Plus: The hottest stock of all time (not that one) July 22, 2024 Sign Up | View online IN THIS ISSUE 8 min read 🪭 Hot HVAC ✂️ Certain cuts? 🏦 Maligned mutual funds It wasn’t a great time to be in an AC duct back when Bruce Willis did it, but it’s a great time to be in the AC business right now. More below. | 20th Century Fox THE WEEK IN MARKETS If you haven't been following the story of the markets this year, it's pretty simple: giant companies (especially the so-called Magnificent 7) have over-performed, smaller ones haven't. And then recently, that reversed: since July 1, the Russell 2000 Index of small cap stocks is up over 10% while the Magnificent 7 are flat. Over the last week, they’re down 6%. No one is exactly sure why this is happening — confidence in impending interest rate cuts? Market mechanics? — but we all want to know if it's a blip or a thing. And we're about to find out more, because it's ... earnings season! About 30% of U.S. companies in the S&P 500 (including Magnificent 7 members Tesla and Google) will start showing their cards next week, a period in the markets that's always a banger. Stocks move about four times as much on earnings release days as on normal days, according to a recent study by Goldman Sachs. Will big tech manage to beat ever-rising expectations and stop the narrative reversal in its tracks? Or will smaller companies grab the spotlight, adding momentum to the shift we’ve started to see? THE WEEK IN ONE NUMBER 24% The increase in Canada’s carbon emissions since 1990. Canada is the only G7 country whose emissions have risen over the past few decades. WHAT HAPPENED LAST WEEK IMPORTANT Traders are 90% certain another rate cut is coming. We won’t know for 100% certain until BoC boss Tiff Macklem issues his decree on Wednesday. But judging by the pace of interest-rate swaps (a type of contract that lets traders essentially bet on rate movements), last week’s lower-than-expected inflation data (2.7%) has “all but cement[ed] expectations” for the summer’s second 0.25% rate cut. That would give homeowners some much-needed mortgage relief, but even this new cut would still leave interest rates more than double their pre-COVID levels, when they were south of 2%. The IMF hypes up Canada’s economy. Yes, we sputtered a bit last year, especially relative to most of our G7 peers. But according to the International Monetary Fund, Canada is going to rebound next year with the fastest-growing economy among advanced nations. That’s because the BoC got a head start cutting interest rates before any of our global peers, which the IMF believes will spur a healthy 2.4% in real GDP growth. But one reason Canada got those cuts is because Canada’s economy has been lagging, and it’ll take more than one year of strong performance to catch up. INTERESTING Air conditioners are hot hot hot. Canada’s summer-long extreme heat wave is bad for humans, bad for wildlife, and bad for business. Most of them, at least: share prices for AC suppliers have been cooking for five years now. Watsco stock is up 234%, Blue Star is up 375%, and Modine Manufacturing is up 643%. To paraphrase an old adage: one civilization's crippling ecological disaster is another person's opportunity. Cigarettes are the all-time killer … investment. Hendrik “Hank” Bessembinder, a finance professor who proved a few years ago that most stocks are losers, is back with another blockbuster study. This time, he dug into archival U.S. stock data to find history’s biggest winners. The all-time champ? Altria, known as Philip Morris until that name became associated with, you know, killing people in droves. Altria generated a 265,528,901% return since December 1925. This is a bit of a surprise: tobacco stocks have traded at low valuations since the ‘90s because a) it’s a pretty distasteful investment and b) there were fears that regulators would kill profits. But the stock performance is based on how much profits exceed expectations, and those low expectations have continued to be surpassed. People just keep buying nicotine products. —Sarah Rieger FROM OUR SPONSOR THE FOMO INDEX by Stacey Woods IMPORTANT 🛟 Calgary warns people against using cheap floaties in rivers. They’re much better suited for the streets of Toronto. Source 🧑‍💻 Disney’s Slack is hacked. Probably just to make sure that Bambi’s mother doesn’t die this time. Source 🌜 Scientists discover what could be a usable cave on the moon. Hoping both big-screen TV and pool table will fit. Source 🚕 Tesla’s robotaxi unveiling delayed for design change to the front. Want it to look better when it crashes into you. Source CRASH & BURN TO THE MOON 🎵 Music labels sue Verizon for US$2.6B for allowing piracy. Want artists paid the full $0.0003 per stream. Source 📸 Tinder’s new feature uses AI to pick your most flattering photos. Guys, it won’t be you holding a fish. Source 🤝 All of Canada’s premiers met in Halifax last week. Still arguing over who won the egg toss. Source 🛩️ 60% scale replica of Avro Arrow jet for sale, in case you’re still fighting 60% of the Cold War. Source WHO CARES THIS WEEK ON THE PODCAST THE BIG IMPORTANT STORY INVESTING Are Mutual Funds Unfairly Maligned? For a long time, nothing said “responsible long-term investing” like the mutual fund. Over the past decade or so, however, the investing world’s long, durable love affair with mutual funds has cooled. What changed? Was it us or them or did we just grow apart? And is there a case to be made for investing in mutual funds in 2024? Let’s dive in. What are mutual funds anyway? Mutual funds are just a pool of different assets — stocks, bonds, cash, etc. Back in the 1980s, the funds’ primary benefit was that they let regular investors take a stake in multiple assets without having to spend time (or pay transaction fees) building a diversified portfolio themselves. This was very handy back when buying a security was a lot harder than opening a phone app. The term “mutual fund” is also associated with a specific investing style: active management, where a team of analysts and managers run the fund. Then, as now, mutual funds tended to charge high fees — around 2% or more of holdings annually. That means that if a mutual fund with a 2% fee generated an 8% return in a given year, you had to pay a quarter of that gain right back to the fund, so your real return was more like 6%. But in the ’80s, mutual funds were sort of the only game in town, so investors just paid up. The dot-com wake-up call In their ’80s and ’90s heyday, mutual funds delivered reliable returns, averaging growth of more than 10% a year in some cases. The thing is, nearly everyone did well in that era’s long bull market. But when the dot-com bubble collapsed, funds began to struggle and people noticed that, over the long run, most mutual funds didn’t perform better than the major stock indexes, like the S&P 500. And certainly not consistently. One study in 2022 looked at 2,132 funds and found that not a single one beat the market five years in a row. Enter the ETF Around the turn of the millennium, ETFs, or exchange-traded funds, quickly gained popularity. ETFs were basically created to track a stock index, like the S&P 500, by simply holding all the companies in that index. This strategy is called passive management. Even though passive index ETFs just mimic the market, they tend to outperform actively managed funds. Because, turns out, beating the market is hard! Passive index ETFs also tend to carry much lower fees (from 0.1% to 0.5%, typically) A mutual fund with a 2% fee basically has to generate a 2% better return than a passive ETF with a 0.1% fee to match its performance. This all helps to explain why in the U.S. the amount of money held in passively managed funds recently surpassed the amount held in actively managed funds. And as ETFs have surged in popularity, investors have created all sorts of new ones that aren’t just index funds: bond ETFs, thematic ETFs (like ones that track semiconductor or EV companies), global-stock ETFs, high-yield cash ETFs, etc. So what should you do? The first thing is simple: know what you’re holding and how much you’re paying for it. What kinds of funds do you own, and what parts of the market do they cover? How have they historically performed against their benchmark, and what kind of fees do they charge? Once you know all that, you can think critically about whether you’re getting your money’s worth. The most reliable way we know of to invest is to put your money in diversified, low-cost funds. While ETFs usually carry lower fees than mutual funds, that’s not always true; you might also feel that you want to use some of your money to bet on the potential upside of an actively managed mutual fund. But if you do, make sure that you know you’re taking a risk, and always read the fine print. —Ben Mathis-Lilley OTHER VERY GOOD READS 🃏 How Computers Made Poker a Game for Nerds Algorithms changed the card game for good — but is it for the better? | Vox 🍕 The Bonkers Story Behind the Pizza Museum It was nearly a Fyre Festival-level disaster. | The New York Post 👔 I Went Looking for a Man in Finance* Trust fund, six-five, blue eyes. | The Cut *Article is paywalled, which, yeah, is kind of annoying. But we think good journalism is worth paying for. POSTS OF WISDOM Allllllmost makes it worth it to use Teams. THOUGHTS ON TODAY’S ISSUE? Love it Good So so This week’s newsletter contributors: Ben Mathis-Lilley (writer), Devin Gordon (writer), Stacey Woods (writer), Sarah Rieger (news writer), Ambrose Martos (fact checker), Ciara Rickard (copy editor), Clare Douglas (copy editor), Sara Black McCulloch (fact checker), Mohini Tailor (lifecycle marketing manager), Matthew Karasz (markets editor) Jared Sullivan (senior editor), Peter Martin (senior editor), Kat Angus (managing editor), and Devin Friedman (editor-in-chief). Wealthsimple Media Inc. 80 Spadina Ave Suite 400 Toronto, ON, M5V 2J4 Replies to this email address are not monitored. Have questions? Visit our Help Centre or submit a request to our Client Support team. VIEW IN BROWSER PRIVACY POLICY UNSUBSCRIBE By participating in a financial goal-setting session or financial planning discussion with a representative of Wealthsimple Inc. you agree to the following terms and conditions. Wealthsimple clients who complete the transfer registration form then initiate deposits, institutional transfers, or crypto transfers totaling $15,000 or more from an existing account of a third party to a Wealthsimple Self-directed Investing, Managed Investing, Crypto, Save, or Cash account within 30 days of registration will receive a 1% cash bonus based on the cumulative transferred amount (less withdrawal) (“Net Funding Amount”). Max 1 bonus per 365 days per client. Minimum fund holding period required. Must be residents of Canada and age of majority. See full T&Cs at wsim.co/transfers-match. TLDR is offered by Wealthsimple Media Inc. and is for informational purposes only. Any views expressed are those of the individual author and/or of Wealthsimple Media Inc., not of Wealthsimple Financial Corp or any of its other subsidiaries or affiliates. The content in TLDR is not investment advice, a recommendation to buy or sell assets or securities, nor any other kind of professional advice. TLDR is not a research report and should not serve as the basis for making investment decisions. Wealthsimple Media Inc. does not endorse any third-party views referenced in this content. When you invest, your money is at risk and it is possible that you may lose some or all of your investment. Past performance is not a guarantee of future results. Historical returns, hypothetical returns, expected returns and images included in this content are for illustrative purposes only. Always research before investing. © 2024 Wealthsimple Media Inc.