U.S. Election Among Several Growing Risks. Manage Them with These 3 Strategies.

Apr. 9, 2024

U.S. equity markets are off to a solid start in 2024, with the S&P 500 Index up 13% to start the year (in Canadian dollar terms), following a Q4 rally of 9%. Improving economic sentiment around a softer landing, and increased expectations for interest rate cuts have helped fuel the rise, along with better-than-expected earnings from several growth companies.

While improving economic sentiment has benefitted the market, the rally has become increasingly fragile in light of a looming U.S. election that will be hotly contested, an equity market near all-time highs and diminishing prospects of interest rate cuts as U.S. economic data continues to run hot.

Funds in Focus

Trade Benefits

  • U.S. equity markets are near all-time levels while inflation, political and market risks are rising, requiring investors to consider downside protection.
  • Expectations for volatility to increase are historically high compared to other U.S. presidential election years, and are expected to move higher (see chart below), underscoring a need for diversification and risk mitigation.
  • Long-short strategies, buffer ETFs as well as a gold exposure provide diversified options to guard against stock declines, while offering upside potential. 

A Hotly Contested Election

The November 2024 election is setting up to be a significant showdown between Joe Biden and Donald Trump, with polling currently locked in a dead heat.1 Several key issues including the border and immigration, economy, crime as well as mental fitness of both candidates are at the forefront of voters’ minds. The election winner will inherit a much more indebted U.S. government and an economy still dealing with the impact of the quickest interest rate increase in modern history. 

Trump promises the continuation of personal tax cuts (and increasing debt), decreasing regulation, and a more protectionist stance with higher tariffs all but guaranteed. On the other hand, Biden proposes a more muted continuation of personal income tax cuts (for those earning under $400,000 per year), a more balanced fiscal outlook, where spending is offset by increased tax revenue, though with an expected hit to GDP growth.

It is too early to forecast a winner, and the impact of the swing states such as Arizona, Georgia, Michigan will be decisive. However, as indicated in the chart below, forecasted election volatility is well up from previous election cycles. The increase in volatility is already high--and likely to move higher still, as it has historically done in previous cycles.

Oct – Sept VIX Futures Spread

Oct–Sept VIX Futures Spread
Source: TD Cowen Equity Derivatives, March 292024.

The broad set of risks combined with equities perched near all-time highs suggests to us that investors should add diversifying tools into their portfolio. To gain such exposures, we encourage clients to consider the following: 

Long-Short ETFs



Management Fee


BMO Long Short US Equity ETF



Hedged Equities

BMO Long Short Canadian Equity ETF



Hedged Equities

These ETFs target 100% of holdings in a diversified basket of securities with better fundamentals, value and market sentiment. Additionally, the ETFs hold a short portfolio targeting 50% in securities with poor fundamental and sentiment characteristics. In particular, in troubled equity markets, low-quality stocks tend to get punished, and as a result the 50% short component has the potential to add significant value. The proceeds of the short securities are invested into short duration fixed income, to provide an additional source of returns.

Benefits of long-short strategies include reduced equity drawdown and diversified source of returns by adding the ability to profit from declining equity prices. Additionally, BMO’s strategy is low cost and offers daily transparency on

Buffer ETFs



Management Fee


BMO US Equity Buffer Hedged to CAD ETF – April



Hedged Equities – Non-Linear

Buffer ETFs purchase a portfolio hedge, in this case the first 15% of losses on a 1-year basis, which is funded by selling an upside call option. As such, ZAPR presents an opportunity to lock in gains and protect on the downside, with a 10% upside price cap versus its inception. In practical terms, investors will not experience a loss on the first 15% decline in the market, while still participating in any market rally of up to 10%.2

Given stocks are near all-time highs, such a strategy is expected to be beneficial in negative equity markets.

Potential Outcomes Scenarios: Day 1 to Day 365

Potential Outcomes Scenarios: Day 1 to Day 365
For illustrative purposes only, using 10% as an example only. The actual upside cap for ZOCT is 10.5%, ZJAN is 9% and ZAPR is 10%.

Gold ETFs



Management Fee


BMO Gold Bullion ETF3




BMO Gold Bullion ETF (USD Units)




Gold offers several potential benefits to traditional equity and fixed income portfolios. Gold is a diversifying asset with low correlations to stocks. In periods of economic distress, gold may act as a haven from risk. Lastly, the precious metal has historically acted as an inflation hedge, and may provide benefits in the context of a higher for longer” rate environment.

Additionally, ZGLD offers exposure to USD/CAD fluctuations, which may present an additional source of diversification in risk-off” markets.

Final Thoughts

Harry Markowitz, Nobel prize winner and father of modern portfolio theory, is credited with the quote, diversification is the only free lunch in investing.” 

This still rings true today, with what is setting up to be a dramatic showdown in this November’s U.S. election, combined with other risks to markets including geopolitical and higher interest rates. 

While traditional equities and fixed income serve essential roles in portfolio construction, non-traditional building blocks such as long/​short ETFs, buffer ETFs and gold can be valuable vehicles to generate returns and lower risks in challenging markets.

1 RealClearPolitics, February 24, 2024.

2 Provided the investment is made on the first day of the Target Outcome Period. BMO Buffer ETFs seeks 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.

3 Changes in rates of exchange may also reduce the value of your investment. 

Advisor Use Only.

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. 

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

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.

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. 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.

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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