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Blue Chip Investing Made Easy

Alfred Lee

Blue Chip Investing Made Easy

Snapshot:

With the calendar year drawing to a close, 2021 has been one to remember. Both the S&P/TSX Composite and the S&P 500 Composite have delivered a total return of 24.0% year-to-date.1 Although we anticipate equities to continue outpacing bonds, there are some concerns on the horizon that investors should consider that would warrant a more defensive approach to equity investing using the quality factor.

Details:

Benefits:

  • ZGQ offers a diversified portfolio of blue-chip companies in the world (management fee: 0.45%); recently recognized as awarded the 2021 Refinitiv Lipper® Fund Award in the Global Equity category2
  • ZUQ and ZUQ.F provide access to a diversified portfolio of U.S. blue chips (management fee: 0.30%)
  • ZEQ allows investors to participate in a diversified portfolio of blue chips in Europe (management fee of 0.40%); recipient of the 2021 Refinitiv Lipper® Fund Award in the European Equity category2

Near-Term Concerns:

  1. Tighter monetary policy: Quantitative easing and lower interest rates were necessary to revive the economy at the onset of the pandemic, to prevent a collapse of the economy. With economies now in expansion mode, with much of the slack being removed, central banks are now focused on removing the excess liquidity from the system. This essentially means interest rates will likely continue to rise across the curve, particularly on the short end.
  2. Sustained inflation: While central banks have refrained from stating that inflation will be anything more that “transitory,” it’s likely that higher prices will be here longer than originally anticipated. Higher wage costs and continued supply chain disruptions mean higher input costs will eat into the profit margins of some companies.
  3. Virus variants: Although the vaccines were once seen as the panacea to ending the pandemic, continued mutations have made a move back to normal more challenging. At this time, not much is known about “Omicron,” the new variant of concern. A few countries have already shut down borders as a result, causing markets to quickly retreat and equity market volatility to rise.

Trade Idea:

Rather than simply allocating equities to the broad-market-capitalization-weighted indices, investors may want to consider the quality factor as either a core equity allocation or tactically tilt a portfolio to a more defensive growth exposure.

Our quality ETFs screen equities, based on three specific criteria:

  • High return on equity (ROE): Companies that have high profitability in relation to their equity offer greater shareholder value. Screening for these companies allows us to isolate the winners.
  • Low earnings variability: A company’s ability to generate earnings is important, but the consistency of the profitability is arguably even more critical.
  • Low financial leverage: This standard allows us to find companies that can generate earnings organically and be not overly reliant on debt. Lower debt also allows a company to better withstand financial downturns and higher interest rates.

The diagram below, provided by MSCI Inc., compares various economic factors and their ability to deliver relative returns in various economic regimes. In times of rising inflation, the quality factor has historically proven to be the most consistent, as it has outperformed the broader index, whether the economy has expanded or contracted. While data suggest the economy is continuing to expand, any derailment caused by a relapse into slower growth due to the ongoing pandemic, may result in stagflation.

Factor performance based on economic regimes



Source: MSCI Inc. Average Monthly Gross Active Returns relative to MSCI World from December 1975 to May 2019. Broad Market Proxy MSCI ACWI Index (USD), Low Volatility Proxy: MSCI ACWI Minimum Volatilty Index (USD), Quality Proxy: MSCI ACWI Quality Index (USD), Dividend Proxy: MSCI ACWI High Dividend Yield Index (USD), Value Proxy: MSCI ACWI Enhanced Value Weighted Index (USD).
* Based on official MSCI Minimum Volatility Index levels from May 1988; Low Volatility Tilt Index prior to that.
Based on MSCI Enhanced Value Index methodology. Prior to 1997, cash earnings to price is used in place of CFO/EV. Before 1994, sector definitions are extended by mapping the Barra model industry classification to the GICS sectors.


Below are comparisons of the three quality ETFs compared to their respective market-capitalization-weighted benchmarks. As illustrated, all three have outperformed since their inception dates.

ZGQ vs. MSCI World Index

Source: Bloomberg (since inception of ZGQ: November 5, 2014), as of October 29, 2021. Performance: 1-year: 26.35%; 3-year: 20.72%; 5-year: 17.14%; SI: 15.81%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

ZUQ vs S&P 500 Composite

Source: Bloomberg (Since inception of ZUQ: November 5, 2014), as of October 29, 2021. Performance: 1-year: 29.94%; 3-year: 21.72%; 5-year: 19.14%; SI: 17.96%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

ZEQ vs. MSCI Europe Index

Source: Bloomberg (since inception of ZEQ: February 10, 2014, vs. MXEU in Euro, given ZEQ is currency hedged), as of October 29, 2021. Performance: 1-year: 36.53%; 3-year: 17.64%; 5-year: 13.53%; SI: 11.66%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.


Outlook:
Combining the above criteria allows our quality-based ETFs to identify blue-chip companies that have competitive advantages within their respective industries. Investors may want to consider companies that possess “economic moats,” given they tend to have better pricing power and can pass higher inflationary costs to the end consumer. Furthermore, because these companies have a lower debt load, higher interest rates have less of an impact, and refinancing is less of an issue. Higher-quality companies also tend to outperform in times of economic uncertainty, which means in the worse case scenario of a further lockdowns, these companies will tend to be more resilient.




1 As of November 26, 2021.

2 About Refinitiv Lipper Fund Awards: For more than 30 years and in over 17 countries worldwide, the highly respected Refinitiv Lipper Awards have honoured funds and fund management firms that have excelled in providing consistently strong risk-adjusted performance relative to their peers and focus the investment world on top-funds. The merit of the winners is based on entirely objective, quantitative criteria. This coupled with the unmatched depth of fund data, results in a unique level of prestige and ensures the award has lasting value. Renowned fund data and proprietary methodology is the foundation of this prestigious award qualification, recognizing excellence in fund management.

Find out more at www.lipperfundawards.com.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers.

The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. The highest 20% of funds in each classification are named Lipper Leaders for Consistent Return and receive a rating of 5; the next 20% receive a rating of 4; the middle 20% are rated 3; the next 20% are rated 2; and the lowest 20% are rated 1. Lipper Leader ratings are subject to change every month. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper.

BMO MSCI Europe High Quality Hedged to CAD Index ETF (ticker ZEQ) was awarded the 2021 Lipper Fund Award in the European Equity category for the three-year period ending July 31, 2021 out of a total of 10 funds. Performance for the fund for the period ended October 30, 2021 is 36.52% (1 year), 17.64% (3 years), 13.54% (5 years), and 11.67% (since inception on February 10, 2014). The corresponding Lipper Leader ratings of the fund for the period ending July 31, 2021 are as follows: 5 (3 years), 5 (5 years), N/A (10 years).

BMO MSCI All Country World High Quality Index ETF (ticker ZGQ) was awarded the 2021 Lipper Fund Award in the Global Equity category for the five-year period ending July 31, 2021 out of a total of 14 funds. Performance for the fund for the period ended October 30, 2021 is 26.34% (1 year), 20.71% (3 years), 17.14% (5 years), and 15.80% (since inception on November 5, 2014). The corresponding Lipper Leader ratings of the fund for the period ending July 31, 2021 are as follows: 5 (3 years), 5 (5 years), N/A (10 years).

Alfred Lee

Blue Chip Investing Made Easy

Snapshot:

With the calendar year drawing to a close, 2021 has been one to remember. Both the S&P/TSX Composite and the S&P 500 Composite have delivered a total return of 24.0% year-to-date.1 Although we anticipate equities to continue outpacing bonds, there are some concerns on the horizon that investors should consider that would warrant a more defensive approach to equity investing using the quality factor.

Details:

Benefits:

  • ZGQ offers a diversified portfolio of blue-chip companies in the world (management fee: 0.45%); recently recognized as awarded the 2021 Refinitiv Lipper® Fund Award in the Global Equity category2
  • ZUQ and ZUQ.F provide access to a diversified portfolio of U.S. blue chips (management fee: 0.30%)
  • ZEQ allows investors to participate in a diversified portfolio of blue chips in Europe (management fee of 0.40%); recipient of the 2021 Refinitiv Lipper® Fund Award in the European Equity category2

Near-Term Concerns:

  1. Tighter monetary policy: Quantitative easing and lower interest rates were necessary to revive the economy at the onset of the pandemic, to prevent a collapse of the economy. With economies now in expansion mode, with much of the slack being removed, central banks are now focused on removing the excess liquidity from the system. This essentially means interest rates will likely continue to rise across the curve, particularly on the short end.
  2. Sustained inflation: While central banks have refrained from stating that inflation will be anything more that “transitory,” it’s likely that higher prices will be here longer than originally anticipated. Higher wage costs and continued supply chain disruptions mean higher input costs will eat into the profit margins of some companies.
  3. Virus variants: Although the vaccines were once seen as the panacea to ending the pandemic, continued mutations have made a move back to normal more challenging. At this time, not much is known about “Omicron,” the new variant of concern. A few countries have already shut down borders as a result, causing markets to quickly retreat and equity market volatility to rise.

Trade Idea:

Rather than simply allocating equities to the broad-market-capitalization-weighted indices, investors may want to consider the quality factor as either a core equity allocation or tactically tilt a portfolio to a more defensive growth exposure.

Our quality ETFs screen equities, based on three specific criteria:

  • High return on equity (ROE): Companies that have high profitability in relation to their equity offer greater shareholder value. Screening for these companies allows us to isolate the winners.
  • Low earnings variability: A company’s ability to generate earnings is important, but the consistency of the profitability is arguably even more critical.
  • Low financial leverage: This standard allows us to find companies that can generate earnings organically and be not overly reliant on debt. Lower debt also allows a company to better withstand financial downturns and higher interest rates.

The diagram below, provided by MSCI Inc., compares various economic factors and their ability to deliver relative returns in various economic regimes. In times of rising inflation, the quality factor has historically proven to be the most consistent, as it has outperformed the broader index, whether the economy has expanded or contracted. While data suggest the economy is continuing to expand, any derailment caused by a relapse into slower growth due to the ongoing pandemic, may result in stagflation.

Factor performance based on economic regimes



Source: MSCI Inc. Average Monthly Gross Active Returns relative to MSCI World from December 1975 to May 2019. Broad Market Proxy MSCI ACWI Index (USD), Low Volatility Proxy: MSCI ACWI Minimum Volatilty Index (USD), Quality Proxy: MSCI ACWI Quality Index (USD), Dividend Proxy: MSCI ACWI High Dividend Yield Index (USD), Value Proxy: MSCI ACWI Enhanced Value Weighted Index (USD).
* Based on official MSCI Minimum Volatility Index levels from May 1988; Low Volatility Tilt Index prior to that.
Based on MSCI Enhanced Value Index methodology. Prior to 1997, cash earnings to price is used in place of CFO/EV. Before 1994, sector definitions are extended by mapping the Barra model industry classification to the GICS sectors.


Below are comparisons of the three quality ETFs compared to their respective market-capitalization-weighted benchmarks. As illustrated, all three have outperformed since their inception dates.

ZGQ vs. MSCI World Index

Source: Bloomberg (since inception of ZGQ: November 5, 2014), as of October 29, 2021. Performance: 1-year: 26.35%; 3-year: 20.72%; 5-year: 17.14%; SI: 15.81%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

ZUQ vs S&P 500 Composite

Source: Bloomberg (Since inception of ZUQ: November 5, 2014), as of October 29, 2021. Performance: 1-year: 29.94%; 3-year: 21.72%; 5-year: 19.14%; SI: 17.96%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

ZEQ vs. MSCI Europe Index

Source: Bloomberg (since inception of ZEQ: February 10, 2014, vs. MXEU in Euro, given ZEQ is currency hedged), as of October 29, 2021. Performance: 1-year: 36.53%; 3-year: 17.64%; 5-year: 13.53%; SI: 11.66%. Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.


Outlook:
Combining the above criteria allows our quality-based ETFs to identify blue-chip companies that have competitive advantages within their respective industries. Investors may want to consider companies that possess “economic moats,” given they tend to have better pricing power and can pass higher inflationary costs to the end consumer. Furthermore, because these companies have a lower debt load, higher interest rates have less of an impact, and refinancing is less of an issue. Higher-quality companies also tend to outperform in times of economic uncertainty, which means in the worse case scenario of a further lockdowns, these companies will tend to be more resilient.




1 As of November 26, 2021.

2 About Refinitiv Lipper Fund Awards: For more than 30 years and in over 17 countries worldwide, the highly respected Refinitiv Lipper Awards have honoured funds and fund management firms that have excelled in providing consistently strong risk-adjusted performance relative to their peers and focus the investment world on top-funds. The merit of the winners is based on entirely objective, quantitative criteria. This coupled with the unmatched depth of fund data, results in a unique level of prestige and ensures the award has lasting value. Renowned fund data and proprietary methodology is the foundation of this prestigious award qualification, recognizing excellence in fund management.

Find out more at www.lipperfundawards.com.

The Refinitiv Lipper Fund Awards, granted annually, highlight funds and fund companies that have excelled in delivering consistently strong risk-adjusted performance relative to their peers.

The Refinitiv Lipper Fund Awards are based on the Lipper Leader for Consistent Return rating, which is a risk-adjusted performance measure calculated over 36, 60 and 120 months. The fund with the highest Lipper Leader for Consistent Return (Effective Return) value in each eligible classification wins the Refinitiv Lipper Fund Award. For more information, see lipperfundawards.com. The highest 20% of funds in each classification are named Lipper Leaders for Consistent Return and receive a rating of 5; the next 20% receive a rating of 4; the middle 20% are rated 3; the next 20% are rated 2; and the lowest 20% are rated 1. Lipper Leader ratings are subject to change every month. Although Refinitiv Lipper makes reasonable efforts to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Refinitiv Lipper.

BMO MSCI Europe High Quality Hedged to CAD Index ETF (ticker ZEQ) was awarded the 2021 Lipper Fund Award in the European Equity category for the three-year period ending July 31, 2021 out of a total of 10 funds. Performance for the fund for the period ended October 30, 2021 is 36.52% (1 year), 17.64% (3 years), 13.54% (5 years), and 11.67% (since inception on February 10, 2014). The corresponding Lipper Leader ratings of the fund for the period ending July 31, 2021 are as follows: 5 (3 years), 5 (5 years), N/A (10 years).

BMO MSCI All Country World High Quality Index ETF (ticker ZGQ) was awarded the 2021 Lipper Fund Award in the Global Equity category for the five-year period ending July 31, 2021 out of a total of 14 funds. Performance for the fund for the period ended October 30, 2021 is 26.34% (1 year), 20.71% (3 years), 17.14% (5 years), and 15.80% (since inception on November 5, 2014). The corresponding Lipper Leader ratings of the fund for the period ending July 31, 2021 are as follows: 5 (3 years), 5 (5 years), N/A (10 years).

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