BMO Canadian ETF Dashboard

— as of November 30, 2018 —

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Taking the Edge Off a Late Equity Cycle

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.

Nov-2018-C.-Heakes-Graph-1.png#asset:1800

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

Nov-2018-C.-Heakes-Graph-2.png#asset:1801

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.

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.

Nov-2018-C.-Heakes-Graph-1.png#asset:1800

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

Nov-2018-C.-Heakes-Graph-2.png#asset:1801

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.