Danielle Neziol: Welcome back to the ETF market insights podcast. As usual, I’m your host, Danielle Neziol with BMO ETFs. And I have Chris Heakes here with me today. Chris, of course, is a portfolio manager with BMO, and an overall ETF expert Chris has always it’s so great to have you with us today. 

Chris Heakes: Yeah, thanks, Danielle. Good to be here.

Danielle Neziol: Well, today, Chris, and I want to provide some education around US dollar traded ETFs that are listed right here in Canada, we call these etf.us. That’s the term we use because you can recognize them, or you can find them. Because there’s a .U extension at the end of the ETF ticker symbol. Now investors who may want to pay particular attention to our conversation today would be those who may require us dollars either because they might travel to the U.S.. Often now, we’re seeing borders are reopening and that travel is happening more and more, perhaps they have properties in the U.S., or maybe they just have US dollar expenses. 

So we’re going to talk about the benefits of these ETFs. And we’re also going to touch on some of our best idea options that are available a little bit later in the show. So, Chris, maybe we’ll just start right at the basics. Can you talk to us or tell us about real what is the .U ETF and what makes it unique to other ETF currency options available? 

Chris Heakes: For sure, Thanks, Danielle. Great to be here once again. So, just to go to the go to the basics the .U is a class of an ETF. Just like a mutual fund, in ETF can have multiple classes. That .U extension signifies that it’s a class of an ETF that trades in US dollars. So, these ETFs that we offer will trade in US dollars, but they still trade on the Toronto Stock Exchange. And the advantage there is that that investors can easily get exposure to investment themes they want that they can use if they have US dollars to fund those purchases. So that’s really very simple. It’s what it is. 

But, it can be a good tool for investors to use who have US dollars lying around or who have U.S. expenses, as you mentioned. It’s a really huge benefit to get that exposure, like you said, to these investment themes that Canadian investors are looking for that access them in US dollars, but on the Canadian exchange, which means it isn’t a Canadian-domiciled asset. 

Danielle Neziol: So, Chris, who might benefit from using a .U ETF? And how are Canadian investors utilizing these currency options? 

Chris Heakes: Yeah, I think there’s a couple of different use cases. One is, we know that many Canadians have US dollar cash balances, both on savings accounts or an investment account. A lot of times, you always have to look at what the fees are. And that’s one reason why ETFs are so compelling. That’s where it’s a low-fee proposition. But sometimes even converting US dollars to Canadian dollars can incur a not insignificant FX conversion theme. So, for people who are impacted by that, from a total fee perspective, it might be beneficial to just simply buy the ETF in US dollars, if that’s what’s sitting in the balance on the account. So that’s, that’s one really effective use case of it. 

Another you mentioned, and we’re going to talk a bit about Snowbirds but Canadians who have U.S. expenses – paying rent in the U.S. or utilities – we see a lot of investors utilizing income-oriented options with our ETFs to help pay those expenses and then once again, avoiding currency conversions can only be beneficial for investors, you avoid unnecessary transaction costs that are associated with that. So, those are the key benefits. I think all the other benefits are the same with ETFs, you know, getting exposure to different asset classes, different products, different exposures, whether it be equity, fixed income, or income. And have a selection of those in our .U line-up across the board. So, all those other kinds of traditional benefits of ETFs, cost efficiency, tax efficiency remained the same. But you know, it’s really that convenience of just simply buying in US dollars.

Danielle Neziol: So, there’s a lot of .U ETFs today that we’re seeing trading on the exchange. There’s a lot for investors to choose from and sort through. You and our team recently wrote a report to highlight our team’s best ideas to help investors dig through and sort through all of these options. And Chris, I know you had a lot of input into this report. I want to ask you a bit about it and some of these ideas that you picked, so maybe we can start with the income options. I know there were three tickers on there: specifically ZWH.U, ZPAY.U, which is our Premium Yield ETF, and then ZUP.U, which is our US Preferred Share Index ETF. Can you speak to these income options or ETFs? 

Chris Heakes: Yeah, for sure. Once again, income has been a popular component of where money’s going on a .U basis. We do see a gravitation to income for that matter. We see that in our broad line-up as well, but it certainly has been popular. –

The first one is an equity covered call strategy, as you know, very well, Danielle, and it’s a diversified high dividend basket in the U.S. that also supplements the income further by selling cover calls, and you’re selling a portion of potential upside in return for income. So, the distribution on that one would be net north of 6% – very attractive distribution and giving you exposure to equity growth, which obviously, the U.S. has been a great source of equity growth. 

BMO Premium Yield ETF is a very interesting one that we launched just prior to COVID, actually, so back in early 2020. Again, it’s about a 6% yield, but a more defensive portfolio construction – it’s only partially exposed to equities. But this one combines not only the covered call writing, but also put selling. And I know, Danielle, we posted a couple of really great episodes on premium yield. So, I’ll save all the details for that, for listeners to tune in there, but as you know, it’s a really efficient strategy to generate income without taking full equity risk. So really, really good for a niche income investor. 

And last but not least, as you mentioned, the US Preferred Share Index ETF. In building portfolios, one of the best things you can do is diversify your exposure. And that’s the reason we launched the US Preferred Share Index ETF – it’s just another tool that can be used in your toolkit of investments to generate income and it’ll have diversification benefits versus equities, bonds, Canadian preferred as well. So, so really strong income, income options, in those three you mentioned. 

Danielle Neziol: Thanks, Chris. And as you mentioned, a little bit earlier for those investors who might have US dollar cash flows or US dollar expenses that they need cash flows in US dollars to offset or to match a product like this, ZPAY.U or ZUP.U can really help do that in an efficient and cost-effective manner. On the other side of the coin, there might be investors who like a little more growth in their US dollar portfolios. Chris, what are your best ideas for .U options on the growth side of the equation? 

Chris Heakes: Yeah, right. So, on this report, we highlighted two, so we’ve got you covered there: ZSP.U, which is our BMO S&P 500 Index ETF, as well as ZUQ.U, which is the BMO MSCI USA High Quality Index

ETF, trading in US dollars – both really great, cost-efficient vehicles to get exposure to U.S. equity growth. Obviously, the S&P 500 needs no introduction, and has been an anchor point in many of our investor portfolios. So, offering US dollar just gives us that ability to offer it to clients who have those US dollars, and want to put it but don’t want to cross the border and trade in a U.S. exchange. 

You know, one side benefit there can be the tax issues of having U.S.-listed ETFs. So, some of those issues can be reduced by keeping your ETF exposure in Canada, so not trading those in New York, but keeping that trade in Toronto can sometimes be attractive. So, S&P 500 needs no introduction and a great source of growth there. And the quality, which is just such a well-rounded portfolio. I think we all want to invest in high quality in all aspects of life usually, and that’s just what this this ETF does – it looks for companies that are more profitable looks for companies with stronger balance sheets, and companies with consistent earnings. And I think those are all three great things that you can look for when you look for stocks. So, this portfolio has about 125 names. Based off the MSCI index, it’s been really a treat have been one of the top-performing factors the past few years now. So, another great option if you’re just looking for more of a growth exposure with those US dollars.

Danielle Neziol: Thanks for talking us through those. So, we have ZSP.U, which is just the straight up S&P 500 Index, accessible in an ETF with the US dollar option. And then the BMO MSCI USA High Quality Index ETF as well. That’s also been a popular ETF for us. Chris, thanks so much for talking us through these best ideas and teaching us a little bit more about US dollar ETF trading here in Canada. 

Chris Heakes: Yeah, my pleasure. Thanks for having me, Danielle. 

Danielle Neziol: If you would like to read more about our top ideas, that whole report is available on ETFMarketInsights.com. Just check out our education and resource centre, or scroll down to investor resources, and the report will be there for you. 

Thanks so much for joining us. If you’d like more ETF education, we have a fantastic webinar we run every Friday, it’s free to join at one o’clock Eastern time. You can join at ETFMarketInsights.com, and we’ll see you next time.