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ZNQ and ZUQ: U.S. Equity Barbell Strategy

Adriana Arrillaga

ZNQ and ZUQ: U.S. Equity Barbell Strategy

Snapshot
At One Summit Capital, we believe that not all factors are created equal. Our strategy selects for two styles in the S&P 500 – Quality and Growth – which we implement using the BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) and the BMO NASDAQ 100 ETF (Ticker: ZNQ). These ETFs complement each other well, creating an American equity sleeve, which adds value and diversification to the average Canadian equity portfolio.


Details

BMO NASDAQ 100 Equity Index ETF (Ticker: ZNQ)
BMO MSCI USA High Quality Index ETF (Ticker: ZUQ)


Benefits

  • Diversification – This U.S. strategy offers Canadian investors another geography with very different sector composition.   
  • Reduced volatility – Underweight exposure to financials, energy and materials leads to lower volatility.
  • Higher returns – Overweight exposure to technology and healthcare targets companies with greater expected growth.  


Trade Idea – 50/50 U.S. Equity Portfolio
Within our investment philosophy of investing in high-quality global growth companies, the Quality factor selects for three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage with overall strong balance sheets. Meanwhile, the global growth side focuses on companies that are expected to increase sales and EPS at an above-average rate compared to their industry or the broader market.

Unfortunately, Canadian Investors have a domestic bias in their equity portfolios. A survey from Vanguard found that Canadian equities represent an average of 60% of the total equity portfolios held by Canadian Investors. As a result, most are underweight tech and healthcare and overweight financials and resources.   


Largest Sector Weight Differences

Largest Sector Weight Differences

Source: Refinitiv, October 27, 2020.

To address this homeward tilt, we have implemented a 50-50 U.S. equity barbell strategy consisting of ZNQ and ZUQ. ZUQ aims to capture the performance of MSCI US high-quality index, while ZNQ replicates the performance of the NASDAQ index, providing exposure to tech companies and other U.S. non-financial equities. 

A combination of the quality and growth factors offers better risk adjusted returns than simply holding the S&P 500 index, and adds substantial risk adjusted returns to a passive TSX portfolio. The pairing also minimizes exposure to financials, energy and materials, which leads to lower volatility as well.


Standard Period Returns

Standard Period Returns

Source: Refinitiv, October 27, 2020.


Outlook
 
In addition to selecting the proper sector, choosing the correct geographical market has a strong impact on future returns. The US dollar’s safe heaven status is particularly helpful in times of strong market corrections, as it strengthens versus all other currencies during a “flight to safety” to USD-denominated assets. Moreover, American equities represent 65% of the MSCI World Index, while Canadian Equities represent 3% of the same index, and they have outperformed Canadian equities since the Financial Crisis of 2007/08. Canadian investors’ domestic bias has been penalized by world equity markets.


Adriana Arrillaga

ZNQ and ZUQ: U.S. Equity Barbell Strategy

Snapshot
At One Summit Capital, we believe that not all factors are created equal. Our strategy selects for two styles in the S&P 500 – Quality and Growth – which we implement using the BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) and the BMO NASDAQ 100 ETF (Ticker: ZNQ). These ETFs complement each other well, creating an American equity sleeve, which adds value and diversification to the average Canadian equity portfolio.


Details

BMO NASDAQ 100 Equity Index ETF (Ticker: ZNQ)
BMO MSCI USA High Quality Index ETF (Ticker: ZUQ)


Benefits

  • Diversification – This U.S. strategy offers Canadian investors another geography with very different sector composition.   
  • Reduced volatility – Underweight exposure to financials, energy and materials leads to lower volatility.
  • Higher returns – Overweight exposure to technology and healthcare targets companies with greater expected growth.  


Trade Idea – 50/50 U.S. Equity Portfolio
Within our investment philosophy of investing in high-quality global growth companies, the Quality factor selects for three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage with overall strong balance sheets. Meanwhile, the global growth side focuses on companies that are expected to increase sales and EPS at an above-average rate compared to their industry or the broader market.

Unfortunately, Canadian Investors have a domestic bias in their equity portfolios. A survey from Vanguard found that Canadian equities represent an average of 60% of the total equity portfolios held by Canadian Investors. As a result, most are underweight tech and healthcare and overweight financials and resources.   


Largest Sector Weight Differences

Largest Sector Weight Differences

Source: Refinitiv, October 27, 2020.

To address this homeward tilt, we have implemented a 50-50 U.S. equity barbell strategy consisting of ZNQ and ZUQ. ZUQ aims to capture the performance of MSCI US high-quality index, while ZNQ replicates the performance of the NASDAQ index, providing exposure to tech companies and other U.S. non-financial equities. 

A combination of the quality and growth factors offers better risk adjusted returns than simply holding the S&P 500 index, and adds substantial risk adjusted returns to a passive TSX portfolio. The pairing also minimizes exposure to financials, energy and materials, which leads to lower volatility as well.


Standard Period Returns

Standard Period Returns

Source: Refinitiv, October 27, 2020.


Outlook
 
In addition to selecting the proper sector, choosing the correct geographical market has a strong impact on future returns. The US dollar’s safe heaven status is particularly helpful in times of strong market corrections, as it strengthens versus all other currencies during a “flight to safety” to USD-denominated assets. Moreover, American equities represent 65% of the MSCI World Index, while Canadian Equities represent 3% of the same index, and they have outperformed Canadian equities since the Financial Crisis of 2007/08. Canadian investors’ domestic bias has been penalized by world equity markets.


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