Staying allocated while safeguarding gains: Three approaches
Strong markets may have pushed portfolio returns ahead of schedule. Long-short, low-beta, and options-based strategies offer ways to protect gains, reduce risk, and remain allocated — without sacrificing long-term objectives.
Investing is an interesting process. A financial plan defines an investor’s required rate of return to meet objectives but, in a mass media age, near-run market returns are a constant distraction.
Markets move quickly and unexpectedly, often defying our efforts to guide outcomes. Infamous Black Swans — named so because they cannot be predicted — force-feed humility to all investors. Ultimately, cost, risk and income are the only things investors can control to any degree.
Recently, some Canadian consulting firms reported their institutional clients’ increasing concern about rising concentration risk in U.S. markets, but also their reservations about the large commodity exposure in Canada and its incumbent risks.1 This well-reasoned prudence can be a good reminder for other investors, too: risk management and attention to rebalancing should be constant components in portfolio management.
Investors have benefitted from robust markets over the past few years, potentially placing many ahead of the anticipated trajectory of their investment goals. If this is the case, it may be prudent to consider lowering their portfolio risk to insulate and protect gains.
This can be accomplished without changing asset mix. Selecting investments with lower volatility would maintain their current asset allocation, aligned to their Investment Policy Statements, but lower their overall portfolio beta to manage risk.
As the diagram below shows, there are several BMO Global Asset Management strategies that help recalibrate client portfolios, maintaining equity exposure while simultaneously dampening volatility.
Diagram 1. Managing the beta ladder
Low volatility factor
BMO’s Quantitative Investment team has developed a proprietary Low Volatility methodology that uses beta as its risk measure, a distinct advantage over Standard Deviation or Variance. beta is systematic measure whereas Standard deviation or Variance measure idiosyncratic risk. Systemic risk, measured through beta, is clearly a larger peril to investors than is idiosyncratic company risk, so it makes sense to use it as the foundation in evaluating companies.
Identifying the best risk measure, however, is only part of the risk management challenge. It is equally important to employ strong portfolio construction rules to avoid unintended risks. Unconstrained mandates may appeal intuitively, but they can produce portfolios with unintended concentration risks. This can result in concentration in sectors highly sensitive to rate changes, unwittingly introducing a risk which could otherwise be contained.
Conversely, highly constrained portfolio construction rules may produce portfolios closely resembling the parent index from which they are constructed. In Canada, for instance, adhering to sector weights produces a portfolio with large exposure to primary industries where management cannot control commodity prices.
BMO Global Asset Management deliberately addresses both extremes by implementing both sector and, if required, company limits to force diversification, thereby measuring risk at both the company and portfolio levels.
Alternative strategies
Alternative investments like Long-Short strategies can also be used to temper portfolio risk. As discussed in a previous article,2 short positions have displayed excellent diversification benefits in the past, lowering correlations more effectively than can be achieved by increasing fixed income exposure.
As seen in the beta graphic above, the strategy lowers beta markedly yet still provides equity exposure to participate in rising markets.
The BMO Premium Yield ETF (ticker: ZPAY) sells out-of-the-money puts to earn valuable premium, benefitting from a positive put-call skew. For a given ‘out-of-the-moneyness,’ investors earn more by selling puts than by selling calls.
If assigned, the portfolio will keep the stock, selling an out-of-the-money call to earn more premium. In essence, the methodology creates a buy-low / sell-high discipline, enhancing income with tax effective option premium.
The strategy also harnesses volatility to be a tax effective return source. Options are priced according to changes in implied volatility. That means premium income rises and falls in direct relation to volatility shifts. Investors in option overlay strategies benefits because their anxiety at rising volatility may be assuaged by the commensurate rise in tax effective option premium.
Three risk-aware approaches
The data below compares and contrasts the strategies. The three approaches — long-short, low-beta and options-based premium yield — are each quite different, but each provides the opportunity to maintain equity exposure for a lower risk profile.
Two-year performance data |
Return (%) |
Standard deviation (%) |
Maximum drawdown (%) |
Sharpe ratio |
Up capture ratio (%) |
Down capture ratio (%) |
21.51 |
5.79 |
-1.93 |
2.74 |
70.62 |
27.60 |
|
21.42 |
8.42 |
-6.85 |
1.92 |
72.98 |
40.56 |
|
11.65 |
6.31 |
-8.30 |
1.18 |
48.74 |
52.99 |
|
22.47 |
6.87 |
-2.68 |
2.42 |
64.48 |
-32.27 |
|
15.40 |
9.29 |
-7.04 |
1.18 |
41.35 |
-19.50 |
|
25.56 |
11.35 |
-12.31 |
1.74 |
99.97 |
102.54 |
|
28.06 |
9.26 |
-3.26 |
2.31 |
99.68 |
99.93 |
Source: BMO Global Asset management, as of December 15, 2025.
Canadian equity beta management
U.S. equity beta management
Used together — or selectively — they allow allocators to tailor portfolios to a client’s risk tolerance. Risk management or mitigation, in our view, is one of the best services councillors and advisors provide to their clients.
Please contact your BMO institutional sales partner for additional market insights.
Performance (%)
Ticker |
Year-to-date |
1-month |
3-month |
6-month |
1-year |
3-year |
5-year |
10-year |
Since inception |
Inception date |
12.29% |
-1.72% |
1.18% |
11.76% |
12.29% |
23.18% |
15.80% |
14.32% |
17.53% |
2012-11-14 |
|
31.55% |
1.30% |
6.22% |
19.46% |
31.55% |
21.32% |
16.01% |
12.62% |
9.61% |
2009-05-29 |
|
25.26% |
0.09% |
5.37% |
10.08% |
25.26% |
16.48% |
14.11% |
11.33% |
12.78% |
2011-10-21 |
|
6.63% |
-3.21% |
-2.02% |
5.82% |
6.63% |
7.79% |
10.28% |
9.23% |
13.20% |
2013-03-19 |
|
5.33% |
-1.15% |
1.14% |
7.16% |
5.33% |
12.72% |
8.09% |
— |
7.98% |
2020-01-15 |
|
20.64% |
0.53% |
4.99% |
9.21% |
20.64% |
— |
— |
— |
20.64% |
2023-09-27 |
Bloomberg, as of December 31, 2025.
Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.
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