Canadian Banks & Lender Stocks

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firebraj
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Canadian Banks & Lender Stocks

Post by firebraj »

Let's say theoretically that I wanted to make a play on the assumption that I believe Canadian banks and lenders will be all hit hard this year. Harder than they have in a while. I can only see a few options with regards to being prepared for this or trying to make some money from it, if it does occur. I do hold a basic Couch Potato Portfolio weighted as follows; 50 % International Equity, 30% Domestic [Canadian], and 20% Bonds. But I do not have too much capital. 45k invested CPP, 12k cash.

We all know the TSX is weighted heavily towards financials and energy. I don't really want to mess with the weightings of the portfolio but I want to take advantage of this scenario if I do end up being right in some sense. I understand this is completely speculative at this point, and I am aware that I am an amateur.

What are some potential plays/strategies someone could do in this scenario? These are few I can think of;

1. Lighten up on Canadian Equity weighting, and buy back in when/if TSX dips. (I don't really want to mess with the weightings in the portfolio but I want to lessen the grasp that the financial portion of the TSX has in my portfolio. Is there a way to do this? VCN is what I hold as Canadian equity. It is almost 38% financials!)

2. Do nothing with the portfolio, proceed as usual. If dips occur, re-balance as necessary and use the opportunity to buy if this scenario occurs. (I prefer this option logically.)

3. Options? This I have no experience with this although I am curious of what possibilities and risks there are in this domain. I wouldn't use a lot of capital. Less than 3% of total net worth. Is there any way to use this as some insane insurance strategy?

4. If this scenario does occur, does it make sense to go overweight buying the dip? I believe if Canadian bank stocks / lenders do drop dramatically, it could be an excellent buying opportunity.

Does anyone have any input on this? I'm curious as to what more experience individuals think. If Canadian bank stocks were to drop 30%, would it not make sense to buy as much as possible and hold for long-term recovery? I think the Canadian banks will not just drop off the face of the earth if such a scenario occurs.

Of course, treat this as complete speculation and grounds for reasonable discussion. This means of course you can (and probably should) completely disregard it! Just interested in what other Canadian investors have to say.
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Re: Canadian Banks & Lender Stocks

Post by Spudd »

I am not in any way recommending this, but an inverse Canadian financials ETF exists:
http://www.horizonsetfs.com/ETF/HFD

If you look at the all-time chart, you can see you would have done well had you bought this in early 2008 and sold at the peak of the financial crisis.

There's also just plain old shorting bank/financial stocks (not that I know how to do that, but I know it exists!). Or buying put options.
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Re: Canadian Banks & Lender Stocks

Post by longinvest »

Firebraj,

As you have chosen to invest into a simple index portfolio, I am surprised that you don't think that your worries have already been priced into the market price. Why are you trying to beat one of the markets you invest into? Didn't you decide to accept market returns when you adopted index investing?

Anyway, as you've asked for feedback:
firebraj wrote: 05 May 2017 10:25 2. Do nothing with the portfolio, proceed as usual. If dips occur, re-balance as necessary and use the opportunity to buy if this scenario occurs. (I prefer this option logically.)
Exactly. Stay the course. Or, as Jack Bogle would say: "Don't do something; just stand there".

Yes, this is the hard part! Index investing is simple, but not easy.
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Re: Canadian Banks & Lender Stocks

Post by StuBee »

I agree with longinvest. Perhaps financials will dip but they will recuperate if the past can be relied upon. Market timing is a dangerous game. When I imagine a paper loss on any stock, I console myself with the knowledge of the dividend income.

If you have some play money, go ahead and play.
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Re: Canadian Banks & Lender Stocks

Post by Spudd »

BTW I agree with the others as to the best actual strategy, my answer was more along the lines of "if you're intent on doing this, here's how you would".
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Re: Canadian Banks & Lender Stocks

Post by firebraj »

longinvest wrote: 05 May 2017 10:50 Firebraj,

As you have chosen to invest into a simple index portfolio, I am surprised that you don't think that your worries have already been priced into the market price. Why are you trying to beat one of the markets you invest into? Didn't you decide to accept market returns when you adopted index investing?

Anyway, as you've asked for feedback:
firebraj wrote: 05 May 2017 10:25 2. Do nothing with the portfolio, proceed as usual. If dips occur, re-balance as necessary and use the opportunity to buy if this scenario occurs. (I prefer this option logically.)
Exactly. Stay the course. Or, as Jack Bogle would say: "Don't do something; just stand there".

Yes, this is the hard part! Index investing is simple, but not easy.
You are what the sound voice of reason sounds like :) .

I've always considered playing around with a small portion of the portfolio which is <5%. So called core & explore strategy. I don't expect much from it, it is very much play money as Spudd says. I think I have some fantasy deep inside my brain of making some type of living trading stock, but logically that's a losing game.

I do agree, and plan to stay the course. I was just thinking 'hypothetically' what could be done. I do appreciate your response and insight, it is valued and I am always interested in what you have to say.
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Re: Canadian Banks & Lender Stocks

Post by firebraj »

Spudd wrote: 05 May 2017 11:28 BTW I agree with the others as to the best actual strategy, my answer was more along the lines of "if you're intent on doing this, here's how you would".
Good! Because that looks like one scary ETF. Crazy what kind of products there are out there.
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Re: Canadian Banks & Lender Stocks

Post by scomac »

Spudd wrote: 05 May 2017 11:28 BTW I agree with the others as to the best actual strategy, my answer was more along the lines of "if you're intent on doing this, here's how you would".
BETAPRO S&P/TSX CAPPED FINANCIALS™ -2X DAILY BEAR ETF is a way to do it. This is a leveraged inverse ETF designed to replicate twice the daily move of the TSX Capped Financials index. This could be used as a hedge against the TSX 60/Composite.

It's expensive and is not designed to be a long term hold, but rather a trading position. I doubt that I'd want to enter into it until I was sure that the market was moving with me (ie. down) on this type of trade. It has started to move in positive territory in the past month, but that might be noise as much as anything at this point. You could hedge your weighting in financials [$45K^.3^.38=$5130/2] with roughly 400 units.

Tread cautiously, YMMV.
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deaddog
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Re: Canadian Banks & Lender Stocks

Post by deaddog »

firebraj wrote: 05 May 2017 13:24
I think I have some fantasy deep inside my brain of making some type of living trading stock, but logically that's a losing game.
Why is that.

Some people make a living trading stocks. You just have to overcome Fear & Greed.
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firebraj
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Re: Canadian Banks & Lender Stocks

Post by firebraj »

deaddog wrote: 05 May 2017 13:43
firebraj wrote: 05 May 2017 13:24
I think I have some fantasy deep inside my brain of making some type of living trading stock, but logically that's a losing game.
Why is that.

Some people make a living trading stocks. You just have to overcome Fear & Greed.
Just because I admit I'm am amateur, which is the reason I chose the couch potato style porftolio long-term and most of my assets.

I like the idea of playing around with a small portion of the portfolio worth (5% max). I'm also eager to learn and test out little things here and there with money I'm not afraid of losing. I had my stock picking losses from years ago when I was really young (still am). That was emotion (fear and greed) at play.

I'm always willing to absorb as much as I can, I don't necessarily have the belief that I am unable to do it. More that I'm better off not to play around foolishly.
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Re: Canadian Banks & Lender Stocks

Post by IdOp »

I agree with the other voices of staying the course.

On the hypothetical side:

* I'd be very wary of leveraged or inverse ETFs.

* Another product in the area is XFN, iShares S&P/TSX Capped Financial sector ETF. Perhaps it could be shorted? Or as you say, you could buy it at the bottom ( apparently that is the point where a loud bell rings ;) ) and hold through recovery. The MER is not the greatest, around 0.6% IIRC. Not sure if there's a similar product that's cheaper. Also, I've no experience shorting, so probably not a good idea to listen to me. :)
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Re: Canadian Banks & Lender Stocks

Post by Taggart »

If our registered portfolios were invested 100% in Canada index funds and ETF's like VCN I might be concerned about the large allocation to financials, but they are not.

Our non-registered all Canadian portfolio's financial sector target has been set at 14% with no deviations since 2010.

Since the ultra-smart professionals on Bay and Wall Street can't consistently get it right by shifting between sectors based on future projections, then I'm not going to try.

No plans to change anything above when we eventually go into another bear market crisis, but we shall see. Every major bear I've lived through since 1987 has been different. I never know what to expect beforehand.
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Re: Canadian Banks & Lender Stocks

Post by firebraj »

Taggart wrote: 06 May 2017 10:58 If our registered portfolios were invested 100% in Canada index funds and ETF's like VCN I might be concerned about the large allocation to financials, but they are not.

Our non-registered all Canadian portfolio's financial sector target has been set at 14% with no deviations since 2010.

Since the ultra-smart professionals on Bay and Wall Street can't consistently get it right by shifting between sectors based on future projections, then I'm not going to try.

No plans to change anything above when we eventually go into another bear market crisis, but we shall see. Every major bear I've lived through since 1987 has been different. I never know what to expect beforehand.
This is a good point. One of the good reasons of geographical and asset diversification. My Canadian equity is set at 30%, which means that financials are approximately 11.3 % of my entire portfolio.

I'm interested in how you have decided to split your investments in your TFSA, RRSP, and non-registered. Do you mind elaborating?
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Re: Canadian Banks & Lender Stocks

Post by Taggart »

firebraj wrote: 12 May 2017 17:21
Taggart wrote: 06 May 2017 10:58 If our registered portfolios were invested 100% in Canada index funds and ETF's like VCN I might be concerned about the large allocation to financials, but they are not.

Our non-registered all Canadian portfolio's financial sector target has been set at 14% with no deviations since 2010.

Since the ultra-smart professionals on Bay and Wall Street can't consistently get it right by shifting between sectors based on future projections, then I'm not going to try.

No plans to change anything above when we eventually go into another bear market crisis, but we shall see. Every major bear I've lived through since 1987 has been different. I never know what to expect beforehand.
This is a good point. One of the good reasons of geographical and asset diversification. My Canadian equity is set at 30%, which means that financials are approximately 11.3 % of my entire portfolio.

I'm interested in how you have decided to split your investments in your TFSA, RRSP, and non-registered. Do you mind elaborating?
I split our investments in such a way as you or any or any other investor should perhaps not be doing. I treat our taxable, TFSA and RRSP portfolios as three separate entities with no regard whatsoever for tax efficient strategies. The passively run TFSA's and RRSP's are backups in case I foul up with the active non-registered. The non-registered is 100% individual Canadian equities split at 14 to 15% each in seven separate targeted sectors. Whatever sector is down the most, gets any new money added to it.

So far, I'm happy with the three portfolios as they stand now.
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