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 (%)

Source: Bloomberg, as of June 30, 2025.
Past Performance is not indicative of future results. 

Portfolio Characteristics

Fixed Income breakdown

Source: BMO Global Asset Management. Model portfolio for illustrative purposes only. As of June 30, 2025.