US Dollars to Invest? These 10 ETFs Should Be on Your Radar

For Advisors, Family Offices and Investment Counselors managing money for wealthy Canadians, our “.U” ETFs (which are $USD denominated, but traded on the Toronto Stock Exchange) offer a convenient way to invest cleanly and directly into US assets. And the benefits don’t stop there.

Two key advantages of .U solutions that portfolio managers should know about are:

• There is no exposure to U.S. Estate Taxes
• There is no requirement to fill out T-1135 Foreign Income Verification forms come tax time each year, as these are considered Canadian-domiciled trusts

BMO Global Asset Management has many offerings to choose from across different asset classes, empowering portfolio managers to build a complete portfolio to match their clients’ risk tolerance level and current market conditions.

Below, we will explore some of the options, broken down by asset class. 

A parking spot for cash

After the historic increase in interest rates over the past year, rates on cash and near-cash instruments have become compelling.

1. ZUS.U – BMO Ultra Short-Term US Bond ETF (USD Units)

ZUS.U invests in U.S. investment grade bonds under one year to maturity, and the bonds are held to maturity. The portfolio is rebalanced based on fundamental analysis, relative strength indicators, and risk-adjusted yield expectations.

Investment Characteristics:²

• Annualized Distribution Yield³: 4.89%; monthly pay
• Yield to Maturity⁴: 5.77%
• Duration: 0.48 years
• MER: 0.17%
• Also available in an Accumulating Units option, the BMO Ultra Short-Term US Bond ETF (US Dollar Accumulating Units) (ZUS.V), which reinvests the monthly distributions

Income plays

2. ZWB.U – BMO Covered Call Canadian Banks ETF (US Dollar Units)

This ETF holds the six largest Canadian banks, equally weighted. Call options are sold on half of the portfolio to protect against downside risk and boost the level of monthly income. Why half? This is to provide a balance between generating additional cash flow while protecting against downside risk and capturing the majority of the upside growth potential of the stocks over time.

The annualized distribution yield is 7.33%;² roughly half of this yield comes from the banks’ dividends, which are taxed as Canadian eligible dividends, and the other half comes from the call option premiums, which are taxed as capital gains.

BMO introduced ZWB, the first covered call ETF, to the market in 2011, and it remains the largest covered call ETF in Canada². The USD units, ZWB.U, were introduced in 2022.

3. ZPAY.U – BMO Premium Yield ETF (USD Units)

This ETF sells call and put options on a basket of large-cap, high-fundamental-quality blue-chip US equities. 

We sometimes refer to this ETF as the ​“buy low, sell high and get paid to wait” ETF. With the out-of-the-money call and put options, equity weight will adjust depending on market conditions. As markets rally, we gradually lighten up on our equity exposure via the call options. As markets drop, we buy names we like on sale via the put options.

The current equity weight² is 45.82% but was as high as 70% in early 2023. 

The annualized distribution yield of ZPAY.U is % 6.62%,² with roughly 1% coming from the underlying dividends. (Because they are dividends from U.S. companies, this portion is taxed as foreign income.) The remainder comes from the call and put option premiums.

Bonds are back

4. ZTL.U – BMO Long-Term US Treasury Bond Index ETF (USD Units)

Many portfolio managers have increased their allocations to fixed income over the last several quarters and have added duration within their bond sleeves. The yield curve may not see much more inversion on the long end. However, the return to a more normalized correlation between long bonds and equities means that the efficiency of long bonds as an equity market hedge is returning.

ZTL.U replicates the returns of the Bloomberg U.S. Treasury 20+ Year Index, net of expenses. The Fund invests in a variety of U.S. Treasuries, primarily with a term to maturity greater than twenty years.

• Entirely AAA rated credit
• Annualized distribution yield of 3.47%, weighted average YTM of 3.98%²
• Weighted average duration of 17.48 years²
• Management fee of 0.2% and MER 0.23%²
• Why purchase ZTL.U instead of the US-listed TLT? No U.S. estate tax exposure or T-1135 filing
• Also available in $CAD unhedged BMO Long-Term US Treasury Bond Index ETF (ZTL) and $CAD hedged BMO Long-Term US Treasury Bond Index ETF (Hedged Units) (ZTL.F)

Not all investors are comfortable with a duration in excess of 15 years. Those who prefer less rate sensitivity but want to maintain a high level of overall credit quality can consider:

5. ZUAG.U – BMO US Aggregate Bond Index ETF (USD Units)

The U.S. has a broader aggregate fixed income index than our FTSE Canada Universe Bond Index, more diversified corporate bond issuers, and 30% weight in securitized bonds (which are mortgage-backed securities backed by the U.S. government that carry a AAA credit rating). The average credit quality for the index is AA. Overall exposure is 40.6% Treasuries, 29.4% Securitized, 25.3% corporates, and 4.9% government agency issued.⁶

• ZUAG.U tracks the Bloomberg US Treasury 20+ Year Index
• Annualized distribution yield of 2.03%, weighted average Yield to Maturity of 4.79%%²
• Lower duration than ZAG (6.31 years versus 7.41 years) – you are assuming less interest rate sensitivity versus the Canadian bond benchmark, or versus ZTL.U outlined above.
• Why purchase ZUAG.U instead of the U.S.-listed AGG? No U.S. estate tax exposure or T-1135 filing
• Competitive management fee of 0.08%,² which is less than half the cost compared to other Canadian-listed issuers.
• Also available in $CAD hedged BMO US Aggregate Bond Index ETF (Hedged Units) (ZUAG.F) and $CAD unhedged BMO US Aggregate Bond Index ETF (ZUAG)

Broad equities: index- and rules-based

6. ZSP.U – BMO S&P 500 Index ETF (USD Units)

Those looking for the broad, low cost and highly liquid U.S. equity exposure to the S&P 500 should look no further than ZSP.U. Many portfolio managers use the S&P 500 alongside their individual stock holdings to capture quick macroeconomic opportunities and to reduce the impact of cash drag on their portfolios to remain fully invested at all times.

BMO’s ZSP is the largest S&P 500 ETF in Canada, with assets under management of $9.59 billion CAD³. The $USD units, ZSP.U, account for another $1.84 billion in assets, and the $CAD hedged ZUE another $1.87 billion; all three purchase options are managed as one pool.

Many portfolio managers are surprised to learn that with a management fee of 0.08% and MER of 0.09%, ZSP.U is now actually priced cheaper than the U.S.-listed SPY (which has a gross expense ratio of 0.0945%).²

And again, why purchase ZSP.U instead of the U.S.-listed SPY? No U.S. estate tax exposure or T-1135 filing.

7. ZNQ.U – BMO Nasdaq 100 Equity Index ETF (USD Units)

Investors with a longer-term horizon may want to consider Nasdaq exposure to boost the growth potential of their portfolios. Since common inception in January 1985, the returns of the Nasdaq-100 Index have dwarfed those of the S&P 500, as the chart below demonstrates.

Contrary to popular belief, the Nasdaq-100 Index is not 100% technology. Its top sector exposures are 51% Technology, 17% Communication Services, 14% Consumer Discretionary, and 5.5% Healthcare.⁷

Between BMO’s three currency options for the Nasdaq-100 Index, the assets under management are $2 billion⁶. Similar to ZSP and ZUAG, the hedged (ZQQ), unhedged (ZNQ), and $USD baskets (ZNQ.U) are managed as one pool. Because the underlying stocks and bonds are large and liquid, the ETF will benefit from that liquidity as well. Investors should look at the bid-offer spreads when evaluating the liquidity of an ETF, and not the trading volume, since ETFs are an open-ended structure and units can be created or redeemed to reflect supply and demand.

Canadian investors with $USD on hand should consider purchasing ZNQ.U instead of the popular U.S.-listed QQQ units. As a Canadian-domiciled trust, ZNQ.U is not subject to U.S. estate taxes or T-1135 filing.

8. ZUQ.U – BMO MSCI USA High Quality Index ETF (USD Units)

Of the U.S. equity factors on the BMO ETF shelf (Low Volatility, High Quality, Value, Size and Dividends), the Quality factor may minimize risk and provide good long-term growth opportunities. 

The MSCI USA High Quality index is rules-based and screens for the 125 names of the highest fundamental quality defined by the following filters: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. As a result of these screens, the Fund will tend to have a lower weight to Financial, and Utilities which have higher leverage, and it a higher weighting in Technology.

While less Technology-oriented than the Nasdaq-100 index (which is at 51%), ZUQ.U still provides an overweight to tech versus the S&P 500 (34.15% and 28.2% respectively).⁶

The three currency versions of ZUQ — unhedged (ZUQ), CAD hedged (ZUQ.F), and ZUQ.U (USD units) — represent $530 million in assets under management.⁵

9. ZLU.U – BMO Low Volatility US Equity ETF (USD Units)

Investors who are focused on capital preservation or are wanting to tilt their U.S. equity exposure more defensively should consider BMO’s Low Volatility ETF, which follows a proprietary rules-based approach and screens for the 100 stocks with the lowest beta versus the broad market. The resulting portfolio is less sensitive to the economic cycle.

Together, all three currency versions of ZLU — unhedged, CAD hedged (ZLH) and ZLU.U (USD units) — account for AUM of $1.67 billion.⁵

One-Ticket Balanced

10. ZMI.U – BMO Monthly Income ETF (USD Units)

ZMI.U is a great option for investors wanting to keep it simple with a one-ticket balanced solution.

• The annualized distribution yield is 4.94%.²
• ZMI ($CAD version; BMO Monthly Income ETF) has been in existence since 2011, and was one of the first one-ticket asset allocation ETFs in Canada.
• ZMI.U features a portfolio of yield-oriented ETFs: dividend-paying ETFs on the equity side, and Investment Grade corporate bonds on the fixed income side.
• The management fee is a very low 0.18% (MER is 0.2% including taxes).² There is no double dipping on management fees of the underlying ETFs – the advertised fee is what investors are actually paying; what you see is what you get.
• Asset allocation is approximately 60% equity, 40% fixed income, and regional allocation is 38% US, 38% Canada, with the balance being international developed markets.²
• The fund is rated low-to-medium risk.

Additional resources for Advisors, Portfolio Managers & Family Offices with snowbird clients: 

BMO ETF Roadmap (.U ETFs listed are listed on page 4)

Article: Tax Issues, U.S. Investing, and Your Clients

Full list of BMO’s .U ETFs: 

Solutions for U.S. Dollar Accounts

• No U.S. Estate Tax Exposure
• No T-1135 Foreign Income Verification form required
• Learn more about our US dollar solutions
  

Equity

Fixed Income

Asset Allocation

Alternatives

Note: When entering U.S. Dollar unit symbol “(.U)” on Thomson One use “(‘U)”. (‘U-T) for TSX listed ETFs and (‘U-GD) for NEO listed ETFs

For more information on BMO’s USD ETF solutions, reach out to your regional Institutional BMO ETF Specialist.

¹ Tax-Efficient: as compared to an investment that generates an equivalent amount of interest income. 

² As of June 30, 2023.

³ Annualized distribution yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV.

⁴ Yield to maturity (YTM): The total expected return from a bond when it is held until maturity – including all interest, coupon payments, and premium or discount adjustments. 

⁵ Measured by AUM, as of March 31, 2023. 

⁶ As of July 4, 2023.

⁷ As of June 26, 2023.