The recent collapse of Silicon Valley Bank, Signature Bank, and Silvergate Bank in the United States has sent shockwaves across the financial sector. Investors and market observers now worry about contagion across the broader North American banking industry. This crisis has, and likely will continue to stimulate significant changes in financial markets – changes that potentially favour bonds, among other investment strategies – as regulatory concern shifts from inflation to the containment of risk within the banking system.
If you’re looking for strategies that could potentially stand to benefit in the wake of the Silicon Valley Bank collapse, there are several ETFs worth consideration.
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Where Investors can Potentially Benefit
Government Bonds Rally
The primary beneficiary of this pivot in rate sentiment has been government bonds. This is not a bullish equity signal, and in fact may be signaling more of a panic in the market, as during a financial crisis, U.S. treasuries typically function as the core risk-off assets.
The Horizons US 7-10 Year Bond ETF (HTB), which tracks an index of 7- to 10-year government bonds, had a one-week performance of 4.78% for the period ending March 13, 2023, reflecting the massive reversal in sentiment on bonds. HTB would be the most direct way for investors to get exposure to a U.S. Treasury rally, as this constitutes the only underlying holding of the ETF. At this point in the curve, there may be more upside potential available than with shorter-term strategies. There is the potential that cash rates could decline, whereas the combination of capital appreciation and the yield on these treasuries, which is around 3.7%, as at March 13, 2023, could be a better total return opportunity.
The Horizons Tactical Absolute Return Bond ETF (HARB) has also been a standout performer since 80% of the ETF’s current net exposure is allocated to U.S. Treasuries, as at March 13, 2023. DMAT Capital, the sub-advisor of the ETF, has been positioned for this type of rally for some time with the belief that the high level of interest rates would effectively result in some form of capital markets sell-off or economic slowdown (or potentially both). HARB’s defensive positioning benefitted from the risk-off focus brought about by this market shift.
Financial Stocks Crater
There is no broad view that the Canadian banking sector has the same risks as the U.S. regional banks, due to much higher levels of capital requirements and oversight by the Canadian regulator, the Ontario Superintendent of Financial Institutions (OSFI). The global financial sector is highly correlated, and any crisis generally results in liquidity and credit concerns, due to contagion. As a result, global financial stocks have sold off. The U.S. S&P 500 Financials Sector GICS Level 1 Index is down more than 11.2% during the one week ending March 13, 2023, according to Bloomberg data. The Horizons Equal Weight Canada Banks Index ETF (HEWB), which holds the six largest Canadian banks in equal weight, is down 6.94% over the same period. Canadian investors might look at this as an opportunity to take advantage of a dip in this popular sector; however, there is likely going to be continued volatility until there is the comfort that the regulatory backstop brought about by U.S. regulators has stopped further runs on regional banks.
This crisis also showcases the potential value of using an inverse-leveraged ETF, such as the BetaPro Equal Weight Canadian Banks -2x Daily Bear ETF (HBKD). This ETF provides -2x daily exposure to the same index used by HEWB. Buying and holding inverse-leveraged ETFs is a very risky investment strategy, but in the case of significant volatility within the banking sector, HBKD could potentially function as a hedge, where investors with a large long position in Canadian banks could use it to tactically protect their overall position from further sell-offs and volatility.
Gold – A Risk-Off Hedge
Gold has historically been viewed as a risk-off hedge during periods of market volatility. In particular, since it is viewed as a store of absolute value, it does exceptionally well in deflationary environments.
The view of Horizons ETFs is that gold, and gold equities, currently represent an attractive asset class to consider since central banks across the globe have embarked on ambitious gold-buying programs to battle rising interest rates, which are impacting the relative value of their currencies. Banks are also buying gold as a hedge against a rapid decline in rates, as is happening right now.
Source: Financial Times
In the case of last week, two of our Covered Call ETFs that provide gold exposure, The Horizons Gold Producer Equity Covered Call ETF (GLCC) and the Horizons Gold Yield ETF (HGY) both delivered strong returns. In particular. GLCC was up more than 4 % during the one week ending March 13, 2023. One of the key features of both of these ETFs is that they sell call options on their underlying securities to enhance potential income generation. Traditionally, as an investment, gold does not pay an income. In the case of gold equities, some income can be achieved but typically, the yield is not significant. However, with these two covered call strategies, the yield can be substantially increased by writing out-of-the-money calls on a proportion of the portfolio. GLCC currently has an estimated annualized yield of 11.66% and HGY at 6.42%, as at February 28, 2023. If rates decline, these are two strategies that can provide yield exactly when you need – when yields deflate!
Impact on High-Interest Savings ETFs
There is a natural view that a banking crisis could result in concerns about the creditworthiness of deposit-taking institutions. In the case of High-Interest Savings ETFs, such as the Horizons High Interest Savings ETF (CASH), there is no CDIC insurance, as would be associated with a traditional high-Interest savings account or a Guaranteed Investment Certificate (GIC). However, in the case of all of these ETFs, the deposits are held with the largest six Canadian banks. The credit risk of these deposits, given the very high creditworthiness of these deposit-taking institutions, should be low.
One key feature of these ETFs is that the interest paid on the deposits is benchmarked to the Canadian overnight rate, so if there is an eventual decline in the overnight rate, it is anticipated that the income yield offered by these ETFs would also decline.
It’s important to view High-Interest Savings ETFs with the perspective that if there is a pivot in interest rate expectations, there could be higher total return opportunities in other types of low-risk fixed-income strategies. However, the fact that these ETFs are effectively cash deposits nearly eliminates their overall exposure to any interest rate or market risk.
Standard Performance Data as at March 13, 2023 (CAD)
|Bloomberg ticker||Name||1m||3m||6m||ytd||1 yr||3yr||5yr||10yr||Since Inception||Inception Date|
|GLCC CN EQUITY||Horizons Gold Producer Equity Covered Call ETF||6.36%||-0.61%||15.83%||-0.61%||-14.66%||7.22%||7.81%||1.23%||-2.51%||11-Apr-11|
|HGY CN EQUITY||Horizons Gold Yield ETF||3.51%||2.63%||11.08%||2.63%||-3.31%||4.30%||4.59%||-0.18%||-0.08%||17-Dec-10|
|GC1 Comdty||Generic 1st ‘GC’ Future||5.16%||6.44%||14.77%||6.44%||8.10%||5.50%||9.13%||4.98%||4.99%||02-Jan-75|
|SOLNAGPN INDEX||Solactive North American Listed Gold Producers Index NTR||6.95%||0.45%||17.62%||0.45%||-15.93%||9.19%||11.88%||2.48%||-1.15%||28-Mar-11|
|HEWB CN EQUITY||Horizons Equal Weight Canada Banks Index ETF||-6.18%||1.29%||3.15%||1.29%||-12.01%||19.23%||8.90%||22-Jan-19|
|SOLCBEW INDEX||Solactive Equal Weight Canada Banks Index||-6.17%||1.34%||3.27%||1.34%||-11.78%||19.59%||8.02%||10.83%||8.85%||16-Mar-07|
|HARB CN EQUITY||Horizons Tactical Absolute Return Bond ETF||3.07%||3.60%||2.17%||3.60%||-1.44%||0.15%||07-Dec-20|
|HTB CN EQUITY||Horizons US 7-10 Year Treasury Bond ETF||4.02%||4.57%||3.45%||4.57%||2.98%||-6.42%||1.96%||1.58%||07-Apr-15|
|SOLUTB INDEX||Solactive US 7-10 Year Treasury Bond Index (Total Return)||4.19%||4.64%||3.71%||4.64%||3.31%||-6.47%||2.15%||4.09%||3.31%||30-Jan-09|
|S5FINL Index||S&P 500 Financials Sector GICS Level 1 Index||-10.67%||-6.43%||3.74%||-6.43%||-9.37%||16.29%||6.32%||13.49%||8.63%||11-Sep-89|
Source: Bloomberg, as at March 13, 2023
Standard Performance Data – February 28, 2023 (CAD)
|Bloomberg ticker||Name||1m||3m||6m||ytd||1 yr||3yr||5yr||10yr||Since Inception||Inception Date|
|GLCC CN EQUITY||Horizons Gold Producer Equity Covered Call ETF||-12.88%||-5.34%||17.94%||-6.56%||-12.25%||1.68%||7.29%||0.66%||-3.02%||11-Apr-11|
|HGY CN EQUITY||Horizons Gold Yield ETF||-4.95%||1.76%||4.39%||-0.85%||-5.23%||2.98%||3.94%||-0.41%||-0.36%||17-Dec-10|
|GC1 Comdty||Generic 1st ‘GC’ Future||-2.70%||5.84%||11.24%||1.22%||3.71%||5.93%||8.18%||4.41%||4.88%||02-Jan-75|
|SOLNAGPN INDEX||Solactive North American Listed Gold Producers Index NTR||-13.42%||-5.44%||18.98%||-6.08%||-13.44%||4.41%||11.01%||1.65%||-1.70%||28-Mar-11|
|HEWB CN EQUITY||Horizons Equal Weight Canada Banks Index ETF||-1.07%||1.28%||8.47%||7.96%||-8.58%||13.76%||10.69%||22-Jan-19|
|SOLCBEW INDEX||Solactive Equal Weight Canada Banks Index||-1.04%||1.35%||8.63%||8.01%||-8.32%||14.11%||9.08%||11.20%||9.31%||16-Mar-07|
|HARB CN EQUITY||Horizons Tactical Absolute Return Bond ETF||-1.28%||0.45%||-2.05%||0.51%||-4.21%||-1.20%||07-Dec-20|
|HTB CN EQUITY||Horizons US 7-10 Year Treasury Bond ETF||-0.56%||0.39%||-0.60%||0.53%||-6.23%||-4.95%||1.47%||1.08%||07-Apr-15|
|SOLUTB INDEX||Solactive US 7-10 Year Treasury Bond Index (Total Return)||-0.87%||-0.37%||-0.40%||0.44%||-6.30%||-4.81%||1.69%||3.57%||3.01%||30-Jan-09|
|S5FINL Index||S&P 500 Financials Sector GICS Level 1 Index||-0.29%||-0.96%||12.57%||4.76%||-0.53%||13.20%||7.85%||14.98%||9.00%||11-Sep-89|
Source: Bloomberg, as at February 28, 2023
The indicated ETF rates of return are the historical annual compounded total returns, including changes in unit/share value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Additionally, index returns do not take into account management, operating or trading expenses that may be incurred in replicating the index. The rates of return above are not indicative of future returns. ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. The indices are not directly investible. Only the returns for periods of one year or greater are annualized returns.
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Effective June 24, 2022, the investment objectives and strategies of the Horizons Gold Producer Equity Covered Call ETF (“GLCC”) (formerly Horizons Enhanced Income Gold Producers ETF (“HEP”)), were changed following receipt of the required unitholder and regulatory approvals, to seek to provide exposure to the performance of an index of equal-weighted equity securities of diversified North American listed gold producers (currently, the Solactive North American Listed Gold Producers Index) and to employ a dynamic covered call option writing program. Previously, the ETF sought exposure to an underlying equal-weight equity portfolio and generally wrote covered call options on 100% of portfolio securities. The new ticker began trading on the TSX on June 27, 2022. For more information, please refer to the disclosure documents of the ETFs on www.HorizonsETFs.com.
The Horizons ReSolve Adaptive Asset Allocation ETF (HRAA) and the Horizons Tactical Absolute Return Bond ETF (HARB), (collectively the “Alternative ETFs”) are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds (“NI 81-102”), and are permitted to use strategies generally prohibited by conventional mutual funds, such as the ability to invest more than 10% of their net asset value in securities of a single issuer, the ability to borrow cash, to short sell beyond the limits prescribed for conventional mutual funds and to employ leverage of up to 300% of net asset value. These strategies will only be used in accordance with the investment objectives and strategies of the applicable Alternative ETFs.
The Horizons Exchange Traded Products include our BetaPro products (the “BetaPro Products”). The BetaPro Products are alternative mutual funds within the meaning of National Instrument 81-102 Investment Funds, and are permitted to use strategies generally prohibited by conventional mutual funds: the ability to invest more than 10% of their net asset value in securities of a single issuer, to employ leverage, and engage in short selling to a greater extent than is permitted in conventional mutual funds. While these strategies will only be used in accordance with the investment objectives and strategies of the BetaPro Products, during certain market conditions they may accelerate the risk that an investment in shares of a BetaPro Product decreases in value. BetaPro Equal Weight Canadian Bank 2x Daily Bull ETF (“HBKU”), which is a 2X ETF or Leveraged ETF, and BetaPro Equal Weight Canadian Bank -2x Daily Bear ETF (“HBKD”), which is a -2X ETF or Inverse Leveraged ETF, as described in the prospectus, are speculative investment tools and are not considered conventional investments. HBKU and HBKD use the Solactive Equal Weight Canada Banks Index as the Underlying Index (the “Index”). The Index includes TSX-listed common shares of Canadian banks. The returns of HBKU can generally be expected to be substantially similar to approximately twice as much on a given day, on a percentage basis, as any increase in its Index (when the Index rises on that day). Conversely, HBKU’s net asset value should lose approximately twice as much on a given day, on a percentage basis, as any decrease in its Index (when the Index declines on that day). The returns of HBKD can generally be expected to be substantially similar to a loss of approximately twice as much the inverse (opposite) the performance on a given day, on a percentage basis, as any increase in its Index (when the Index rises on that day). Conversely, HBKD can generally be expected to be substantially similar to a gain approximately twice as much the inverse (opposite) on a given day, on a percentage basis, as any decrease in its Index (when the Index declines on that day). Due to the compounding of daily returns, a Leveraged and Inverse Leveraged ETF’s returns over periods other than one day will likely differ in amount, and possibly direction, from the performance of their respective investment objectives for the same period.
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