
Why alts matter in the current regime
Despite the recovery in broad risk over the past few months, the underlying issue remains the same. The decades-long integration of global trade — with the United States at the hub — has been permanently disrupted. And unless we see a complete reversal from the Trump administration, the current regime of higher trade barriers is likely here to stay.
What’s more, we also appear to be in the early stages of something more nefarious — a capital war. As congressional members pass the “One, Big, Beautifull Bill Act”, a provision like Section 899, even if excluded, should send a reminder to non-U.S. investors that foreign investment is becoming less welcome than it has been in the past.
A more balkanized trade and capital flow environment will likely lead to two things globally: higher price pressures and higher capital costs. The former is easy enough to conceptualize as firms will have to re-orient supply chains to source more inputs domestically — even if such measures are more costly. The latter would occur as capital providers demand a higher premium to lend to places that enact such measures. One of the foremost drivers of productivity is the availability of capital and U.S. policymakers are sorely mistaken if they think it is the other way around.
But there is also another side effect to higher price pressures and capital costs that portfolio managers need to be attuned to. Indeed, such regimes usually result in a greater degree of positive correlation between traditional assets (namely, stocks and bonds – see Chart 1). Of course, that is every portfolio manager’s nightmare — which then begs the question as to where one can find a good diversifier?
Chart 1 – Higher CPI usually means positive correlation between stocks and bonds

Enter alternatives and non-traditional hybrids. As an example, the inclusion of Gold within a portfolio can mitigate the overall volatility. And while one could make the case that the yellow metal is overbought at this point, the underlying demand from central banks, investors, and end-users remains strong. At the very least, this tells us that we’re likely to remain in a holding pattern for the next while.
Another example are funds that track infrastructure. Besides the benefits of diversification for a portfolio, these funds are set up to perform in the coming years for a few reasons. One, the opportunities in the space are set to increase as countries turn to infrastructure spending as an offset to trade-related drags on economic growth. Just think of the countries that have already actioned major legislation aimed at boosting such spending (Germany and the UK) as well as others that are on their way (Canada).
Second, the increase in global infrastructure spending will mean a need for private sector funding. Given the attractive intrinsic properties of infrastructure investment, namely the stable, long duration revenue streams that benefit from inelastic demand, we expect such funding to be readily available.
In addition to Gold and infrastructure, we continue to like alpha strategies given the opportunities provided. We expect active management to outperform passive in the coming quarter given the potential landmines in the investment space.
All told, our own sense is that as fixed income loses its allure as a reliable ballast for portfolios (at least in the near-term), the appeal of alternative assets and strategies should continue to increase. As such, our readers will note that we have increased our allocation to alternatives/hybrids to the upper end of the allocation range for that sleeve (20%).
For the traditional sleeves, we’re shifting to a more neutral stance for equities and remaining underweight fixed income. For the former, we see risks as more balanced than they have been in a few quarters. We’re also prioritizing regional diversification and low volatility as a factor for the coming quarter. For the latter, we remain circumspect given that it feels like the Bank of Canada (BoC) is close to the end of its easing cycle, while the Federal Reserve (Fed) is likely to re-start rate cuts towards the end of Q3.
Balanced Portfolio for Q3 2025
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 Volatility | Volatility Contribution | Annualized Distribution Yield (%)* | Yield/Volatility** |
---|---|---|---|---|---|---|---|---|---|---|
Fixed Income | ||||||||||
ZDB | BMO Discount Bond Index ETF | Fixed Income | Core | $15.14 | 0.09% | 5.0% | 5.77% | 1.85% | 2.39% | 0.41 |
ZBI | BMO Canadian Bank Income Index ETF | Fixed Income | Core | $30.71 | 0.25% | 10.0% | 3.07% | 1.97% | 3.53% | 1.15 |
ZTS | BMO Short-Term US Treasury Bond Index ETF | Fixed Income | Tactical | $51.05 | 0.20% | 5.0% | 7.38% | 2.37% | 2.36% | 0.32 |
Total Fixed Income | 20.0% | 6.20% | ||||||||
Equities | ||||||||||
ZUQ | BMO MSCI USA High Quality Index ETF | Equity | Core | $85.35 | 0.30% | 15.00% | 26.11% | 25.16% | 0.56% | 0.02 |
ZLB | BMO Low Volatility Canadian Equity ETF | Equity | Core | $52.92 | 0.35% | 15.00% | 12.34% | 11.89% | 2.13% | 0.17 |
ZLI | BMO Low Volatility International Equity ETF | Equity | Core | $29.01 | 0.40% | 15.00% | 15.01% | 14.46% | 2.22% | 0.15 |
ZIN | BMO Equal Weight Industrials Index ETF | Equity | Tactical | $43.79 | 0.55% | 6.00% | 21.91% | 8.45% | 1.39% | 0.06 |
ZEM | BMO MSCI Emerging Markets Index ETF | Equity | Tactical | $22.98 | 0.25% | 9.00% | 21.27% | 12.30% | 2.40% | 0.11 |
Total Equity | 60.0% | 72.25% | ||||||||
Non-Traditional Hybrids | ||||||||||
ZLSU | BMO Long Short US Equity ETF | Hybrid | Tactical | $41.56 | 0.65% | 5.00% | 17.22% | 5.53% | 1.16% | 0.07 |
ZLSC | BMO Long Short Canadian Equity ETF | Hybrid | Tactical | $39.81 | 0.65% | 5.00% | 11.42% | 3.67% | 1.16% | 0.10 |
ZWGD | BMO Covered Call Spread Gold Bullion ETF | Hybrid | Tactical | $30.38 | 0.65% | 5.00% | 20.15% | 6.47% | 5.00% | 0.25 |
ZGI | BMO Global Infrastructure Index ETF | Hybrid | Tactical | $51.58 | 0.55% | 5.00% | 18.31% | 5.88% | 2.91% | 0.16 |
Total Alternatives | 20.00% | 21.55% | ||||||||
Total Cash | 0.00% | 0.00% | ||||||||
Portfolio | 0.37% | 100.0% | 15.57% | 100.00% | 2.14% | 0.14 |
As of June 30, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. 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.
* The Annualized Distribution Yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.
** Yield calculations for bonds are based on yield to maturity, including coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity and. For equities, it is based on the most recent annualized income received divided by the market value of the investments. Please note yields of equities will change from month to month based on market conditions.
Changes to Portfolio Strategy*
Sell/Trim |
Ticker |
Old weight |
(%) |
New weight |
BMO Discount Bond Index ETF |
ZDB |
8% |
-3% |
5% |
BMO Canadian Bank Income Index ETF |
ZBI |
15% |
-5% |
10% |
BMO Short-Term US TIPS Index ETF |
ZTIP/F |
5% |
-5% |
0% |
BMO International Dividend ETF |
ZDI |
10% |
-10% |
0% |
BMO SPDR Health Care Select Sector ETF |
ZXLV |
5% |
-5% |
0% |
BMO Covered Call Energy ETF |
ZWEN |
5% |
-5% |
0% |
BMO MSCI China Selection Equity Index ETF |
ZCH |
5% |
-5% |
0% |
BMO Gold Bullion ETF |
ZGLD |
8% |
-8% |
0% |
BMO Global Infrastructure Index ETF |
ZGI |
7% |
-2% |
5% |
BMO USD Cash Management ETF |
ZUCM |
5% |
-5% |
0% |
Buy/Add |
Ticker |
Old weight |
% |
New weight |
BMO Short-Term US Treasury Bond Index ETF |
ZTS |
0% |
5% |
5% |
BMO MSCI USA High Quality Index ETF |
ZUQ |
10% |
5% |
15% |
BMO Low Volatility Canadian Equity ETF |
ZLB |
12% |
3% |
15% |
BMO Low Volatility International Equity ETF |
ZLI |
0% |
15% |
15% |
BMO Equal Weight Industrials Index ETF |
ZIN |
0% |
6% |
6% |
BMO MSCI Emerging Markets Index ETF |
ZEM |
0% |
9% |
9% |
BMO Long Short Canadian Equity ETF |
ZLSC |
0% |
5% |
5% |
BMO Covered Call Spread Gold Bullion ETF |
ZWGD |
0% |
5% |
5% |
As of June 30, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. 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.
Asset Allocation:
- In contrast to the more defensive approach we took in the past two quarters, we’re adopting a more neutral stance from here. This reflects our view that the Trump administration is now actively trimming the extremes of its own trade policy, and that the Fed is likely to re-start its easing cycle in the coming period.
- At the same time, the macro backdrop remains precarious. The pause on ‘Liberation Day’ tariffs ends in July, and so far, the U.S. has only managed to negotiate token trade deals with a few countries. The conflict in the Middle East is ongoing, and while it’s unlikely that energy infrastructure in the region will be targeted, it’s still a risk to monitor.
- Additionally, the “One, Big, Beautiful Bill” has moved through the legislative process in the U.S. We’ve mentioned in our prior work that we don’t envisage this Bill adding much new stimulus to the U.S. economy.
- Within the equity sleeve, we are prioritizing regional diversification. Indeed, we feel that the rotation from an overweight position in U.S. assets and into other regions remains a structural theme. Also, the precarious backdrop suggests that quality and low-volatility strategies should outperform relative to others.
- We are underweight fixed income. Put simply, most central banks are close to the end of their easing cycles in the developed world while coupon issuance is expected to increase across most countries. That implies a softer supply/demand backdrop.
- As mentioned in the lead article, we are overweight alternatives and non-traditional hybrids.
Things to keep an eye on…
a.) We’re expecting the BoC to ease 1-2 more times for this cycle. That largely pays tribute to the aggressive degree of easing already seen for this cycle, but also feels more appropriate considering that there is a fair bit of fiscal stimulus coming in the quarters ahead. We won’t have a sense of just how much until the government releases the fiscal budget this fall. Nevertheless, additional coupon issuance as the BoC enters into an extended pause portends a softer supply/demand backdrop for CAD rates. As such, we’re electing to trim our core positions in ZDB (the BMO Discount Bond Index ETF) as well as ZBI (the BMO Canadian Bank Income Index ETF). For the latter, we remain concerned that higher CAD yields will be felt in the credit space as the economic backdrop hits a soft patch for Q2/Q3 this year.
b.) Conversely, we feel that rate cuts in the U.S. should be coming into sharper relief in the months ahead. That is not least because there are early signs of pressure developing in the U.S. labour market, and as the Core PCE reading for April indicated, price pressures have decelerated to their lowest year-over-year growth in four years. Despite the unknowns that the current tariff policy and the evolving situation in the Middle East bring, the fact is that the real policy rate (Fed funds minus headline CPI) has shifted from 137 basis points (bps) in February to just over 200 bps now. That is the sort of ‘passive tightening’ that the Fed should remain guarded against. At the same time, we feel that nominal front-end yields look to have peaked at this point. As such, we have swapped out of our tactical long in ZTIP/F (BMO Short-Term US TIPS Index ETF) to ZTS (BMO Short-Term US Treasury Bond Index ETF).
c.) We are continuing to prioritize regional diversification in the equity sleeve of our portfolio. At the same time, we see quality (in the U.S.) and low volatility (outside of the U.S.) as factors that are likely to outperform. That is our way of acknowledging the still precarious position that global markets continue to find themselves in. As such, we’re adding to our core positions in ZUQ (BMO MSCI USA High Quality Index ETF) and ZLB (BMO Low Volatility Canadian Equity ETF). Additionally, we’re swapping out of our core position in ZDI (BMO International Dividend ETF) for ZLI (BMO Low Volatility International Equity ETF). In keeping with our view on regional diversification, we are adding a tactical position in ZEM (BMO MSCI Emerging Markets Index ETF). Indeed, we feel that EM is currently under-owned relative to their fundamentals.
d.) The focus for Canadian government fiscal policy is centred around defense, infrastructure and home building. So far, the Carney government has already announced that it will be getting defense spending up to the 2% NATO target in the current fiscal year. The added benefit of doing this is that there is a large overlap between defense and infrastructure spending typically. Given this, Canadian industrials should be well placed to perform in the months ahead. We have established a fresh long position for ZIN (BMO Equal Weight Industrials Index ETF).
e.) A more precarious backdrop for broad risk implies that volatility should remain elevated. As such, we expect active strategies to outperform passive in both the U.S. and Canadian markets. In addition to our existing position in ZLSU (BMO Long Short US Equity ETF), we’re adding ZLSC (BMO Long Short Canadian Equity ETF). Additionally, we’re switching out of ZGLD (BMO Gold Bullion ETF) for ZWGD (BMO Covered Call Spread Gold Bullion ETF). That jives with our call that Gold prices should consolidate in the near-term.
Fund Performance (%)
Year-to-date |
1-month |
3-month |
6-month |
1-year |
3-year |
5-year |
10-year |
Since inception |
Inception date |
|
ZDB |
1.38 |
0.01 |
-0.62 |
1.38 |
6.00 |
4.24 |
-0.46 |
1.75 |
2.30 |
2/10/2014 |
ZBI |
2.44 |
0.62 |
1.29 |
2.44 |
7.71 |
6.23 |
- |
- |
3.90 |
2/10/2022 |
ZTS |
-2.09 |
-0.04 |
-4.09 |
-2.09 |
5.42 |
4.97 |
0.71 |
- |
1.96 |
2/28/2017 |
ZUQ |
-0.62 |
2.99 |
2.35 |
-0.62 |
8.59 |
23.28 |
15.65 |
15.64 |
16.07 |
11/12/2014 |
ZLB |
13.79 |
1.18 |
7.67 |
13.79 |
25.20 |
14.27 |
14.73 |
10.06 |
12.49 |
10/27/2011 |
ZLI |
14.39 |
0.20 |
5.07 |
14.39 |
25.22 |
14.41 |
7.71 |
- |
6.57 |
9/9/2015 |
ZIN |
5.38 |
6.54 |
18.02 |
5.38 |
16.14 |
15.96 |
15.48 |
10.20 |
11.13 |
11/20/2012 |
ZEM |
9.79 |
5.81 |
5.91 |
9.79 |
14.36 |
10.78 |
6.37 |
5.37 |
5.70 |
10/26/2009 |
ZLSU |
2.99 |
1.61 |
2.88 |
2.99 |
16.24 |
- |
- |
- |
23.23 |
9/26/2023 |
ZLSC |
10.47 |
3.19 |
10.75 |
10.47 |
23.15 |
- |
- |
- |
21.09 |
9/26/2023 |
ZWGD |
Returns are not available as there is less than one year’s performance data. |
5/27/2025 |
||||||||
ZGI |
1.88 |
-0.42 |
-4.65 |
1.88 |
22.05 |
9.44 |
10.38 |
7.93 |
11.43 |
1/21/2010 |
Source: Bloomberg, as of June 30, 2025.
Past Performance is not indicative of future results.
Portfolio Holdings
Ticker |
Name |
Weight |
Country |
ZDB |
BMO Discount Bond Index ETF |
5.00% |
Canada |
ZBI |
BMO Canadian Bank Income Index ETF |
10.00% |
Canada |
ZTS |
BMO Short-Term US Treasury Bond Index ETF |
5.00% |
U.S. |
ZUQ |
BMO MSCI USA High Quality Index ETF |
15.00% |
U.S. |
ZLB |
BMO Low Volatility Canadian Equity ETF |
15.00% |
Canada |
ZLI |
BMO Low Volatility International Equity ETF |
15.00% |
International |
ZIN |
BMO Equal Weight Industrials Index ETF |
6.00% |
Canada |
ZEM |
BMO MSCI Emerging Markets Index ETF |
9.00% |
International |
ZLSU |
BMO Long Short US Equity ETF |
5.00% |
U.S. |
ZLSC |
BMO Long Short Canadian Equity ETF |
5.00% |
Canada |
ZWGD |
BMO Covered Call Spread Gold Bullion ETF |
5.00% |
|
ZGI |
BMO Global Infrastructure Index ETF |
5.00% |
International |
Total |
100.00% |
Source: BMO Global Asset Management. Model portfolio for illustrative purposes only. As of June 30, 2025.
Portfolio Characteristics
Asset breakdown

Regional breakdown

Sector breakdown

Fixed Income breakdown
Federal |
35.3% |
Weighted average term (years) |
4.11 |
Provincial |
8.1% |
Weighted average duration (years) |
3.51 |
Corporate |
56.1% |
Weighted average coupon (%) |
3.53 |
Municipal |
0.4% |
Annualized dist. yield (%) |
2.94 |
Weighted average yield to maturity (%) |
3.91 |
Source: BMO Global Asset Management. Model portfolio for illustrative purposes only. As of June 30, 2025.
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Disclaimers
For advisor use only.
The portfolio holdings are subject to change without notice. They are not recommendations to buy or sell any particular security.
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 prospectus.
The viewpoints expressed by the author 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 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.
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Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). The yield calculation does not include reinvested distributions. Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and NAV fluctuations. The payment of distributions should not be confused with the BMO ETF’s performance, rate of return or yield. If distributions paid by a BMO ETF are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO ETF, and income and dividends earned by a BMO ETF, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero.
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