BMO Canadian ETF Dashboard

— as of June 30, 2019 —

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ZLE: Thank You, Mr. Powell

Chris Heakes

ZLE: Thank You, Mr. Powell

Snapshot
A newly dovish Federal Reserve (Fed) – who now forecast zero rate hikes in 2019 – suggests there is potential for the current cycle to continue, especially in Emerging Market (EM) countries that have attractive valuations and positive investor sentiment. To this end, ZLE can help investors: 

  • Benefit from an end to the U.S.-China trade war. Reports indicate1 the both sides have nearly reached a compromise to rollback tariffs on $250 billion worth of goods,2 which would potentially remove a drag on China`s economic growth. 
  • Compensate for EM underrepresentation in global equity indexes. EM countries account for 60% of the world’s economy,3 but only 15% of global market cap.4 As a result, targeted exposure to EM funds can provide a healthier, more diversified asset mix.
  • Be part of the smart money. Fund flow data reveals Canadian and U.S. purchases of EM funds increased by $308 million and $24.0 billion, respectively, in January and February of this year.5

Details
BMO Low Volatility Emerging Markets Equity ETF (Ticker: ZLE)

Benefits
Cost efficiency. Attractive valuation. Exposure to long-term, above-average gross domestic product (GDP) growth. Broad geographical, sector and security diversification. 

Trade Idea – ZLE
Fed Chairman Jerome Powell surprised markets in January 2019 by saying interest rates were not on a “pre-set policy path” to normalization, and could be “paused” if economic conditions were softer than expected. This was a game-changer, as the Fed had pledged patience, but was now indicating the potential for the cycle to extend. Adding fuel to the fire, two forecasted rate hikes were removed from the Fed`s latest policy statement6 – leaving only one in 2020, and none in 2021. 

This newly accommodative stance is a positive development for EM countries, especially as trade negotiations between the U.S. and China reach their conclusion. An end to tariffs on $250 billion worth of Chinese products would reinvigorate the country’s GDP growth, potentially spurring inflows to EM-focused funds and further delaying the late equity cycle. In fact, Canadian and American fund flows to EM increased by $308 million and $14.5 billion, respectively, in January and February,5 indicating that the smart money is already betting on these tailwinds to continue in 2019, while reducing bets to U.S. and International equities.

Year-end CAPE 10-year historical average CAPE Valuation relative to historical average
Emerging markets 12.1 14.7 Far below
Developed markets 20.6 18.9 Moderately above
United States 23.7 20.4 Far above

Source: Parametric, MSCI, as of December 31, 2018.


Value for money is another reason EMs are looking attractive. Based on the above chart, EM countries have a lower cyclically adjusted earnings multiple (CAPE ratio) than either the U.S. or developed markets as a whole, and the discount today is Significantly more attractive, relative to U.S. and Developed markets.

Moreover, the MSCI Emerging Markets Index is up-weighting China’s A Class shares in May 2019. The goal is to provide North American investors with better access to the country’s booming technology sector, and to improve representation in the Index. The fact is EM nations contribute 60% of the world’s GDP,3 while accounting for only 10% of global market cap.4 Combined with above average GDP growth of emerging markets for the near and long term, having a long-term holding in ZLE makes sense. ZLE has 234 holdings, and offers well diversified exposure to the region by country and sector.

Outlook
When the Fed was on the path to normalization, tighter monetary policy had the effect of strengthening the US dollar relative to EM currencies, but with the Fed’s shift to a more accommodative stance, the opposite is likely to be true, further improving the funding situation for EM equities. Given the Fed’s prudent pause on rates, and further upside catalysts, the backdrop is favourable for EM.

Owing to historically higher levels of price variance in EM, we chose a low-volatility approach to this trade to provide a smoother path to participating in this opportunity. ZLE's mitigation of downside capture is consistent with our other low-volatility ETFs, and can ultimately help investors maintain the confidence to participate in promising market opportunities.



https://www.nytimes.com/2019/03/24/business/china-trade-xi.html.
Ibid.
https://www.imf.org/external/datamapper/PPPSH@WEO/OEMDC/ADVEC/WEOWORLD
https://www.msci.com/emerging-markets.  
5 National Bank Financial, Bloomberg
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320a.htm

Chris Heakes

ZLE: Thank You, Mr. Powell

Snapshot
A newly dovish Federal Reserve (Fed) – who now forecast zero rate hikes in 2019 – suggests there is potential for the current cycle to continue, especially in Emerging Market (EM) countries that have attractive valuations and positive investor sentiment. To this end, ZLE can help investors: 

  • Benefit from an end to the U.S.-China trade war. Reports indicate1 the both sides have nearly reached a compromise to rollback tariffs on $250 billion worth of goods,2 which would potentially remove a drag on China`s economic growth. 
  • Compensate for EM underrepresentation in global equity indexes. EM countries account for 60% of the world’s economy,3 but only 15% of global market cap.4 As a result, targeted exposure to EM funds can provide a healthier, more diversified asset mix.
  • Be part of the smart money. Fund flow data reveals Canadian and U.S. purchases of EM funds increased by $308 million and $24.0 billion, respectively, in January and February of this year.5

Details
BMO Low Volatility Emerging Markets Equity ETF (Ticker: ZLE)

Benefits
Cost efficiency. Attractive valuation. Exposure to long-term, above-average gross domestic product (GDP) growth. Broad geographical, sector and security diversification. 

Trade Idea – ZLE
Fed Chairman Jerome Powell surprised markets in January 2019 by saying interest rates were not on a “pre-set policy path” to normalization, and could be “paused” if economic conditions were softer than expected. This was a game-changer, as the Fed had pledged patience, but was now indicating the potential for the cycle to extend. Adding fuel to the fire, two forecasted rate hikes were removed from the Fed`s latest policy statement6 – leaving only one in 2020, and none in 2021. 

This newly accommodative stance is a positive development for EM countries, especially as trade negotiations between the U.S. and China reach their conclusion. An end to tariffs on $250 billion worth of Chinese products would reinvigorate the country’s GDP growth, potentially spurring inflows to EM-focused funds and further delaying the late equity cycle. In fact, Canadian and American fund flows to EM increased by $308 million and $14.5 billion, respectively, in January and February,5 indicating that the smart money is already betting on these tailwinds to continue in 2019, while reducing bets to U.S. and International equities.

Year-end CAPE 10-year historical average CAPE Valuation relative to historical average
Emerging markets 12.1 14.7 Far below
Developed markets 20.6 18.9 Moderately above
United States 23.7 20.4 Far above

Source: Parametric, MSCI, as of December 31, 2018.


Value for money is another reason EMs are looking attractive. Based on the above chart, EM countries have a lower cyclically adjusted earnings multiple (CAPE ratio) than either the U.S. or developed markets as a whole, and the discount today is Significantly more attractive, relative to U.S. and Developed markets.

Moreover, the MSCI Emerging Markets Index is up-weighting China’s A Class shares in May 2019. The goal is to provide North American investors with better access to the country’s booming technology sector, and to improve representation in the Index. The fact is EM nations contribute 60% of the world’s GDP,3 while accounting for only 10% of global market cap.4 Combined with above average GDP growth of emerging markets for the near and long term, having a long-term holding in ZLE makes sense. ZLE has 234 holdings, and offers well diversified exposure to the region by country and sector.

Outlook
When the Fed was on the path to normalization, tighter monetary policy had the effect of strengthening the US dollar relative to EM currencies, but with the Fed’s shift to a more accommodative stance, the opposite is likely to be true, further improving the funding situation for EM equities. Given the Fed’s prudent pause on rates, and further upside catalysts, the backdrop is favourable for EM.

Owing to historically higher levels of price variance in EM, we chose a low-volatility approach to this trade to provide a smoother path to participating in this opportunity. ZLE's mitigation of downside capture is consistent with our other low-volatility ETFs, and can ultimately help investors maintain the confidence to participate in promising market opportunities.



https://www.nytimes.com/2019/03/24/business/china-trade-xi.html.
Ibid.
https://www.imf.org/external/datamapper/PPPSH@WEO/OEMDC/ADVEC/WEOWORLD
https://www.msci.com/emerging-markets.  
5 National Bank Financial, Bloomberg
https://www.federalreserve.gov/newsevents/pressreleases/monetary20190320a.htm