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ETFs to Consider in the Wake of the Silicon Valley Bank Collapse

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.


You may also like:

Read more about the Silicon Valley Bank collapse and what changes to the U.S. Federal Reserve’s positioning may be on the horizon as a result.


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.

Commissions, management fees and expenses all may be associated with an investment in exchange traded products managed by Horizons ETFs Management (Canada) Inc. (the “Horizons Exchange Traded Products”). The Horizons Exchange Traded Products are not guaranteed, their value changes frequently and past performance may not be repeated. Certain Horizons Exchange Traded Products may have exposure to leveraged investment techniques that magnify gains and losses and which may result in greater volatility in value and could be subject to aggressive investment risk and price volatility risk. Such risks are described in the prospectus. The prospectus contains important detailed information about the Horizons Exchange Traded Products. Please read the relevant prospectus before investing.

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.

An investment in HBKU, HBKD, or any of the BetaPro Products is not intended as a complete investment program and is appropriate only for investors who have the capacity to absorb a loss of some or all of their investment. The BetaPro Leveraged ETFs are designed to provide daily investment results, before fees, expenses, distributions, brokerage commissions, and other transaction costs, that endeavour to correspond to a multiple or inverse (opposite) multiple of the daily performance of a specified Underlying Index. The BetaPro Leveraged and Inverse Leveraged ETFs do not seek to achieve their stated investment objective over a period of time greater than one day. Please read the full risk disclosure in the prospectus before investing. Investors should monitor their holdings in BetaPro Products and their performance at least as frequently as daily to ensure such investment(s) remain consistent with their investment strategies.

The financial instrument is not sponsored, promoted, sold, or supported in any other manner by Solactive AG nor does Solactive AG offer any express or implicit guarantee or assurance either with regard to the results of using the Index and/or Index trade name or the Index Price at any time or in any other respect. The Index is calculated and published by Solactive AG.  Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards the Issuer, Solactive AG has no obligation to point out errors in the Index to third parties including but not limited to investors and/or financial intermediaries of the financial instrument. Neither publication of the Index by Solactive AG nor the licensing of the Index or Index trade name for the purpose of use in connection with the financial instrument constitutes a recommendation by Solactive AG to invest capital in said financial instrument nor does it in any way represent an assurance or opinion of Solactive AG with regard to any investment in this financial instrument.

Certain statements may constitute a forward-looking statement, including those identified by the expression “expect” and similar expressions (including grammatical variations thereof). The forward-looking statements are not historical facts but reflect the author’s current expectations regarding future results or events. These forward-looking statements are subject to a number of risks and uncertainties that could cause actual results or events to differ materially from current expectations. These and other factors should be considered carefully and readers should not place undue reliance on such forward-looking statements. These forward-looking statements are made as of the date hereof and the authors do not undertake to update any forward-looking statement that is contained herein, whether as a result of new information, future events or otherwise, unless required by applicable law.

This communication is intended for informational purposes only and does not constitute an offer to sell or the solicitation of an offer to purchase exchange traded products (the “Horizons Exchange Traded Products”) managed by Horizons ETFs Management (Canada) Inc. and is not, and should not be construed as, investment, tax, legal or accounting advice, and should not be relied upon in that regard. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. Investors should consult their professional advisors prior to implementing any changes to their investment strategies. These investments may not be suitable to the circumstances of an investor.

All comments, opinions and views expressed are generally based on information available as of the date of publication and should not be considered as advice to purchase or to sell mentioned securities. Before making any investment decision, please consult your investment advisor or advisors

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