Strategy

BMO U.S. ETF Blended Strategy

The question remains, how can our clients get U.S. equity exposure in this volatile environment without taking on excessive risk? One way, clients can achieve this by using a combination of our Low Volatility and Growth ETFs.

Aug. 29, 2022

The first half of 2022 has been rough for equity markets with significant headwinds such as geopolitical tension and inflation. During this period, we saw defensive companies outperform vs their growth counterparts, as they were less susceptible to short term disruptions in the markets. However, we saw the exact opposite in the month of July, where growth stocks rallied on positive economic data (lower inflation). Furthermore, looking ahead we will continue to see this volatility and factor/​exposure rotation in the equity market driven by evolving monetary policy/​inflation concerns and geopolitical tensions.

The question remains, how can our clients get U.S. equity exposure in this volatile environment without taking on excessive risk?1 One way, clients can achieve this by using a combination of our Low Volatility and Growth ETFs.

Details

BMO Low Volatility US Equity ETF (Ticker: ZLU)
BMO NASDAQ 100 Equity Index ETF (Ticker: ZNQ)

Benefits

This strategy is important now given the significant headwinds in the equity markets, as it allows investors to have a barbell strategy with exposure to both defensive and growth exposures. ZLU provides more defensive low volatility exposure while ZNQ provides more growth exposure.

Trade Idea

The analysis below is conducted using 50% weight in ZLU and 50% weight in ZNQ.

  • ZLU provides more defensive low volatility exposure
  • ZNQ provides more growth exposure 

This mix is complementary from a factor point of view as well.

  • From an annualized return perspective, this blend is beating the benchmark by 2.98% on a net returns basis (see below). If we used gross returns, this outperformance will be higher.
  • The portfolio is not taking higher risk, vs. the benchmark, to achieve this outperformance. As you can see in the table below, it has slightly lower volatility and higher risk-adjusted return, compared with the benchmark.
  • Finally, apart from lower volatility, the portfolio also has a better maximum drawdown, compared to the benchmark by approximately 3.5% (see below).
Blended (50% ZLU; 50% ZNQ)
BMO S&P 500 Index ETF (ZSP)
Annualized Return2
18.44%
15.46%
Volatility
12.02%
12.37%
Risk-Adjusted Return
1.53
1.25
Maximum Drawdown
-15.18%
-18.66%

Source: Bloomberg, BMO Global Asset Management Annualized figures from March 19, 2013 to July 312022.

Blended (50% ZLU; 50% ZNQ) versus BMO S&P 500 Index ETF (ZSP) graph
Source: Bloomberg, BMO Global Asset Management, March 19, 2013 to July 312022.

Outlook

We remain cautiously optimistic on equities looking forward. We will continue to see bouts of volatility in the equity market driven by evolving monetary policy/​inflation concerns & geopolitical tensions. However, the U.S. should be much more sheltered from the Russia-Ukraine war, given its energy independence and less reliance on commodity consumption in GDP. On the inflation front, we have started to see lower inflation, however, it is still well above the Federal Reserve expectations, implying further rates hikes. Given the current headwinds, we expect a balanced approach, with exposure to both defensive as well as Growth equities, can potentially add value to investors, while managing risk.


1 Risk is defined as the uncertainty of return and the potential for capital loss in your investments.

2 ZLU annualized performance to July 31, 2022: 1-year: 10.94%; 3-year: 9.61%; 5-year: 11.64%; SI (March 19, 2013): 14.86%.
ZNQ annualized performance to July 31, 2022: 1-year: -10.94%; 3-year: 17.34%; SI (February 15, 2019): 18.44%.
ZSP annualized performance to July 31, 2022: 1-year: -2.39%; 3-year: 11.88%; 5-year: 13.03%; Since Inception(November 14, 2012): 16.77%.

Disclosures:

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 Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. 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.

The 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.

Risk tolerance measures the degree of uncertainty that an investor can handle regarding fluctuations in the value of their portfolio. The amount of risk associated with any particular investment depends largely on your own personal circumstances including your time horizon, liquidity needs, portfolio size, income, investment knowledge and attitude toward price fluctuations. Investors should consult their financial advisor before making a decision as to whether this Fund is a suitable investment for them.

NASDAQ®, and NASDAQ-100 Index® or NASDAQ-100 Index® Hedged to CAD, are registered trademarks of Nasdaq, Inc. (which with its affiliates is referred to as the Corporations”) and are licensed for use by the Manager. The ETF(s) have not been passed on by the Corporations as to their legality or suitability. The ETF(s) are not issued, endorsed, sold, or promoted by the Corporations. The Corporations make no warranties and bear no liability with respect to the ETF(s).

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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.

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