Richard Orrell, Portfolio Manager, Croft Financial Group

Focus: ETFs

Top picks: Invesco NASDAQ 100 Index ETF, Global X Artificial Intelligence Semiconductor Index ETF, iShares Core S&P 500 Index ETF (CAD – Hedged)

MARKET OUTLOOK:

The period since my last appearance in March has seen considerable market activity, marked by a substantial correction initiated by the “Liberation Day” tariff announcement. Encouragingly, since the April 7th lows, the U.S. market, specifically the NASDAQ and S&P 500, has rebounded to new all-time highs. Canadian markets are also currently trading near their historical peaks.

My assessment is that the market has largely priced in the tariff-related news. Despite the approaching Aug. 1 deadline, current market behaviour implies an expectation among participants for less severe final tariff rates. My forward-looking view is primarily shaped by two critical elements: the future path of U.S. interest rates and the U.S. dollar’s valuation.

I anticipate a downward trend for U.S. interest rates, with market expectations now firmly set on rate cuts. While the U.S. economy may encounter a period of slower growth, the Federal Reserve possesses the capacity to deploy lower interest rates as a mechanism to bolster economic activity. Furthermore, declining interest rate differentials are expected to contribute to a weakening US dollar, which has already seen approximately a 10 per cent depreciation against a basket of major currencies this year.

Considering these dynamics, I advise incorporating CAD-hedged versions of ETFs that provide U.S. equity exposure. The long-term growth potential of artificial intelligence remains robust, with an increasing number of corporate applications emerging. Consequently, my strategic focus includes adding further technology exposure to benefit from the enduring AI theme.

Finally, observing historical seasonality, the end of July often presents a period of market softness. I would view any such weakness as an opportune moment to increase equity exposure, targeting an additional five to 10 per cent.

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TOP PICKS:

Invesco NASDAQ 100 Index ETF (QQC.F TSX)

My first pick is Invesco NASDAQ 100 Index ETF. It’s the NASDAQ 100 so the highest weights are Nvidia, Microsoft, Apple, Amazon, and Broadcom. The management expense ratio (MER) is 0.21 per cent and this is the Canadian dollar hedged version as per our earlier discussion. While this index has the most volatility, it also has the best record of long-term return at 16.79 per cent annually for the last 10 years. Many of the top holdings are involved in the AI ecosystem which is a growing market and should propel the index higher over the next few years.

Global X Artificial Intelligence Semiconductor Index ETF (CHPS TSX)

My second pick is CHPS by Global X. This ETF is concentrated on 10 standout global semiconductor names including Nvidia, Broadcom and Taiwan Semiconductor. The MER is 0.63 per cent so large portfolios could replicate the ETF. This is an outright play on the growth of AI and the picks and shovels that power the technology. I think this is an ETF you can buy and hold for the long term. It has a very minimal dividend but a large potential for capital gains.

iShares Core S&P 500 Index ETF (CAD – Hedged) (XSP TSX)

My third pick is a core holding for many clients across the Croft platform. The XSP by iShares is CAD hedged and provides exposure to the S&P 500. It is a solid core holding with market exposure to the MAG 7. The top holdings are mega caps. The MER is 0.09 per cent. This a good ETF for investors that want strong long-term growth with less volatility than some of the technology ETFs I’ve picked.

PAST PICKS: JAN. 20, 2025

Invesco S&P 500 GARP ETF (SPGP NYSERCA)

Then: US$110.22

Now: US$108.85

Return: -1%

Total Return: -0.49%

JPMorgan US Equity Premium Income Active ETF (JEPI TSX)

Then: $26.82

Now: $24.69

Return: -8%

Total Return: -4%

TD U.S. Equity Index ETF (TPU TSX)

Then: $49.17

Now: $49.10

Return: -0.14%

Total Return: 0.34%

Total Return Average: -1%