BMO Canadian ETF Dashboard

— as of October 31, 2018 —

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Chris Heakes

Taking the Edge Off a Late Equity Cycle

Snapshot

The recent equity correction has put a spotlight on the need to mitigate portfolio risks, while maintaining some participation in late-cycle returns. BMO offers six ETFs to this end, including ZLB (Canada) and ZLU (U.S.). 

Chris Heakes

Taking the Edge Off a Late Equity Cycle

The recent equity correction has put a spotlight on the need to mitigate portfolio risks, while maintaining some participation in late-cycle returns. BMO offers six ETFs to this end, including ZLB (Canada) and ZLU (U.S.). They help: 

  • Preserve investors’ upside potential by levering the “low volatility anomaly” and
  • Manage clients’ expectations by taking action to reduce risk while staying invested in the markets.

To demonstrate these historical benefits offered by ZLB, consider its the legacy of achievement for ZLB – 1st percentile in its fund class for the past 5 years and a top-decile performer year-to-date. 

Details 
BMO Low Volatility U.S. Equity ETF (Ticker: ZLU)
BMO Low Volatility Canadian Equity ETF (Ticker: ZLB)

Benefits
Continued equity exposure, while minimizing drawdowns by adding low-beta-weighted ETFs,1 putting you in a better position to outperform once markets recover. ZLB and ZLU consistently have had lower downside capture relative to broad indexes. 

Trade Idea – Use Low Vol to Reduce Risk and Add Value

With the prolonged bull market signalling its end, you can play defence without timing the market. Morningstar data shows the average VIX2 level rising quickly, from 11.1 in 2017, to 19.4 in October.

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To combat this growing risk, a low-volatility strategy is ideal. Research demonstrates that stocks with comparatively low variability often outperform over full market cycles, by preserving a greater portion of their capital during times of decline. Adding exposure to these assets is important, given how difficult it is to predict the timing and source of external shocks.

For U.S. equities, our approach is to remain deliberately open to exchange rate fluctuations. Underlying economic forces, including trade negotiations and monetary policy, generally tilt in favour of the U.S. dollar. The US dollar also tends to shelter value in market corrections, adding an additional diversification benefit for investors. 

It’s also important to choose a low volatility fund that’s uncorrelated with the broader market. Some low-volatility ETFs have active caps on sector allocation, keeping them tied to the index and limiting the risk mitigation value they provide. ZLB and ZLU are pure-play funds, with largely unrestricted exposure to low-risk equities in their respective markets. 

Outlook

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Over the last five years, ZLB doubled the performance of ZCN, our proxy for the S&P/TSX Composite – demonstrating the power of the “low volatility anomaly” to guard against drawdowns, and keep you in a position of strength for when equity prices recover. Investors anxious over the pullback in equities, but willing to stay in the market, will find ZLB and ZLU offer a perfect middle-of-the-road approach. 

ZLB – TOP 10 DRAWDOWN RELATIVE PERFORMANCE

ZLB return TSX Comp return Diff
24/08/2015 -2.70% -3.11% 0.41%
21/06/2012 -1.37% -2.98% 1.61%
01/09/2015 -1.53% -2.72% 1.19%
28/09/2015 -1.77% -2.71% 0.94%
15/04/2013 -0.84% -2.70% 1.86%
09/11/2011 -0.90% -2.66% 1.76%
05/01/2015 -1.17% -2.45% 1.27%
20/06/2013 -2.14% -2.44% 0.30%
10/12/2014 -1.50% -2.40% 0.90%
07/12/2015 -1.33% -2.37% 1.03%

Source: Bloomberg, as of October 31, 2018.


ZLU – TOP 10 DRAWDOWN RELATIVE PERFORMANCE

ZLU return SPX (CAD) return Diff
24/08/2015 -2.70% -3.68% 0.99%
01/09/2015 -1.93% -3.67% 1.75%
05/02/2018 -2.28% -3.49% 1.21%
08/02/2018 -2.14% -3.29% 1.15%
10/10/2018 -0.54% -3.20% 2.66%
03/02/2014 -2.31% -3.12% 0.82%
09/10/2014 -0.81% -2.76% 1.94%
21/08/2015 -1.57% -2.75% 1.18%
22/03/2018 -0.93% -2.70% 1.76%
23/03/2018 -1.63% -2.58% 0.95%

Source: Bloomberg, as of October 31, 2018.


Annualized Performance (as of October 31, 2018)

NAV 1 Year 3 Year 5 Year 10 Year Since Inception
ZLB -3.53% 5.65% 10.03% - 12.4%
ZLU 11.75% 9.32% 16.49% - 17.38%

Source: BMO Global Asset Management.

 

 

1 Beta is a measure of volatility.

2 CBOE Volatility Index.

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Larry Berman

When Will Gold Shine Like Gold?

Snapshot

As a value-tilt or growth-at-a-reasonable-price investment, gold equities are a compelling BUY BUY BUY. Fundamentally, valuation is at a multi-decade low; tactically, all sorts of flight-to-safety potential.

Larry Berman

When Will Gold Shine Like Gold?

Snapshot

As a value-tilt or growth-at-a-reasonable-price investment, gold equities are a compelling BUY BUY BUY. Fundamentally, valuation is at a multi-decade low; tactically, all sorts of flight-to-safety potential.

Details
BMO Equal Weight Global Gold Index ETF (Ticker: ZGD)
BMO Junior Gold Index ETF (Ticker: ZJG)

Benefits

  • I’m not a gold bug, so I don’t think gold should always be in a portfolio. However, it’s an asset class that is low or negatively correlated to everything else. That makes it a compelling asset class to use in portfolio construction.
  • Volatility is high and tactical entry must be good for the return to risk ration to be compelling.

Trade Idea

Gold and gold equities have been hit hard in 2018 until recently. Strong US-dollar policies and rising rates are often gold’s worst enemy. Looking forward, while the Federal Reserve gets closer to its terminal rate hike in 2019, other central banks have not even started. In particular, Japan, Europe and China have been in easing mode for years. That could change in 2019 with Germany taking over the European Central Bank in October, and Abenomics in Japan focused on reforms and now immigration to grow and come off a negative interest rate policy.

A weaker dollar at some point is gold bullish, in addition to a potential recession in the U.S. as the yield curve inverts and the credit expansion reverses, cracking the liquidity bubble supporting asset markets. Our return-to-risk models see the potential for gold equities to test the highs of the past few years, leading to 30-40% upside potential with very little downside risk, given the massive degree of intrinsic value in 35-year low valuations.

We could see a return to a gold standard within the next 25 years, as Central Banks turn to a more permanent debt monetization in the next and subsequent recessions in the years to follow. While our more tactical call for 30-40% upside looks to the end of 2019, we could be seeing base patterns building to last a decade or more – yummy food for thought from a value or growth at a reasonable price perspective.

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Outlook

Since BREXIT in June 2016, gold equities have underperformed world equities by approximately 50%. We need only recover a fraction of that decline in the next RISK-OFF market, and there are all kinds of those in front of us. BREXIT 2.0 is a high probability too. During periods of weakness in the coming months, consider BUY BUY BUY, as some other famous TV personality likes to say. It’s our biggest sector overweight in all three of our funds* by a mile.

Buy gold equites in your portfolio and sleep a bit better at night.

 

* BMO Tactical Global Growth ETF Fund, BMO Tactical Dividend ETF Fund and BMO Tactical Balanced ETF Fund. Click here to view the Third Quarter Commentary to September 30, 2018.

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Russ Visch

Trick or Treat: Buy Those REITs

Snapshot

The S&P/TSX Composite REIT index broke out of a 3+ year sideways trading range earlier this year. The break above resistance near 3245 signalled a resumption of the long-term uptrend and opened a new upside target of 3875 (roughly 20% higher from today’s level.) The index is currently in the midst of a routine pullback test of the breakout, which is usually an excellent buying opportunity.

Russ Visch

Trick or Treat: Buy Those REITs

Summary of Trade Ideas

BMO Equal Weight REITs Index ETF (Ticker: ZRE)

Macro Update

  • The S&P/TSX Total Return REIT Index is up 8.08% YTD while the S&P/TSX Composite Index is down -8.11% YTD.
  • Industrial REITs and Residential REITs are the strongest sub-sectors up 24.50% YTD and 19.78% YTD respectively, thanks to high occupancy rates.
  • Although a defensive sector, rising rates have not impacted REITs as much as other interest rate sensitive sectors. Attractive valuations have caused a flurry of M&A transactions within the industry this year, providing upward pressure on these securities.

Bottom-Up Impact

  • Strong performers in the sector include InterRent REIT (up 35% YTD) and Canadian Apartment Property REIT (up 24% YTD)
  • Dividend Income: Many REITs consistently grow their dividends. Dream Industrial REIT’s annualized yield is 7.3%, RioCan REIT’s annualized yield is 5.8% and with other REITs yielding around 5% which enhance total portfolio performance.
    Source: Bloomberg, October 2018

The Technical Analysis

The S&P/TSX Composite REIT index broke out of a 3+ year sideways trading range earlier this year. The break above resistance near 3245 signalled a resumption of the long-term uptrend and opened a new upside target of 3875. (Roughly 20% higher from today’s level.) The index is currently in the midst of a routine pullback test of the breakout, which is usually an excellent buying opportunity.

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Implementation

For exposure to the Real Estate sector, consider buying the BMO Equal Weight REITs Index ETF, ticker: ZRE

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Top Holdings (%)
InterRent REIT 5.94
Killam Apartment REIT 5.49
Northview Apartment REIT 5.38
H&R REIT 5.38
Crombie REIT 5.3
SmartCentres REIT 5.3
Granite REIT 5.3
Cdn Apartment Prop REIT 5.28
Boardwalk REIT 5.27
NorthWest Healthcare Prop 5.24