BMO Canadian ETF Dashboard

— as of April 30, 2020 —

Thank you for printing our content at https://www.bmoetfs.ca/en/trade-tips/zqb-and-zbbb-quality-up-risk-down-in-your-fixed-income-exposure/.

ZQB and ZBBB: Quality Up, Risk Down in Your Fixed Income Exposure

Alfred Lee

ZQB and ZBBB: Quality Up, Risk Down in Your Fixed Income Exposure

Snapshot
With coronavirus becoming the main concern in markets, Advisors may want to rethink their clients’ positioning, especially on the fixed income side of the portfolio.

Investors worried that coronavirus fears will continue to weigh on the market can use BMO High Quality Corporate Bond Index ETF (Ticker: ZQB) to trade up in quality within the corporate bond universe. Meanwhile, those with high yield bonds in the portfolio can de-risk by moving into BMO BBB Corporate Bond Index ETF (Ticker: ZBBB), which earns a competitive yield among investment grade fixed income. Both these ETFs allow investors to more appropriately mitigate risks in their portfolios by targeting specific parts of the corporate bond universe.

Details
BMO High Quality Corporate Bond Index ETF (Ticker: ZQB)
BMO BBB Corporate Bond Index ETF (Ticker: ZBBB)

Benefits

  • Consistent Income – Designed to provide dependable returns 
  • Greater security – Higher quality bonds reduce exposure to market volatility
  • Risk mitigation – Ability to trade a basket of quality bonds in a single ETF
  • Targeted exposure – Helps calibrate risk to desired level, in accordance with macro outlook

Trade Idea – Quality Up, Risk Down
As political factors (election, trade wars, etc.) take a back seat to coronavirus fears, markets are concerned about the implications for global growth and asset prices. With a recent downturn in risk assets, central banks have recently taken a coordinated move in cutting rates. While lower rates may stoke confidence, concerns still remain, which means there is greater need for investors to control risk in their fixed income portfolios.   

Investors that are worried that the uncertainty will persist through the remainder of 2020, it’s time to move up the ladder in quality. Focusing on high-quality, A-and-above-rated bonds, such as ZQB, provides an added layer of defense, while still earning corporate bond yields. It’s also useful for investors carrying restrictions in their Investment Policy Statements (IPSs), which would prohibit them from investing in BBB bonds. ZQB provides an effective solution for those asset managers: a low-cost vehicle, which allows them to maximize yield at a higher level of quality. 

In addition, investors in high-yield bonds can mitigate their equity-like risk by moving up the risk spectrum into investment-grade corporate bonds that are rated BBB. This is also a segment that tends to outperform the rest of the investment-grade corporate bond universe. If you believe the COVID-19 concerns are overblown and spreads are likely going to tighten, then ZBBB offers a precise solution for investors looking to maximize the credit spread compression opportunities without having exposure to high yield bonds, which are more prone to an economic downturn. Additionally, with oil prices recently turning lower as a result of the OPEC countries failing to reach an agreement on a cut in crude supplies, high-yield issuers will likely face some solvency concerns. ZBBB will provide investors with an area within the investment-grade spectrum to collect a higher yield than the broader investment-grade universe.  

BBB Bonds Outperform Other Corporate Bond Segments

Feb-2020-BBB-Bonds-Graph.png#asset:3816

Source: Bloomberg, December 31, 2003-December 4, 2019.

Outlook
On a go-forward basis, markets will look to central banks to counteract the coronavirus-related volatility. As anticipated, the U.S. Federal Reserve made an intra-meeting emergency rate cut of 50 basis points in its overnight lending rate. This prompted the Bank of Canada to follow suit the day after and also make a 50bp cut. While the rate cuts should create confidence in the short term, it’s difficult to gauge how the impact of the coronavirus will weigh on credit over the next several months. Fine tuning corporate bond exposure through these ETFs should allow investors to more appropriately manage risk. 

Alfred Lee

ZQB and ZBBB: Quality Up, Risk Down in Your Fixed Income Exposure

Snapshot
With coronavirus becoming the main concern in markets, Advisors may want to rethink their clients’ positioning, especially on the fixed income side of the portfolio.

Investors worried that coronavirus fears will continue to weigh on the market can use BMO High Quality Corporate Bond Index ETF (Ticker: ZQB) to trade up in quality within the corporate bond universe. Meanwhile, those with high yield bonds in the portfolio can de-risk by moving into BMO BBB Corporate Bond Index ETF (Ticker: ZBBB), which earns a competitive yield among investment grade fixed income. Both these ETFs allow investors to more appropriately mitigate risks in their portfolios by targeting specific parts of the corporate bond universe.

Details
BMO High Quality Corporate Bond Index ETF (Ticker: ZQB)
BMO BBB Corporate Bond Index ETF (Ticker: ZBBB)

Benefits

  • Consistent Income – Designed to provide dependable returns 
  • Greater security – Higher quality bonds reduce exposure to market volatility
  • Risk mitigation – Ability to trade a basket of quality bonds in a single ETF
  • Targeted exposure – Helps calibrate risk to desired level, in accordance with macro outlook

Trade Idea – Quality Up, Risk Down
As political factors (election, trade wars, etc.) take a back seat to coronavirus fears, markets are concerned about the implications for global growth and asset prices. With a recent downturn in risk assets, central banks have recently taken a coordinated move in cutting rates. While lower rates may stoke confidence, concerns still remain, which means there is greater need for investors to control risk in their fixed income portfolios.   

Investors that are worried that the uncertainty will persist through the remainder of 2020, it’s time to move up the ladder in quality. Focusing on high-quality, A-and-above-rated bonds, such as ZQB, provides an added layer of defense, while still earning corporate bond yields. It’s also useful for investors carrying restrictions in their Investment Policy Statements (IPSs), which would prohibit them from investing in BBB bonds. ZQB provides an effective solution for those asset managers: a low-cost vehicle, which allows them to maximize yield at a higher level of quality. 

In addition, investors in high-yield bonds can mitigate their equity-like risk by moving up the risk spectrum into investment-grade corporate bonds that are rated BBB. This is also a segment that tends to outperform the rest of the investment-grade corporate bond universe. If you believe the COVID-19 concerns are overblown and spreads are likely going to tighten, then ZBBB offers a precise solution for investors looking to maximize the credit spread compression opportunities without having exposure to high yield bonds, which are more prone to an economic downturn. Additionally, with oil prices recently turning lower as a result of the OPEC countries failing to reach an agreement on a cut in crude supplies, high-yield issuers will likely face some solvency concerns. ZBBB will provide investors with an area within the investment-grade spectrum to collect a higher yield than the broader investment-grade universe.  

BBB Bonds Outperform Other Corporate Bond Segments

Feb-2020-BBB-Bonds-Graph.png#asset:3816

Source: Bloomberg, December 31, 2003-December 4, 2019.

Outlook
On a go-forward basis, markets will look to central banks to counteract the coronavirus-related volatility. As anticipated, the U.S. Federal Reserve made an intra-meeting emergency rate cut of 50 basis points in its overnight lending rate. This prompted the Bank of Canada to follow suit the day after and also make a 50bp cut. While the rate cuts should create confidence in the short term, it’s difficult to gauge how the impact of the coronavirus will weigh on credit over the next several months. Fine tuning corporate bond exposure through these ETFs should allow investors to more appropriately manage risk.