Ask the expert

Expert – Scotia iTRADE

Non-registered accounts such as Cash accounts can invest in equities, mutual funds, ETFs, fixed income, exchange traded options and more.  TFSAs can invest in equities, bonds, mutual funds, GICs and ETFs. 

Expert - Horizons ETFs

While it is true that ETFs trade on a stock exchange like equities, if they invest in non-equity asset classes, we generally would not expect their pricing to be significantly impacted by volatility in the equity markets, unless that asset class had a high correlation to equities. For example, ETFs that track non-equity asset classes like gold and treasuries, and historically are inversely correlated to equities, did quite well during the financial crisis of 2007/2008.

ETFs can provide some liquidity advantages during financial volatility, because they can be bought and sold throughout the day,  in contrast to some security types such as  fixed income, which can be difficult to sell in a broad market selloff.

The key point is that an ETF’s net asset value is correlated to the performance of the underlying securities/assets it holds. 

Expert – Horizons ETFs

ETFs were basically designed to be a hybrid of stocks and mutual funds, with the goal of combining the best features of both investment structures.

• Similarities to stocks:
• ETFs trade like a stock on a listed exchange with a listed ticker symbol, and as a result, you can buy or sell an ETF anytime during the trading day using your brokerage account, and track the performance fairly easily throughout the day.

• Similarities to mutual funds:
  
• ETFs provide the diversification of mutual funds, in that they are a portfolio that holds a basket of underlying securities, giving you scale and diversity as an investor to buy a number of securities in one transaction. They are also what we refer to as an open-ended investment trust, like a mutual fund, where the value of the ETF is reflective of the cumulative market value of the underlying securities held by the ETF.

In general, ETFs tend to have lower management fees than mutual funds, likely contributing to  a growing number of investors in Canada gravitating towards ETFs as an alternative to mutual funds.    

Expert – Horizons ETFs

Most U.S. stock/equity index ETFs are offered in Canada as both currency-hedged and non-currency-hedged strategies. Simply put, a currency-hedged ETF seeks to eliminate the impact of currency exchange on the performance of the ETF.

For example, an S&P 500 index ETF that had a currency hedge would not benefit from the appreciation of the U.S. dollar versus the Canadian dollar, but it would also be insulated from the negative impact of a rise in the value of the Canadian dollar versus the U.S. dollar. The net effect is that the ETF is currency neutral, and the investor is isolating the performance of the underlying securities only. While a currency neutral ETF isolates the performance of underlying securities, there are costs to running a currency hedge, and typically the performance will have a high tracking error.    

Expert – Horizons ETFs

Most U.S. stock/equity index ETFs are offered in Canada as both currency-hedged and non-currency-hedged strategies. Simply put, a currency-hedged ETF seeks to eliminate the impact of currency exchange on the performance of the ETF.

For example, an S&P 500 index ETF that had a currency hedge would not benefit from the appreciation of the U.S. dollar versus the Canadian dollar, but it would also be insulated from the negative impact of a rise in the value of the Canadian dollar versus the U.S. dollar. The net effect is that the ETF is currency neutral, and the investor is isolating the performance of the underlying securities only. While a currency neutral ETF isolates the performance of underlying securities, there are costs to running a currency hedge, and typically the performance will have a high tracking error.    

Expert – Horizons ETFs

Most gold bullion ETFs hold gold futures contracts. Generally these trade very close to the spot price of gold.

In the case of leveraged bullion ETFs which are only designed to replicate the daily returns of gold futures, you should keep in mind that they reset daily to two times exposure to gold bullion.

Holding these ETFs beyond one day means the performance can deviate from the performance of the underlying index. 

Expert - Horizons

There are roughly 500 ETFs in Canada that provide exposure to literally dozens of different asset classes and strategies.

Currently ETFs exist that provide exposure to the following asset classes, to name a few:

• Stocks (Canadian, U.S., Global, Small-Cap, Emerging Market, Sectors)
• Bonds (Investment grade corporate bonds, treasuries, global bonds, high yield bonds, senior loans)
• Commodities (Gold, Oil Futures, Natural Gas futures)
• Preferred Shares
• Volatility
• Multi-Asset (ETFs of ETFs)

The risk of any ETF is related to the risk of the ETF’s strategy and underlying holdings of the ETF. Canadian ETF providers are required to provide risk ratings on the ETFs they offer. This information should be publicly available on their websites.    

Expert – Horizons ETFs

Remember that when you’re comparing a hedged to non-hedged product, you’re actually comparing ETFs that are impacted by currencies in different ways. For example, in a rising U.S. dollar market, a non-hedged U.S. equity ETF would do really well, where a hedged ETF would not. In the opposite scenario, the reverse would happen. For example in 2015, the S&P 500 delivered a 1% calendar year approximate return, while a non-hedged U.S. equity ETF in Canada investing in that index delivered about 20% due to the currency benefit. (Seeking Alpha, https://seekingalpha.com/article/3786046-2015-s-and-p-500-return).

The cost of hedging is different. ETFs that use hedging will cost more than an ETF that doesn’t hedge because there is a cost to hedge a portfolio. Generally this cost is shown in the trading expense ratio of the ETF and reflected in the performance. The best way to determine this cost is to compare a hedged ETF versus the underlying index it seeks to track in the local currency; for example the S&P 500. The difference in return, minus the management fees, can usually be attributed to the cost of the currency hedge.    

Expert – Scotia Wealth Management

First, let’s discuss what is meant by the “guaranteed” in Guaranteed Investment Certificate (GIC). This means the Canada Deposit Insurance Corporation (CDIC) has insured your investment for up to $100,000. This insurance is only available for regular bank deposits or GICs, NOT other investments. So, generic bonds are not a guaranteed investment like GICs. Also note, if you have invested more than $100,000 in a GIC with the same issuer, anything invested above the $100,000 level is not “guaranteed” by the CDIC.

For other bonds, there is no such guarantee. Rather, an investor must rely on the creditworthiness of the company or government that issued the bond. Simply because a bond ranks higher in the capital structure (it has preference in bankruptcy) and has a lower risk of default than equity of the same issuer, doesn’t mean it is “guaranteed.”

Additionally, bonds, like equities, have market risk. If you need to sell a bond before maturity the price may have dropped below your purchase price. This could occur if the creditworthiness of the bond issuer has deteriorated or if interest rates have risen, for most bonds.

As for payment, bonds can have many forms. Most bonds pay semi-annually. That is, they pay interest every six months or twice a year. While less common, bonds can also pay monthly or annually. It is best to inquire about the details of any bond before you purchase to make sure its characteristics are right for you.    

Expert – Scotia Wealth Management

Typically, long yields fall relative to short yields at the end of a business cycle. This is caused by expectations that future growth will be lower, resulting in higher demand for long term bonds over short term bonds. This process causes the yield curve to flatten. The historical and future expectations of spreads between long yields and short yields will lead to expectations for the yield curve. If expectations are for the yield curve to flatten, then the demand would be for long bonds. But if the opposite is true, the demand would be for short bonds.    

Expert – Scotia iTRADE

As a client, you get access to all of the tools, research and resources you need to choose and purchase mutual funds that match your investment goals, including the Mutual Fund Screener, Performance Tool and Comparison Tool.

To help diversify your portfolio, we offer you funds from industry leaders including:

ScotiaFunds

AGF

Blackrock

CI Investments

Dynamic Funds

Fidelity Investments Canada

Invesco Trimark

Mackenzie Financial

For additional information, please feel free to contact one of our Client Service Associates by phone at 1-888-872-3388 or by email at service@scotiaitrade.com for clarification on what mutual funds can be held in your Scotia iTRADE account. 

Expert – Pro Market Advisors

As with all long security positions, one of the risks is that the security’s price could fall to zero. In such a case, you would lose the amount invested in the security.

Another risk factor is that your option position could possibly change, which would then change your risk exposure. If you hold a long put into expiration, it may be auto-exercised if the put is in-the-money by $0.01 (according to CDCC rules). If that happens, your long put becomes a short stock position. At that point, you would have the risk associated with a short stock. As you can see, this has the potential to be significantly higher than the risk associated with a long put. For that reason, you need to be aware of the possibility of auto-exercise if you choose to hold a long option position into expiration.    

Expert – Scotia iTRADE

Registered accounts cannot be leveraged as per CRA rules. When selling a put in a registered account, there is no means to ensure the cash in the account will not be used for alternative purposes. In other words, one could sell the put today, only to turn around and use the cash proceeds to buy another security, leaving the registered account holding a naked put which is explicitly prohibited. In a margin account, the system automatically allocates sufficient equity against the naked put position, thus guaranteeing satisfaction of any adverse market moves or exercise.

In addition, note the difference in the terminology. While the call sold against the underlying stock is said to be “covered”, the put is not sold against an underlying security, but is only said to be “cash-secured.” These are not mirror scenarios and Scotia iTRADE has no means of securing the cash-covered call position. As a result, Scotia iTRADE does not support the cash-secured put strategy and it is not allowed in a registered account. The strategy is considered a naked put. 

Expert – The Montreal Exchange

An Iron Condor is a delta-neutral, defined-risk strategy that assumes a stock, ETF or index, will remain within a specific price range (support/resistance) and is a four-legged option strategy combining out-the-money bear call and out-the-money bull put spreads. It is executed by placing the short call vertical spread above resistance and by placing the short put vertical spread below support. 

Expert - The Montreal Exchange

There are several reasons an investor might wish to opt for an OTM option:

• They are certain the stock is going to reach the specific target price
• They are expecting a significant favourable move in the stock price
• To utilize a higher degree of leverage, because, with the identical capital, they are able to buy more contracts when it's OTM

Delta is a measure of impact per $1 increase in the underlying security. The delta is also used as an estimate of the probability that the option will expire in-the-money. OTM options have very low deltas. Hence, the investor is able to make a tradeoff between the higher risk of the option expiring worthless and the cheaper price of the option. (The OTM option price consists of time value only).    

Expert – Scotia iTRADE

Both common and preferred shares represent an interest in the ownership of the company. If the business improves and its share price increases, the investor benefits. If the business deteriorates and the share price decreases, the investor may experience a loss.

Common shares give the holder voting rights, whereas not all preferred shareholders have voting rights. In fact, some preferred shares may have one vote or even multiple votes per share.  Both common and preferred shareholders can receive dividends.  Dividends for preferred are fixed, whereas for common shares, dividend payments are based on the decision of the board of directors and typically declared following board meetings. 

Preferred shareholders have a higher claim to the assets and earnings of a company, and are always paid out ahead of common shareholders. This is especially important should the company become insolvent. Common shareholders are entitled to their claim on the company’s assets, but only after all other liabilities have been paid out to creditors, bondholders and dividends to preferred shareholders.

Preferred shares pay out a fixed dividend on a fixed schedule much like a bond, but can trade on a stock market much like a common stock. As a result, they act as a hybrid security and can participate in the upside of a company with a price increase. Due to the fixed payments which are typically guaranteed, the price does not fluctuate as much as the common stock.

Unlike common shares, preferred shares can have a callable feature which allows the issuer to recall the shares after a predetermined time. As an investor, you may wish to research this feature thoroughly prior to purchasing a preferred share.

Lastly, preferred shares can have a conversion feature which allows the investor to convert their shares into a fixed number of common shares of the company. Common shares do not have this feature.    

Expert - Recognia

Gaps are important technical indicators because they indicate areas of support or resistance in the price action. There are two types of gap patterns: gap ups and gap downs. Gaps typically have very short-term influence lasting approximately ten bars from the occurrence of the gap.

Gap ups are generally thought of as bullish events. When the price of a security breaks upward through a gap, it indicates an important psychological level has been breached. However, three gap ups within a trend can often indicate a reversal due the trend. Three gap ups within a trend is considered a sign of exhaustion.

Similarly, gap downs are generally thought of as bearish. When the price of a security breaks downward through a gap, it indicates traders are fearful and are rapidly pushing down the price of the stock. Again, three gap downs within a trend can indicate the reversal of the trend due to exhaustion.   

Expert - Recognia

A stock crossing over or under its moving average is often considered an important technical event. You can view moving averages on a Scotia iTRADE advanced chart by looking under the technical indicators section. You can set the moving average time period to whatever you like. In this example, we can see that the stock price crossed above the 50 day moving average before moving sharply higher. 

It is also possible to use the Recognia Technical Analysis tool to see important technical events for an instrument such as moving average cross-overs. From the stock quote page, select Technical Analysis to view the Recognia analysis for the instrument in question.

Expert - Recognia

There is no universally defined meaning of the term bear market. However, a commonly used metric is a drop of 20% or more occurring over at least a two month period. A drop of 10% is typically referred to as a correction.    

Expert – Scotia iTRADE

Please note the Toronto Stock Exchange does not Stop Market orders. As a result, Scotia iTRADE does not provide the Stop Loss functionality for Canadian orders. You can, however, place Stop Limit orders on Canadian stock exchanges through your Scotia iTRADE account. You still have the option of placing Stop Loss orders on US exchanges.

Stop Limit (Sell) orders are orders that become booked limit orders when a board lot is traded at or below the trigger price on the marketplace to which the order has been booked. 

Stop Limit (Buy) orders are orders that become booked limit orders when a board lot is traded at or above the trigger price on the marketplace to which the order has been booked.

The stop limit price has to be within 10% of the stop price.

Since these orders are not immediately executable on order entry, when these orders are booked to the marketplace they will be booked to the Principal Marketplace (the TSX/TSXV) for execution and will remain on the Principal Marketplace until cancelled, executed, or expiry. Once booked to the Principal Marketplace, if these orders are changed, they will be handled in accordance with the Standard Handling of Orders.     

Expert – Scotia iTRADE

Short sellers provide an important component of an efficient market. Short sellers provide liquidity to the markets and keep stocks from being pushed up too high on hype and over-enthusiasm.

Short selling, when done properly, can also be used as a risk management strategy in your portfolio in the event of a market downturn.    

Expert – Scotia iTRADE

Scotia iTRADE provides contextual help using the blue question mark icon located just to the right of the “Price Type” label on the Trade ticket. Below are responses to your inquiry:

Price types:

Market Order: A market order is an order to buy or sell an equity immediately at the best price currently available in the market.

Limit: A limit order is an order to buy or sell an equity at a specified price or better.

Stop: Stop (Sell) orders are orders that become booked market orders when a board lot is traded at or below the trigger price on the marketplace to which the order has been booked. 

Stop (Buy) orders are orders that become booked market orders when a board lot is traded at or above the trigger price on the marketplace to which the order has been booked. 

When a Stop (Sell) order or Stop (Buy) order is triggered, the order initially becomes a Limit order on the Principal Marketplace. Scotia iTRADE automatically cancels the Limit order and submits a new Market order which is subject to the Standard Handling of Orders. 

Stop limit: Stop Limit (Sell) orders are orders that become booked limit orders when a board lot is traded at or below the trigger price on the marketplace to which the order has been booked. 

Stop Limit (Buy) orders are orders that become booked limit orders when a board lot is traded at or above the trigger price on the marketplace to which the order has been booked. The stop limit price has to be within 10% of the stop price.

Since these orders are not immediately executable on order entry, when these orders are booked to the marketplace they will be booked to the Principal Marketplace (the TSX/TSXV) for execution and will remain on the Principal Marketplace until cancelled, executed, or expiry. Once booked to the Principal Marketplace, if these orders are changed, they will be handled in accordance with the Standard Handling of Orders. 

Trailing stop: A trailing stop order is an order to sell an equity that is set at a fixed dollar amount or percentage below the market price - for a long position. The trailing stop price is adjusted as the price fluctuates. A trailing stop order can be placed as a trailing stop market order. When a trailing stop order is modified, the original Calculated Price is recalculated using the current market price. 

Gord Wiesemann began working in the financial industry in 1992 with ScotiaMcLeod as an Advisor’s Assistant and quickly cultivated an interest in market analysis and commodity futures trading that soon saw him advance to oversee the company’s central futures trading desk. He eventually left ScotiaMcLeod to pursue the setup and operation of an independent futures commission merchant and in the process began publishing daily financial market commentary and analysis. As an investment advisor Gord developed a name for himself in Toronto’s small commodity trading community by offering consistently valued, high quality research material and trading models that were coveted by investors and advisors alike. In 2010 Gord was recruited to return to ScotiaMcLeod as a part of the Plaza Futures team. He brought a level of technical experience and analytical skill that was intended to set Scotia’s Plaza Futures’ offering apart from everyone else in the industry. Since 2010 Gord has regularly published Scotia Plaza’s Futures Notes with an emphasis on disciplined technical trading strategies and an unbiased summary of critical macroeconomic events.

Scotia Wealth Management is an innovative team-based approach to wealth management that addresses the entirety of your life – your family, your business, your future – one facet at a time. Together with your relationship manager, our Scotia Wealth Management specialists bring their skills and expertise to the consideration of what you’ve accumulated – and how best to administer it through life’s changes. From financial counsel on managing your wealth to careful contemplation of how to transfer it to future generations, it’s your thinking, combined with our thinking, to create Enriched Thinking^®.

Gary is responsible for technical analysis and equity, commodity research in the North American region for Trading Central. Previously, Gary served 8 years as a Senior Investment Representative (Options Specialist) and resource officer for TD Bank as well as an account manager for Bank of America. Gary has been an active proprietary trader in the US Equity and Options/FX market, and has over 15 years of experience studying technical analysis strategies and developing trading plans. Gary is regularly quoted in Bloomberg News and has been a guest speaker at the New York Traders Expo.

For the past 10 years, Kathryn St. John has been building products and tools to help self-directed investors understand, utilize and leverage technical analysis and chart pattern recognition to make better investment decisions. Her passion for excellence and her love of technical analysis has helped Trading Central build industry leading products that today provide actionable investment research to a wide range of investors and traders. More than technical analysis, these products offer dynamic and action oriented trading ideas for all trader types. Mrs. St. John continues to lead product management initiatives at Trading Central and has seen the products deployed around the globe in the world's largest brokerage firms, banks, and institutions. Prior to joining Trading Central, Mrs. St. John held positions at Nortel Networks in Web Development and Project Management. Mrs. St. John is a graduate of Carleton University where she earned a Bachelor of Computer Science degree with a minor in Business and High Honours. She also holds certifications in Project Management Professional (PMP) and Pragmatic Marketing's Practical Product Management, and is a frequent guest speaker at different industry associations.
 

About Trading Central

Trading Central is the industry leader in providing actionable technical analysis for self-directed investors and traders of all levels and types. The firm currently provides coverage of more than 55 exchanges worldwide, including stocks, ETF's, forex, indices, and futures. Founded in 2000, Trading Central now has more than 20 million provisioned accounts worldwide, with a client base that includes Bloomberg, NYSE Euronext, Fidelity, Charles Schwab, Scotia iTRADE, TD Waterhouse, Kotak Securities, Saxo Bank and many more.

AJ Monte is a Chartered Market Technician with over 30 years of experience in the financial industry. He currently serves as Chief Market Strategist for The Market Guys, teaching professionals and novices alike innovative techniques to accumulate and protect wealth. He is also one of the more recognized financial experts in the industry, thanks to his appearances on ABC, FOX Business and PBS television as well as a regular guest slot on "Serious Money Radio". AJ has authored two financial education books, and is known internationally for his financial educational Live events. His audiences range from small private investor groups, universities and corporate employee training, to large public events, including Tony Robbins Wealth Mastery & Harv Ecker's, 'Never Work Again'.

As an Associate Director on Sustainalytics’ Advisory Services team, Kirsten supports asset managers and asset owners to integrate Sustainalytics’ environment, social and governance (ESG) research in the execution of their sustainable investment strategies. Kirsten also manages and executes projects to support investors in developing and implementing sustainable investment strategies and has supported the development of thematic content related to carbon risks and stranded carbon assets. Prior to joining Sustainalytics, Kirsten worked for a certification standard in the voluntary carbon markets, where she oversaw the certification of greenhouse gas emission reduction projects and the commercialization of the resulting carbon credits.
 

About Sustainalytics

Sustainalytics is a global leader in ESG and Corporate Governance research and ratings. Over the last 25 years, we have brought together leading ESG research and client servicing professionals to retain that personal touch that has helped us to grow. Today, Sustainalytics supports hundreds of the world’s foremost investors who incorporate ESG and corporate governance insights into their investment processes.

About Scotia Wealth Management

Scotia Wealth Management is an innovative team-based approach to wealth management that addresses the entirety of your life – your family, your business, your future – one facet at a time. Together with your relationship manager, our Scotia Wealth Management specialists bring their skills and expertise to the consideration of what you’ve accumulated – and how best to administer it through life’s changes. From financial counsel on managing your wealth to careful contemplation of how to transfer it to future generations, it’s your thinking, combined with our thinking, to create Enriched Thinking®.

Mark Noble has been with Horizons ETFs for more than 7 years and is responsible for its external communications and sales strategy. Mark is a strong proponent of financial literacy and ETF education and works closely with Horizons sales and marketing teams to build out client education tools and initiatives that help Canadians become better ETF investors. Prior to working at Horizons ETFs, Mark was a personal finance journalist at the Advisor Group, a leading financial services publication that serves the Canadian Financial Advisor market.

About Horizons

With approximately $4.2 billion in assets under management and 76 ETFs listed on the Toronto Stock Exchange, Horizons makes up one of the largest families of ETFs in Canada. Horizons ETFs is a subsidiary of Horizons ETFs Management (Canada) Inc. and a member of the Mirae Asset Financial Group.

David Barber is Vice President of National Accounts and brings more than 20 years of experience in the financial services sector to his role at First Asset. David is responsible for the development and maintenance of key relationships for First Asset ETFs. He works with ETF Analysts, Portfolio Managers both institutional and retail, Product Managers, Investment Consultants as well as with the Self-Directed Investment channels to integrate First Asset ETFs into their business models.

Prior to joining First Asset, David was an investor relations account executive, as well as a fixed-income broker at an inter-dealer brokerage. David has a BSc. (Biology) from the University of Western Ontario and holds the Chartered Alternative Investment Analyst (CAIA) designation.

Jason Ayres has been an instructor for the Montréal Exchange for several years, and actively advocates and educates investors on the practical utilization of options for managing risk, cash flow and leverage. In addition to the development of numerous strategic relationships with some of the most prominent brokerages and exchanges in North America, Jason is the President of Learn To Trade Global as well as Founder of OptionSource.net. He is a Derivative Market Specialist by designation.

Patrick Ceresna has been providing education on behalf of the Montréal Exchange for several years. Patrick specializes in analyzing the inter-market relationships of the broader derivative markets and the impact those trends have on trading and investment decision making. In addition to being an Instructor, he is the Chief Derivative Market Strategist for Learn To Trade Global.com. He is a Chartered Market Technician, Derivative Market Specialist and Canadian Investment Manager by designation.


About the Montréal Exchange

The Montréal Exchange (MX) is Canada's national derivatives exchange, offering futures and options products that cover major asset classes, including interest rates with a time horizon of one day to 30 years, equities, FX, and Canadian stock indices. MX's options market comprises equity, index, currency and ETF options.

Paul Bhangu is a registered Portfolio Manager within the Global Portfolio Advisory Group of Scotia Wealth Management, responsible for developing equity strategy for U.S. and international equities. Paul employs both bottom‐up and top‐down investment strategies in managing two equity mandates and associated recommended lists. Prior to joining Scotia Wealth Management, he held the positions of Senior Analyst at HSBC Investments and Analyst at SEI Investments, where he focused on International and Canadian equity research and portfolio strategy. At SEI, he was a member of the portfolio management team that was awarded Lipper Awards for the best Canadian Equity Fund in the ten‐year category for 2010, 2011 and 2012. Paul has over 13 years of experience in the investment industry. Paul holds an MBA degree from the Rotman School of Management at the University of Toronto. He is a Chartered Financial Analyst and has completed the Chartered Market Technician Program.

About Scotia Wealth Management

Scotia Wealth Management is an innovative team-based approach to wealth management that addresses the entirety of your life – your family, your business, your future – one facet at a time. Together with your relationship manager, our Scotia Wealth Management specialists bring their skills and expertise to the consideration of what you’ve accumulated – and how best to administer it through life’s changes. From financial counsel on managing your wealth to careful contemplation of how to transfer it to future generations, it’s your thinking, combined with our thinking, to create Enriched Thinking^®.