decisions. Ultimately, a well-considered asset allocation combined with continuous market observation will be key to achieving stable wealth growth.