The Bank of Canada made its most recent interest rate decision last month, holding its policy rate steady at 2.25%. The decision was widely anticipated prior to its announcement, consistent with the Bank’s long-term policy of both battling inflation and keeping the housing market stable. While the Bank’s decision was not unexpected, it was one that many investors nevertheless wanted to respond to. In this article, I’ll explain why I would buy in light of the Bank of Canada’s recent rate decision.
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Don’t radically alter your portfolio in response to the decision
The first thing I’d note is that I would not make any radical changes to my portfolio in light of the Bank’s recent interest rate decision. There are several reasons for this.
First, the Bank’s decision was one to keep rates steady; that is, to not change the status quo. If the move is indicative of future ones, then the theoretical value of stocks is the same as they were in March.
Second, actively trading stocks based on short-term factors such as interest rate decisions generally isn’t considered sound investing practice. Numerous studies show that attempting to time the markets rarely works out in the long term. Betting on interest rates is a classic form of “timing the market.” While interest rates have an effect on the theoretical value of stocks, a single interest rate decision does not predict long-term rates. It’s generally considered the case that long-term interest rates are unpredictable. The only sensible way to invest is for the long term. So, dramatically changing your portfolio in response to an interest rate decision isn’t wise.
What I’d buy today
With all of the foregoing out of the way, I can now share what I would buy in today’s investing climate, considering a variety of factors, including interest rates.
Generally speaking, a value-tilted portfolio of profitable companies seems likely to make sense right now. Stocks have been rising for a long time, driven by tech stocks, which — on average — are starting to get rather expensive. While a high price-to-earnings (P/E) ratio doesn’t inherently make a stock overvalued (its earnings could grow), it does increase the probability that it’s going to become perceived as overvalued. So, the markets in general, with their high weighting in AI stocks, might be a little frothy at the moment.
A Canadian value oriented fund such as BMO Canadian Dividend ETF (TSX:ZDV) could make a lot of sense here. This fund’s theme is dividends, not value, but as it excludes non-dividend stocks, it has an unintentional value tilt. The fund’s P/E ratio is approximately 16.10, which is much lower than Canadian market averages at present. It has a 2.86% dividend yield, which is higher than average — a factor worth considering for investors who need consistent income. The fund is well diversified and managed according to sound investment principles. Finally, ZDV’s fee (0.35%), while not the lowest available, is not extremely high either. All in all, BMO Canadian Dividend ETF could make a lot of sense in this environment.
