Podcast: How Long Will Nvidia’s Reign Last?
U.S. chipmaker Nvidia again topped earnings expectations amid the AI boom. In today’s episode, portfolio managers Chris McHaney and your host, Mckenzie Box, discuss whether it’s time to take profits. They also explore Canadian bank earnings, the probability of a recession, and navigating options skew.
McKenzie Box is Director of Product and Strategy at BMO Global Asset Management. She is joined on the podcast by Chris McHaney, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, February 28, 2024.
Nvidia
Nvidia year to date is up close to 60% and looking back from 2023 it was up over 225%. So it may be prudent to take a bit of profits and diversify. It is also hard to bet against the momentum, and the expectations of AI. ETFs can be good way to maintain exposure to names like Nvidia and The Magnificent Seven that have exposure to AI, but still be able to diversify. Looking at our line up three options for diversification come to mind. BMO MSCI USA High Quality Index ETF (Ticker: ZUQ), BMO NASDAQ 100 Equity Index ETF (Ticker: ZNQ) or BMO Covered Call Technology ETF (Ticker: ZWT).
Canadian Bank Earnings
It has been a mixed bag so far with Bank of Montreal reporting slightly negative earnings, whereas Scotiabank was generally positive. National and Royal look to be relatively positive, but without huge price action. Across the board, provisions for credit losses have been higher than what the market has expected. A conservative approach from Canadian banks in terms of setting money aside. Capital markets earnings have generally been lower this quarter. Some positive takeaways is that capital ratios are very strong and with higher interest rates mean interest margins are wider for the banks. Overall Canadian economy looks to be slowing and that does impact the banks and their businesses. Here are a few ETF options for Canadian bank exposure: BMO Equal Weight Banks Index ETF (Ticker: ZEB), BMO Covered Call Canadian Banks ETF (Ticker: ZWB), BMO Canadian Bank Accelerator ETF (Ticker: ZEBA).
Soft Landing?
The probability of a recession when we look at Bloomberg has certainly gone down, but the variance has widened over the last recent months. If the US economy is too strong, that can force the Federal Reserve to delay interest rate cuts. The market and the economy overall were anticipating massive rate cuts this year. We are in the environment where good news is bad news or bad news is good news. Former US Treasury Secretary Larry Summers, mentioned that there is a meaningful chance that the next move could be a hike. So there is uncertainty of the path and timing of interest rate movements. So you may want to maintain equity exposure but at the same time manage that downside risk as well. So we do have a number of ways of accomplishing this: BMO Low Volatility US Equity ETF (Ticker: ZLU), BMO MSCI USA High Quality Index ETF (Ticker: ZUQ), BMO US Equity Buffer Hedged to CAD ETF – January (Ticker: ZJAN).
Option Based ETFs
Option skew tries to measure the difference between pricing for put options, or downside protection, and pricing for call options, or upside potential. The difference is driven by supply and demand. So it can give us a sense of market sentiment. When skew is high there’s more demand for put protection, indicating investors are more concerned about hedging that downside risk. We’ve seen the demand for calls and that upside potential, increasing their price and making put options cheaper. So covered call investors that is great news because they can collect higher premiums. And for investors looking for protection with Buffer ETFs, the cost of protection has come down. BMO Covered Call Technology ETF (Ticker: ZWT), BMO Covered Call Canadian Banks ETF (Ticker: ZWB), BMO US Equity Buffer Hedged to CAD ETF – January (Ticker: ZJAN).
*BMO Accelerator ETFs seek to provide unitholders with income and approximately double (2x) the price return of a Reference Index that gives exposure to equity securities up to a cap (before fees, expenses and taxes).
**ZNQ - Changes in rates of exchange may also reduce the value of your investment.
ZWT, total returns as at 2024/01/31: 1yr: 58.84%%, 3yr: 15.45%, Since Inception (SI): 14.45%
ZUQ – Information Technology is 37.67%, as of Feb 29, 2024.
Short selling: When an investor believes a security will decline in price, they may decide to borrow and sell a given asset in the hope of being able to buy it back for a lesser price and return it to the lender at some future date.
Capital ratio: The percentage of a bank’s capital to its risk-weighted assets.
Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
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