Strategy

Investing Cash in Ultra Short-Term Bond ETFs

Nov. 7, 2022

Cash or cash-like” instruments have been gaining in popularity this year as markets are anticipated to remain volatile with central banks expected to continue raising rates to combat inflation. BMO’s Ultra Short-Term bond ETFs can offer investors attractive yields, protection against rising rates, intraday liquidity and no lockup period. 

BMO’s Ultra Short-Term Bond ETFs invest in investment grade bonds and T-bills that mature in one-year or less. As interest rates move up, bonds are purchased at a lower price (and higher yield) and given bonds are held until maturity, they ultimately mature at par value. This means, in a rising interest rate environment, the yield to maturity (YTM) on our Ultra Short-Term Bond ETFs will increase along with rising interest rates. 

Unlike traditional GIC’s, Ultra Short-term Bond ETFs do not lock investors into a fixed rate, given the expectations of the further aggressive rate hikes by central banks this can be an advantage for holders as it enables investors to capture higher yields in the future.

BMO ETFs not only offers flexible Ultra Short-Term ETFs in both CAD and USD but in Accumulating Units as well:

BMO Ultra Short-Term Bond ETF 

BMO Ultra Short-Term Bond ETF (Accumulating Units)

BMO Ultra Short-Term US Bond ETF (USD Units)

BMO Ultra Short-Term US Bond ETF (US Dollar Accumulating Units)

Ticker

ZST

ZST.L

ZUS.U

ZUS.V

Accumulating Units

No

Yes

No

Yes

Currency

CAD

CAD

USD

USD

Holdings

53

53

48

48

YTM

4.5%

4.5%

5.3%

5.3%

Source: Bloomberg November 7, 2022. Weighted Average 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.

Key Benefits of Ultra Short-Term Bond ETFs

Cash-Plus Vehicle”
Earn additional yield above treasury bills (T-bills) and GICs
De-risk a portfolio
Tactically or strategically move out of equities or bonds, when markets become volatile
Highly liquid
Can be bought or sold even in large institutional sizes without market impact given the liquidity of the underlying portfolio
Hedge against rising rates
Keep capital protected against inflation, while minimizing market and price volatility
No Lock-up Period
Unlike GICs, ETFs can be sold at any time without penalty
Low Duration
Lower interest rate sensitivity in your portfolio.


BMO Ultra Short-Term Bond ETF (Ticker: ZST)
| BMO Ultra Short-Term Bond ETF Accumulating Units (Ticker: ZST.L)

Duration: 0.5 | Yield to Maturity: 4.5% | Management Fee: 0.15% | Standard Deviation: 0.5 (3 year)**

ZST Sector AllocationZST Credit Allocation


BMO Ultra Short-Term US Bond ETF (Ticker: ZUS.U) | BMO Ultra Short-Term US Bond ETF USD Accumulating Units (ZUS.V)

Duration: 0.48 | Yield to Maturity: 5.3% | Management Fee: 0.15% | Standard Deviation: 0.58 (3 year)**

ZUS Sector AllocationZUS Credit Allocation

Source: BMO Global Asset Management October 31, 2022.
**Source: Morningstar October 31, 2022.
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.

Accumulating Units

BMO offers an accumulating units series for its ultra short-term bond ETFs. BMO Ultra Short-Term Bond ETF Accumulating Units (ZST.L) and BMO Ultra Short-Term US Bond USD Accumulating Units (ZUS.V).

ZST.L and ZUS.V offer an effective solution to mitigate price decline by reinvesting coupons and consolidating the units. Distributions occur on a quarterly reinvested and consolidated basis, which will be added back to the net asset value (NAV). For investors who do not require cash distributions, no coupon is paid out.

* A management fee waiver of 16 bps was implemented on November 30, 2021. The estimated MER represents what the MER would be with the reduction in place for the entire year.

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, 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. Please refer to the distribution policy for BMO ETF set out in the prospectus.

Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.

Commissions, management fees and expenses (if any) all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus 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 prospectus. BMO ETFs and ETF series 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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