Second Quarter 2023

BMO ETF Portfolio Strategy Report (Q2 2023)

All prices, returns and portfolio weights are as of market close on March 31, 2023, unless otherwise indicated.

A Walk Down Memory Lane

Over the last year, the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) have been raising rates at the fastest pace in recorded history. As the global economy has grown accustomed to zero-interest rate policies (ZIRP) over the last decade, it is no surprise that the rapid rate hikes have revealed some systemic risks. We saw the first signs last autumn, with the long bonds within some U.K. pension plans being exposed to rising rates and, more recently, when two U.S. regional banks went into receivership in March. 

Memory lane is paved with parallels
With the held-to-maturity (HTM) portfolios of Silicon Valley Bank (SVB) and Signature Bank (SBNY) valued at a notable discount if marked-to-market, the Fed and the U.S. Treasury created the Bank Term Funding Program (BTFP) and backstopped the Federal Deposit Insurance Program (FDIC) with the ability to guarantee even deposits exceeding $250,000. For my fellow market historians, some elements are eerily reminiscent of the Savings and Loan (S&L) crisis that took place during the 1980s and 1990s.

Pressing pause to play catch-up
In October, we started calling for a spring pause in rate hikes by the U.S. and Canadian central banks. We have so far only seen this from the BoC. The Fed pause is likely imminent, but we believe it is prudent, as it allows time for the economy to digest the impact of rate hikes properly. Inflation data continuing to trend in the right direction provides further reason to do so.

Many investors remain overly focused on Fed rate hikes, even though the BTFP has increased the central bank’s balance sheet. At one point, it essentially erased the Fed’s quantitative tightening (QT) efforts dating back to October. 

While this program isn’t exactly quantitative easing (QE) per se, it certainly looks and feels that way. The BTFP injects liquidity into the system while the Fed simultaneously tries to remove it through QT and higher rates. The BTFP’s introduction is part of the reason long bond yields have declined, with the U.S. 10-year treasury yield falling 75 basis points (bps) since early March. As a result, we believe long-duration assets (both stocks and bonds) should be added to a portfolio.

The Federal Reserve’s balance sheet
The Federal Reserve's balance sheet
Source:, Credit and Liquidity Programs and the Balance Sheet, as of April 6, 2022-March 62023.

All eyes are on the Fed’s next move

While the U.S. regional banking crisis may linger, it may also lead the Fed to back down on its rate hike intensity, which could be positive for the broader equity markets. In fact, any further remedies to prevent potential contagion will be exactly the opposite policy to fight inflation. The Fed cannot be on the accelerator and the brakes concurrently, so to speak. The best-case scenario is that it has done enough to fight inflation, allowing it to pause rates and prevent further pressure on the banks or any other risks we don’t know about yet. The worst case is inflation is not on the mend, and the Fed has to continue hiking rates into a banking crisis, which would leave us in a stagflation environment. 

In our first quarter report, we pointed out that a breach above last year’s resistance level would lead to technical buying, which we have seen. Supply and demand of the market suggest equities are trying to mount a rally as a new support level is forming. Whether this continues, however, depends on inflationary data trending in the right direction. The good news is that inflationary data out of Canada and the U.S. continues to trend in the right direction, which should be supportive of equities. 

S&P 500 Composite forming a new support level
S&P 500 Composite forming a new support level
Source: Bloomberg, BMO Global Asset Management, as of March 17, 2017-March 12023.
Things to keep an eye on

Clearly, low volatility and dividends were the winning factors in 2022. However, with the expectation that the end of the Fed’s hiking cycle is within sight, a factor leadership change looks to be developing. Similar to low volatility and dividends, quality also exhibits defensive growth characteristics but has more of a growth bias. Longer-term rates falling has benefited quality blue chip stocks and removed the headwinds that the technology stocks in the BMO MSCI USA High Quality Index ETF (ZUQ) faced last year. The technology stocks in ZUQ tend to be more cash-rich and mature companies like Apple Inc., Alphabet Inc. and Microsoft Corp., amongst others. 

Recommendation: Positions such as the BMO Low Volatility US Equity ETF (ZLU) and ZUQ remain the core positions in our portfolio strategy. As a long-term strategic combination, it allows investors to better manage downside risk while also providing growth. Additionally, low volatility has proven to fare well in rising rate environments, whereas quality will be better situated as rate hiking expectations ease. We believe this barbell strategy is well positioned both strategically and tactically. 




2022 YTD*

2023 YTD





Since Inception

Inception Date

BMO S&P 500 Index ETF


Market Cap









BMO MSCI USA High Quality Index ETF






















BMO US Dividend ETF











BMO Low Volatility US Equity ETF


Low Volatility









BMO S&P US Small Cap Index ETF


Size (Small)









Source: Bloomberg, BMO Global Asset Management, as of March 31, 2023 (total return, net of fees, expressed in CAD).

The recent decision by the Organization of Petroleum Exporting Countries (OPEC) to cut oil production may put pressure on consumers at the gas pumps. As both Brent Crude and West Texas Intermediate (WTI) prices have fallen since last summer, OPEC’s move is to defend the cost of crude and attempt to establish a floor at approximately US$80/barrel.

This will have political consequences as the current U.S. administration began drawing on the Strategic Petroleum Reserve (SPR) ahead of the 2022 mid-terms to gain political traction. However, this strategy may backfire, as inventory levels have not been this low since the early 1980s and will need to be replenished shortly, which will ramp up demand. Biden’s approval rating remains low, and Republicans continue to gain momentum.

Recommendation: Energy stocks tend to be lower duration, as cash flows are earned in the near term. While yields are falling, longer duration sectors such as technology and utilities have been in favour. Over the long term, the push towards renewables has disincentivized traditional energy companies to invest in infrastructure, which will leave fossil fuels in short supply. Cash flows at energy companies continue to build up, and raising dividends may look to be the only option. Investors may want to consider either the BMO Equal Weight Oil & Gas Index ETF (ZEO) or the BMO Covered Call Energy ETF (ZWEN).

Drawing down the U.S. Strategic Petroleum Reserve
Drawing down the U.S. Strategic Petroleum Reserve
Source: U.S. Energy Information Administration, as of August 20, 1982-August 202022.

Long government bonds have historically been the ideal equity market hedge. When equity markets sell-off in anticipation of an economic slowdown, central banks typically respond by easing rates to stimulate economic growth. Lower rates tend to benefit longer duration bonds, and in turn, investors further benefit as the market flocks towards risk-free government bonds. The sell-off we experienced last year was unique in that long bonds were ineffective in mitigating equity market risk. This was due to the primary concern being inflation, which forced central banks to raise rates aggressively to slow growth, contrary to their typical end-of-cycle playbook. 

Recommendation: Central banks have relied heavily on ultra-lax monetary stimulus measures since the Great Financial Crisis of 2009. From Alan Greenspan, every Fed Chair successor has kept monetary conditions too low for too long, which has led to asset inflation. It should come as no surprise that removing liquidity will deflate assets and cause correlations between stocks and bonds to become increasingly positive. However, with the Fed easing up on the pace of its rate hikes, that positive correlation has started to break down and market dynamics are normalizing. This potentially means that the BMO Long Federal Bond Index ETF (ZFL) and the BMO Long-Term US Treasury Bond Index ETF (ZTL) may be effective equity market hedges again. 

Correlation between the S&P 500 Composite and Long U.S. Treasury Bonds
Correlation between the S&P 500 Composite and Long U.S. Treasury Bonds
Source: BMO Global Asset Management, Bloomberg, as of January 4, 2022-April 42023.

Asset allocation:
  • After increasing our allocation to fixed income last quarter, we are leaving our asset mix unchanged. While we are still overweight equities, our exposure tends to be more defensive compared to traditional market capitalization-weighted indices. On the one hand, the Fed’s move to increase its balance sheet will inject liquidity into the system, which likely benefits risk assets. However, the Fed is ultimately further encouraging bailout culture and moral hazards in the long term. Additionally, the higher rates have unearthed some systemic risks. We remain cautiously optimistic and are still overweight equities; however, as already noted, our positioning remains biased towards defensive growth. Our focus this quarter will be to fine-tune our allocations within each of the sleeves.
Fixed income:
  • Last quarter, we halved our weight to the BMO Equal Weight US Bank Index ETF (ZBK), which allowed us to partially skate past the damage the SVB and SBNY insolvencies caused. A recent rebalance of ZBK in late March allowed it to improve its quality as several smaller problematic regionals no longer met the minimum market capitalization thresholds and have since exited the ETF. For investors who believe the industry has addressed contagion and companies are undervalued, ZBK provides a pure play to the area. Investors may want to consider the BMO Covered Call US Banks ETF (ZWK), to monetize volatility in the sector. The BTFP and FDIC, having been granted full guarantees on accounts, will probably help calm depositors. However, from our perspective, we see better risk-to-reward opportunities elsewhere. As a result, we are removing the remaining 3.0% in ZBK.
  • We believe larger-cap technology stocks will continue to see some reprieve as interest rates look to level off. There has been a distinction between the larger cap, more mature technology names and their smaller cap counterpart. This is evident through the outperformance of the Nasdaq-100 Index compared to the broader Nasdaq Composite Index. We are thus reallocating the 3.0% from ZBK to the BMO Covered Call Technology ETF (ZWT). This ETF includes 30 of the largest U.S. technology names and writes call options against these positions to generate yield. 
  • Preferred shares have not been able to catch a break in the recent past. However, with monetary policy easing, we hope the secondary effect will be tightening credit spreads. Corporate spreads widened last year when higher rates placed additional pressure on the balance sheet of issuers as the cost of debt servicing and refinancing increased. Lower rate volatility will eliminate some uncertainty with preferred shares. While the market is pricing in rate cuts by the BoC in the very near future, we believe that it is unlikely in 2023 unless there is a crisis event. Rates remaining stable and at these levels, while credit spreads tighten, is the ideal scenario for the BMO Laddered Preferred Share Index ETF (ZPR). In the meantime, ZPR is an effective portfolio construction tool, as it is non-correlated to traditional assets and generates a tax-efficient yield.

Stats and portfolio holdings

Investment objective and strategy:

The strategy involves tactically allocating to multiple asset-classes and geographies to achieve long-term capital appreciation and total return by investing primarily in ETFs.

Ticker ETF Name Sector Positioning Price Management Fee* Weight (%) 90-Day Vol Volatility Contribution Yield(%) Yield/Vol**
Fixed Income
ZDB BMO Discount Bond Index ETF Fixed Income Core $14.72 0.09% 9.0% 8.2 6.8% 2.5% 0.30
ZSU BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF Fixed Income Tactical $13.14 0.25% 7.0% 5.2 3.4% 3.2% 0.61
ZTIP.F BMO Short-Term US TIPS Index ETF (Hedged Units) Fixed Income Tactical $28.97 0.15% 5.0% 3.6 1.7% 0.4% 0.11
ZTL BMO Long-Term US Treasury Bond Index ETF Fixed Income Tactical $43.62 0.20% 5.0% 9.3 4.3% 3.3% 0.35
ZST BMO Ultra Short-Term Bond ETF Fixed Income Tactical $48.65 0.30% 2.0% 1.4 0.3% 4.7% 3.29
Total Fixed Income 28.0% 16.4%
ZLB BMO Low Volatility Canadian Equity ETF Equity Core $42.31 0.35% 17.0% 8.7 13.6% 2.7% 0.31
ZRE BMO Equal Weight REITs Index ETF Equity Tactical $21.63 0.05% 4.0% 14.7 5.4% 4.9% 0.33
ZLU BMO Low Volatility US Equity ETF Equity Core $48.43 0.30% 8.0% 10.5 7.7% 2.3% 0.22
ZLD BMO Low Volatility International Equity Hedged to CAD ETF Equity Core $25.21 0.40% 7.0% 10.8 6.9% 2.8% 0.25
ZEO BMO Equal Weight Oil & Gas Index ETF Equity Tactical $60.77 0.55% 4.0% 24.9 9.1% 5.1% 0.21
ZUH BMO Equal Weight US Health Care Hedged to CAD Index ETF Equity Tactical $71.48 0.35% 4.0% 16.9 6.2% 0.4% 0.02
ZEB BMO Equal Weight Banks Index ETF Equity Tactical $33.98 0.55% 8.0% 13.4 9.9% 5.0% 0.37
ZUQ BMO MSCI USA High Quality Index ETF Equity Core $55.30 0.30% 10.0% 15.8 14.5% 1.1% 0.07
ZWT BMO Covered Call Technology ETF Equity Tactical $27.91 0.65% 3.0% 20.6 5.7% 5.1% 0.25
Total Equity 65.0% 79.0%
Non-Traditional Hybrids
ZPR BMO Laddered Preferred Share Index ETF Hybrid Tactical $8.85 0.45% 3.0% 12.2 3.4% 6.0% 0.49
ZBI BMO Canadian Bank Income Index ETF Hybrid Tactical $27.30 0.25% 4.0% 3.6 1.3% 3.4% 0.94
Total Alternatives 7.0% 4.7%
Total Cash 0.0% 0.0 0.0% 0.0%
Portfolio 0.32% 100.0% 10.9 100.0% 2.9% 0.27
Source: Bloomberg, BMO Asset Management Inc., as of March 31, 2023. *Management Fee as of March 31, 2023. ** Annualized Distribution Yield: The most recent regular distribution, or expected distribution (excluding additional year-end distributions) annualized for frequency, divided by current NAV. Annualized Yield to Maturity: The market value weighted average yield to maturity includes the coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity. Please note yields of equities will change from month to month based on market conditions. The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Portfolio holdings
Portfolio holdings
Source: Bloomberg, BMO Asset Management Inc., as of March 312023.

Portfolio characteristics
Regional breakdown (overall portfolio)
Regional Breakdown
Source: Bloomberg, BMO Asset Management Inc., as of March 312023.
Equity sector breakdown
Equity sector breakdown
Source: Bloomberg, BMO Asset Management Inc., as of March 312023.
Fixed income sector breakdown
Federal48.4%Weighted Average Term12.01
Provincial14.2%Weighted Average Duration6.68
Investment Grade Corporate37.4%Weighted Average Coupon2.21%
Non-Investment Grade Corporate0.0%Weighted Average Current Yield2.26%
Weighted Average Yield to Maturity3.78%

Weighted Average Term: The average interest received by a bond investor, expressed on a nominal annual basis.
Weighted Average Current Yield: The market value-weighted average coupon divided by the weighted average market price of bonds.
Weighted Average Yield to Maturity: The market value-weighted average yield to maturity includes coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.
Weighted Average Duration: The market value-weighted average duration of underlying bonds divided by the weighted average market price of the underlying bonds. Duration is a measure of the sensitivity of the price of a fixed income investment to a change in interest rates.
Weighted Average Coupon: The average time it takes for bonds to mature in a fixed income portfolio.
The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Source: Bloomberg, BMO Global Asset Management, as of March 312023.

Visit or contact Client Services at 18003611392.
To listen to our Views From the Desk BMO ETF Podcasts, please visit

BMO ETF Podcasts are also available on

Volatility: Measures how much the price of a security, derivative, or index fluctuates. The most commonly used measure of volatility when it comes to investment funds is standard deviation.

Yield curve: A line that plots the interest rates of bonds having equal credit quality but differing maturity dates. A normal or steep yield curve indicates that long-term interest rates are higher than short-term interest rates. A flat yield curve indicates that short-term rates are in line with long-term rates, whereas an inverted yield curve indicates that short-term rates are higher than long-term rates.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

The viewpoints expressed by the individuals represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

The Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by the Manager. S&P®, S&P 500®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”), and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the Manager. The ETF is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.

The ETFs referred to herein is not sponsored, endorsed, or promoted by MSCI and MSCI bears no liability with respect to the ETF or any index on which such ETF is based. The ETF’s prospectus contains a more detailed description of the limited relationship MSCI has with the Manager and any related ETF.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/​or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

®/™Registered trademarks/​trademark of Bank of Montreal, used under licence.