Tis the Season to Pick Up Some Tax Loss Bargains

My rule of thumb here, and always, is that you have to fundamentally want to own the stock (or ETF). In our stock selection process, we filter the main ETFs that represent the major indexes and remove the bottom half of the index that does not meet our quality, earnings momentum and value screens. We are left, in theory, with some of the better companies that show relative value, good profitability, and healthy balance sheets. One thing to keep in mind is that we NEVER can know where the bottom might be for a stock’s valuation.

We often get asked how much should I have of a stock or ETF in my portfolio? To answer this question, we then figure out at what levels the risk-return are attractive for the individual holdings from a sizing perspective. In Canada, that means if you like Shopify (SHOP) it needs to be more than 7.1% of your portfolio if your goal is beating the S&P TSX Index. In the US, if you want to beat the S&P 500, and you like Apple (AAPL), you need to have more than 7% in your portfolio. If your goal is the to beat the Vanguard Total World Index ETF (VT), AAPL needs to be more than 3% and Shopify needs to be just more than 0.21%. At the world level, there are only 13 stocks with a higher weight than 0.5% (I’m sure you can name most of them). None of them are outside the US. So for me, 0.5% is the minimum size that I look to have in a single security. If, I’m really confident, it could be as high as 4%. Twenty-five stocks at 4% each would be a highly concentrated high conviction portfolio. In general, I’m looking at about 50-100 stocks in the portfolio seeking the best risk returns in each sector sub-industry. For me, 1-2% is my primary guideline. You’ll often hear me say that I would have a one-third position or one-half of a position in the portfolio. The main challenge with market cap indexes are that you often need to make large concentrated bets to “outperform” the index.

Our criteria for ETF selection is slightly different and would generally apply to a sector or region of the world that we want to own fundamentally but has seen some forced (tax loss) selling. The US is now 58.3% of the VT ETF, so to beat the index if you like the US market, its weight needs to be higher. Canada is only 2.8% of the world index. By this definition, Canadians are almost always underweight the rest of the world, since Canadians tend to have 30-60% of their portfolios in Canadian exposure. It makes sense for the benefit of the dividend tax credit in taxable situations, but for little else unless you believe the S&P TSX will strongly outperform the world. This seems unlikely going forward given the makeup of our economy and the sector exposure in our indexes.

A few ETF thematic sectors we like fundamentally, but have had not performed well in recent months offer some good tax loss selling candidates. We like marijuana, silver, and clean tech to highlight a few that have had tough years beyond rallies earlier in the year.

Within each of these groups, there are some good companies that are being sold now for tax losses. We look at the YTD performance of the stocks in the ETFs for tax loss candidates. We think all three sectors are compelling longer-term stories but have struggled this year. Within Clean energy, BEPC – Brookfield Renewable is one that is on our radar. We have not bought it yet. JPM just upgraded it to buy with a US $52 target.

In the silver miner sector, PAAS – Pan American Silver is a name we added recently (1%). We are now liking the silver exposure better than the gold names. You get the inflation hedge and benefit from the long-term electrification trend.

On the Marijuana side, WEED – Canopy is a good pick to play the large cap sector.

Our Fall 2021 virtual roadshow is now over. For those of you who missed any, watch all our event replays on our official YouTube channel.

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