How to Stay Dialed Into the Market
Snapshot
As the economy faces a potential slowdown in growth and continued volatility in interest rates, Portfolio Manager Chris McHaney provides one prudent way to protect your portfolio from equity market weakness while still participating in some upside potential.
Details
Benefits
- Protect your portfolio from equity market volatility as interest rates reach post-financial crisis highs
- A built-in cushion on the downside keeps you invested in broad U.S. equities1
- Reduce the risk of market timing
Mitigate losses and stay invested
Long-term interest rates remain elevated, as central banks repeat their “higher for longer” mantra. The U.S. 10-year yield has increased almost 70 basis points since the end of August, reaching levels not seen since 2007. This shows markets are digesting the U.S. Federal Reserve’s latest signs, suggesting it will hold shorter-term rates at high levels for the foreseeable future.
This volatility in the rates market has spilled over into the equity market, with major indices ranging 9-12% lower than the recent highs observed this past summer2. Despite this short-term weakness, the S&P 500 is still more than 13% positive for the year, and the tech-focussed Nasdaq-100 is up more than 35%, as of September 30, 2023.
Volatility in major indices over 2023
Equity investors can look to protect some of those gains by shifting a portion of their equity allocation into the BMO US Equity Buffer Hedged to CAD ETF – October (Ticker: ZOCT). ZOCT invests in the S&P 500 and adds a protective option overlay, providing a 15% buffer against downside risk over the course of one year (the Outcome Period). The ETF aims to reset this protective overlay once a year at the start of October. Investors in ZOCT can expect to participate in equity market upside up to a cap, in exchange for protection against the first 15% of losses over the Outcome Period, provided that they invest at starting NAV at the start of the outcome period.
Potential outcomes scenarios: day 1 to day 365
Outlook
By using a buffer strategy, investors can avoid trying to time the market and benefit from any continued growth experienced by the market. Investors can feel comfortable that they are protected should volatility continue to affect equity prices.
1 BMO Buffer ETFs seek to provide income and appreciation that match the return of a Reference Index up to a cap (before fees, expenses and taxes), while providing a buffer against the first 15% (before fees, expenses and taxes) of a decrease in the Reference Index over a period of approximately one year, starting from the first business day of the stated outcome period.
2 Bloomberg, as of September 29, 2023.
Advisor Use Only.
An investor that purchases Units of a Structured Outcome ETF other than at starting NAV on the first day of a Target Outcome Period and/or sells Units of a Structured Outcome ETF prior to the end of a Target Outcome Period may experience results that are very different from the target outcomes sought by the Structured Outcome ETF for that Target Outcome Period. Both the cap and, where applicable, the buffer are fixed levels that are calculated in relation to the market price of the applicable Reference ETF and a Structured Outcome ETF’s NAV (as Structured herein) at the start of each Target Outcome Period. As the market price of the applicable Reference ETF and the Structured Outcome ETF’s NAV will change over the Target Outcome Period, an investor acquiring Units of a Structured Outcome ETF after the start of a Target Outcome Period will likely have a different return potential than an investor who purchased Units of a Structured Outcome ETF at the start of the Target Outcome Period. This is because while the cap and, as applicable, the buffer for the Target Outcome Period are fixed levels that remain constant throughout the Target Outcome Period, an investor purchasing Units of a Structured Outcome ETF at market value during the Target Outcome Period likely purchase Units of a Structured Outcome ETF at a market price that is different from the Structured Outcome ETF’s NAV at the start of the Target Outcome Period (i.e., the NAV that the cap and, as applicable, the buffer reference). In addition, the market price of the applicable Reference ETF is likely to be different from the price of that Reference ETF at the start of the Target Outcome Period. To achieve the intended target outcomes sought by a Structured Outcome ETF for a Target Outcome Period, an investor must hold Units of the Structured Outcome ETF for that entire Target Outcome Period.
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