BMO Canadian ETF Dashboard

— as of December 31, 2018 —

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Alfred Lee

Ultra-Short-Term Bonds: An All-Weather Solution

Snapshot

Since early October, global markets have faced turmoil from increased headline risk and moderated global growth expectations. To combat this rise in uncertainty, investors should consider ZST for the following uses:

  1. Fixed income that works in today’s environment: The short-term nature of the ETF and high yield-to-maturity of 2.5% works well in today’s environment. (According to Morningstar data, ZST is in the 5th percentile on a 1-year return basis.)1
  2. Putting cash to work for the in short term: Money market exposure with 100% investment-grade Canadian corporate bonds that have a duration of 0.7 years and held to mature at par – all at the cost of a 17 bps management expense ratio.Investors looking to accrue monthly distributions can opt for ZST.L, which is available at the same management fee. 
Alfred Lee

Ultra-Short-Term Bonds: An All-Weather Solution

Snapshot
Since early October, global markets have faced turmoil from increased headline risk and moderated global growth expectations. To combat this rise in uncertainty, investors should consider ZST for the following uses:

  1. Fixed income that works in today’s environment: The short-term nature of the ETF and high yield-to-maturity of 2.5% works well in today’s environment. (According to Morningstar data, ZST is in the 5th percentile on a 1-year return basis.)1
  2. Putting cash to work for the in short term: Money market exposure with 100% investment-grade Canadian corporate bonds that have a duration of 0.7 years and held to mature at par – all at the cost of a 17 bps management expense ratio.Investors looking to accrue monthly distributions can opt for ZST.L, which is available at the same management fee. 

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

Benefits
With the return of equity market volatility and a flatter yield curve, ZST insulates portfolios from a “yield curve inversion” and widening credit spreads, without relinquishing the possibility of additional returns.

Trade Idea – An All-Weather Solution
Last year, in what has historically been a rare occurrence, cash outperformed both bonds and equities. With continue concerns of “Brexit” and U.S.-China trade-related concerns, headline risk is expected to result in continued uncertainty. Should equity market volatility remain and the yield curve remain relatively flat, cash and short-term instruments may be an important tool for investors in 2019. While, not quite cash, ZST can be used as a “cash-like” vehicle that provides additional yield above treasury bills (T-Bills). 

Corporate bonds one year or less from maturity, which are held within ZST, tend to be less sensitive to interest rate movements, and given they are held to expiration, the underlying bonds ultimately end up at par value.

Alfred-Lee-Jan-2019-Graph.gif#asset:2004

Source: Bloomberg, as of December 18, 2018.

From a credit perspective, ZST contains high-quality bonds that are selected based on an investment-grade rating and a more attractive yield. As an ETF, it also provides constant liquidity, unlike Guaranteed Investment Certificates (GICs) that have a lock-up period and floating-rate vehicles that tend to be thinly traded.

Outlook
After hitting a post-recession high of 2.6%, the 10-year Government of Canada bond yield retraced all the way to 2.0%.3 At the same time, Canadian corporate bond spreads expanded 29 bps from early October, reflecting a higher degree of uncertainty in the market.4 While this downward pressure on long-term rates is matched by a rise in near-term borrowing costs, positioning on the short end of the curve is a way to manage interest rate risk, while obtaining a more attractive yield.

 

1 Morningstar, as of December 17, 2018.
2 Ibid.
3 Bloomberg, as of December 18, 2018.
4 Ibid.

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Larry Berman

Playing DEFENSE in a Bear Market

Snapshot

In 2018, almost all asset classes were in or approaching negative territory. With equity markets looking as challenging for returns in 2019, investors can play defense by:

  1. Getting tactical with ZWH, ZPW and ZLU, and
  2. Maintaining broad exposure to the market with ZSP, ZSP.U and ZUE.

This combination of funds can deliver half the beta of the U.S. market, a 5% yield, and moderate upside participation in the event we are wrong. 

Larry Berman

Playing DEFENSE in a Bear Market

Snapshot
In 2018, almost all asset classes were in or approaching negative territory. With equity markets looking as challenging for returns in 2019, investors can play defense by:

  1. Getting tactical with ZWH, ZPW and ZLU, and
  2. Maintaining broad exposure to the market with ZSP, ZSP.U and ZUE.

This combination of funds can deliver half the beta of the U.S. market, a 5% yield, and moderate upside participation in the event we are wrong.

Details
BMO S&P 500 Index ETF (Ticker: ZSP)
BMO S&P 500 Index ETF (US Dollar Units) (Ticker: ZSP.U)
BMO S&P 500 Hedged to CAD Index ETF (Ticker: ZUE)

BMO US High Dividend Covered Call ETF (Ticker: ZWH)
BMO US Put Write ETF (Ticker: ZPW)
BMO Low Volatility US Equity ETF (Ticker: ZLU)

Benefits
Be prepared for another year of disappointing returns, without throwing in the towel. Offset correction risks with high-quality dividend ETFs and reduce your exposure with low-volatility assets, for a sleep-at-night portfolio.

Trade Idea – Playing DEFENSE in a Bear Market
When it comes to portfolio construction, for us, it’s about controlling risk as much as it is about delivering returns, so when we adjust returns relative to risk, we are able to position for uncertainty.

In 2018, there is almost nothing that is up. In fact, in the Bloomberg World Index shows a consistent decline in market breadth in 2018. Currently, 23% of stocks globally are above their own 200-day average. We are in a global bear market, except Wall Street hasn’t figured that out yet because the cap-weighted broad market indexes like the S&P 500 are masking the decay. The average stock in the U.S. was down about 8% last year.

Jan-2018-Larry-Graph-A.png#asset:2009

Source: Bloomberg, as of January 3, 2019. 

 When we want to get defensive in BMO Tactical Dividend ETF Fund, we optimize the portfolio for taking less risk. We think 2019 will be even more of a challenge for returns than 2018 has been. As markets bounce off the current oversold levels, we expect to shift to ZWH, ZPW, and ZLU, versus holding exposure to the broad U.S. market. This combination of ETFs has a yield of about 5% and half the beta of the U.S. market.

Jan-2018-Larry-Graph-B.png#asset:2010

Source: Bloomberg, as of January 3, 2019.

Over the past year, these three ETFs have delivered, compared to the broad U.S. market. Now, given we expect some recovery from a tactical perspective, we have broader U.S. exposure in ZSP.U, ZSP, ZUE holdings, so our beta is higher. We want more upside capture from low points in the market. Sometime in Q1, after a bit of a bounce, we expect to get very defensive again.

Outlook
Over the past year, the low-risk, higher-yielding portfolio exposure has done the job. If we are wrong, and the market actually rallies in 2019 to the average gain of about 10%, our expected return of holding these three ETFs would be about 10% (5% from yield and 5% from growth). If we are right, and see about a 20% correction, we see a 10% capital loss, plus a 5% yield, for a net decline of about 5%. That’s DEFENSE in a bear market, while still generating a very nice ZZZ, sleep-at-night experience.

 

Larry Berman is the portfolio manager of BMO Tactical Balanced ETF Fund, BMO Tactical Dividend ETF Fund and BMO Tactical Global Growth ETF Fund – three, all-in-one investment solutions designed for today’s changing markets. For more information, click here.