BMO Canadian ETF Dashboard

— as of September 30, 2019 —

Thank you for printing our content at https://www.bmoetfs.ca/en/trade-tips/.

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Alfred Lee

A Flightpath for Snowbirds: Covered Calls, Equities & Cash-Like Bonds

Snapshot

The current market uncertainty presents a tradeoff for Canadian “snowbirds”: How to meet their cash needs, while staying invested to prolong their capital in retirement? To this end, we see value in a strategy combining high dividend and low-volatility stocks, covered calls and a sleeve of ”cash-like” instruments.

Alfred Lee

A Flightpath for Snowbirds: Covered Calls, Equities & Cash-Like Bonds

Snapshot
The current market uncertainty presents a tradeoff for Canadian “snowbirds”: How to meet their cash needs, while staying invested to prolong their capital in retirement? To this end, we see value in a strategy combining high dividend and low-volatility stocks, covered calls and a sleeve of ”cash-like” instruments. The uses include:

  • Maintaining disposable income. ZUS.U acts as a “cash-like” position by investing exclusively in investment grade U.S. corporate bonds with maturities of less than one year. By investing in ultra-short-term bonds, investors get a higher yield than cash, but also maintain cash-like liquidity.    
  • Achieving higher aggregate yields. A combination of high dividend stocks and ultra-short-term bonds offers higher returns than simply holding U.S. cash.  
  • Accumulating defensive growth. For investors concerned about where we are in the macro cycle, ZWH and ZLU provide equity exposure with additional income from writing covered calls.

Details
BMO Ultra Short-Term US Bond ETF (US Dollar Units) (Ticker: ZUS.U)
BMO Low Volatility US Equity ETF (US Dollar Units) (Ticker: ZLU.U)
BMO US High Dividend Covered Call ETF (US Dollar Units) (Ticker: ZWH.U)

Benefits
Cost efficiency. Disposable cash and conservative growth to offset the “burn-rate” in a retirement portfolio. 

Trade Idea – ZUS, ZLU, ZWH – All in US Dollars
As many of your clients head south for winter, there could be increased demand for solutions which provide liquidity and conservative long-term growth. After all, Canadians are living longer than ever before and the burn rate on their retirement savings should be a strong consideration when constructing a portfolio.

For disposable income, ZUS.U provides a conservative vehicle that offers a higher yield than cash, yet unlike a GIC, can be redeemed for cash at any time. By holding ultra-short-dated corporate bonds investor can get a higher yield than a T-Bill, but by holding only investment-grade bonds, capital preservation is also an emphasis.

As a growth complement, ZWH.U invests in high dividend U.S. companies and writes out-of-the-money call options to generate a 6% yield. Investors benefit from the dividend paying companies in the portfolio with the additional yield of call premiums. The addition of low-volatility stocks, also provides exposure to equities, while maintaining a more defensive exposure by investing in stocks that are less volatile than the market. A combination of these three ETFs is a simple way in meeting the objectives of snowbird client.

Outlook
Given the heightened uncertainty on trade, monetary policy, geopolitics, and a possible shift to the late cycle, it may be prudent to de-risk your clients’ investment portfolios while ensuring some participation in upside gains. 

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Natalia Moreno

Defensive Diversification in Late Cycle Markets

Snapshot

As we move into the latter stages of an extended business cycle, global growth has continued to slow down. Some countries have fared better than others with those more dependent on trade being hit the hardest.

Investors looking to defend against potential late cycle volatility should consider investing in BMO low-volatility ETF strategies. When investing specifically in international markets, investors can access BMO Low Volatility International Equity ETF Hedged to CAD (ticker: ZLD).

Natalia Moreno

Defensive Diversification in Late Cycle Markets

Snapshot
As we move into the latter stages of an extended business cycle, global growth has continued to slow down. Some countries have fared better than others with those more dependent on trade being hit the hardest.

Investors looking to defend against potential late cycle volatility should consider investing in BMO low-volatility ETF strategies. When investing specifically in international markets, investors can access BMO Low Volatility International Equity ETF Hedged to CAD (ticker: ZLD).

Details
BMO Low Volatility International Equity ETF Hedged to CAD (Ticker: ZLD)

Benefits
As a late cycle brings more volatility, investors become wary of equity markets. To stay invested and control broad market risk (beta), investors may look to defensive strategies. ZLD provides investors with the opportunity to access international markets defensively.

Trade Idea
ZLD is exposed to equities across developed markets (EAFE) countries in defensive sectors, including Consumer Staples, Real Estate and Utilities. The Fund’s geographic and sector exposures complement an equity portfolio composed primarily of S&P TSX stocks.

Sector Comparison (%) of ZLD vs. S&P TSX

ZLD S&P TSX Diff
Communication Services 9.78 5.64 4.15
Consumer Discretionary 9.73 4.26 5.47
Consumer Staples 12.57 4.09 8.48
Energy 1.14 16.54 -15.39
Financials 5.19 31.78 -26.59
Health Care 9.42 1.56 7.86
Industrials 16.67 11.17 5.50
Information Technology 2.10 5.43 -3.33
Materials 3.28 11.39 -8.11
Real Estate 15.03 3.58 11.46
Utilities 14.67 4.55 10.44

Source: Bloomberg, as of September 23, 2019.

When comparing ZLD to the broad market index (MSCI EAFE Hedge to CAD Index), ZLD has outperformed the index during periods of market volatility and fallen behind in upward trending markets. This is because ZLD invests in securities with low beta (broad market risk exposure) that outperform when volatility picks up.

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EAFE countries have been bruised by slower growth out of China, trade tensions between the U.S., and China and Brexit uncertainty. As these issues continue to put pressure on markets, central bank accommodation should provide some stimulus to EAFE economies and support to equity markets indirectly.

Eurozone PMI Showing Worrisome Signs
EURO AREA - headline readings from the latest PMI surveys

Mar-19 Apr-19 May-19 Jun-19 Jul-19 Aug-19 Sep-19 Normalized
Composite PMI 51.6 51.5 51.8 52.2 51.5 51.9 50.4 -0.6
Services PMI 53.3 52.8 52.9 53.6 53.2 53.5 52.0 -0.3
Manufacturing PMI 47.5 47.9 47.7 47.6 46.5 47.0 45.6 -1.3
Construction PMI 52.2 52.1 50.6 50.8 50.6 49.1 - -

Source: Markit.


Monetary Policy Action by the ECB on September 12, 2019


*ECB LOWERS DEPOSIT FACILITY RATE TO -0.5%

*ECB TO BUY EU20b OF DEBT/MONTH FROM NOV. 1

Source: Bloomberg.


Volatility in the markets has picked up over the last year and will likely remain elevated. Slower growth and increased volatility will be key themes going forward. 

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Outlook
Adding to international markets will protect investors from Canadian idiosyncratic risk. As global equity markets are vulnerable to slower growth and increased volatility, implementing a defensive strategy to gain exposure to international markets may protect returns going forward.