BMO Canadian ETF Dashboard

— as of February 28, 2019 —

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ZUS.U: Generate a More Attractive Yield on U.S. Cash

Alfred Lee

ZUS.U: Generate a More Attractive Yield on U.S. Cash

Snapshot
Canadians are holding more foreign deposits than ever before, up 10% in the last year,1 which is driving demand for solutions to quickly invest their U.S. cash while still having access to it. Meanwhile, investors are also shortening the term of their fixed income to reduce volatility and more quickly participate in any rising rates. This combination has created a demand for solutions that focus on ultra-short-term U.S. bonds. Other uses include:

  • A stable investment that can offer investors a higher yield than cash. By investing in U.S. investment-grade corporate bonds with less than one year from maturity, ultra-short-term bonds can be used as a near-cash position.
  • Access to high-quality U.S. fixed income. With its focus on investment grade bonds, ZUS can avoid excessive credit risk by avoiding speculative corners of the fixed income universe.  
  • Insulate interest rate risk by investing in bonds that are near maturity. By holding bonds that mature in one year or less, investors can minimize duration risk, as bonds are held until maturity and ultimately mature at par value, regardless of interest rate fluctuations.  
  • Avoid equity market risk, while still collecting a yield. Given equity market volatility is expected to persist, investors may prefer to de-risk a portfolio, by moving out of equities and into a near-cash vehicle. 

Details
BMO Ultra Short-Term US Bond ETF – US Dollar Units (Ticker: ZUS.U)
BMO Ultra Short-Term US Bond ETF – US Dollar Accumulating Units (Ticker: ZUS.V)

A multi-purpose investment tool:

  • Cash Alternative Investment: Generate a more attractive yield for idle U.S. cash positions, by taking slightly more duration and credit risk.
  • Replacement for U.S. bond exposure: Eliminate almost all of duration risk, without sacrificing yield.
  • Strategic and tactical positioning tool for portfolio construction: Allows investors to tactically de-risk a portfolio or use as a long-term replacement for bond positions or alongside cash.  

Recent Developments
According to the national balance sheet accounts, Canadians held CA$76.9 billion in the form of foreign currency cash and deposits, up from $69.9 billion a year previous. This, combined with a move to the near-end of the yield curve, creates a growing need for solutions that help investors earn a higher yield on the idle U.S. dollars while still maintaining liquidity.

In the last year, the U.S. Treasury curve has continued to flatten with the difference in the 10- and 2-year Treasury yield moving from 56.4 to 17.16 basis points (bps). With a flatter yield curve, investors have not been compensated with additional yield by taking duration risk. 

As a result, many investors have been moving to the short-end of the curve, while also trying to maximize yield. As we near the later stages of a credit cycle; however, it will be important for investors to remain in investment-grade bonds, rather than those of more speculative issuers.

A growing number of investors have also moved or considered moving into cash, given equity market volatility and the possibility that the bull market is nearing an end.

etf-dash-feb-2019-canadian-household-en-1200.jpg#asset:2169

Trade Idea – Earn a Higher Yield for U.S. Cash
To help snowbirds put their U.S. cash to work while still having access to it, BMO Ultra Short-Term U.S. Bond ETF (ZUS.U) invests in a portfolio of U.S. investment-grade corporate bonds with a maturity of one year or less diversified across both industries and issuers. This exchange traded fund (ETF) will trade in US dollars and also be available in an accumulating units (ZUS.V).

By holding bonds that mature in one year or less, investors are able to minimize interest rate risk and benefit by allowing them to mature at par value. Not only does the lower term to maturity of the underlying bonds insulate interest rate risk more effectively, but the focus on investment-grade bonds helps investors obtain a more attractive yield without having to take on excessive credit risk.  

While not cash, the very low-duration risk and investment-grade characteristics of the portfolio allow investors to use the ETF as a “cash-plus” instrument to earn a higher yield for idle US dollars.

Alternatively, for those investors that have exposure to U.S. bonds, it allows investors to position themselves in the very short end of the yield curve to remove almost all of the interest rate risk, without having to sacrifice yield or take excessive credit risk. As such, investors can use ZUS.U as a strategic position in a portfolio, by using the ETF as a substitute for U.S. bond exposures. 

ZUS can also be used as a tactical tool in a portfolio. As equity market volatility is expected to reside, investors that exit out of equities and/or ETFs that trade in US dollars can utilize ZUS.U, and collect a higher yield, rather than remaining in cash as they wait out volatility, before re-equitizing their exposure.   

Outlook
Although equity market volatility has been rather complacent in recent years, investors were reminded about how quickly risk assets can fall in the fourth quarter of last year. As the market has become increasingly concerned about headline risk, it is expected that equity markets will experience frequent bouts of volatility going forward.

As we enter the later stages of an economic cycle, some investors are de-risking their portfolios by moving to cash. However, as interest rates remain relatively low, investors are seeking a higher yield for idle cash, without taking excessive risk. 

1 Statistics Canada/Haver Analytics.

Alfred Lee

ZUS.U: Generate a More Attractive Yield on U.S. Cash

Snapshot
Canadians are holding more foreign deposits than ever before, up 10% in the last year,1 which is driving demand for solutions to quickly invest their U.S. cash while still having access to it. Meanwhile, investors are also shortening the term of their fixed income to reduce volatility and more quickly participate in any rising rates. This combination has created a demand for solutions that focus on ultra-short-term U.S. bonds. Other uses include:

  • A stable investment that can offer investors a higher yield than cash. By investing in U.S. investment-grade corporate bonds with less than one year from maturity, ultra-short-term bonds can be used as a near-cash position.
  • Access to high-quality U.S. fixed income. With its focus on investment grade bonds, ZUS can avoid excessive credit risk by avoiding speculative corners of the fixed income universe.  
  • Insulate interest rate risk by investing in bonds that are near maturity. By holding bonds that mature in one year or less, investors can minimize duration risk, as bonds are held until maturity and ultimately mature at par value, regardless of interest rate fluctuations.  
  • Avoid equity market risk, while still collecting a yield. Given equity market volatility is expected to persist, investors may prefer to de-risk a portfolio, by moving out of equities and into a near-cash vehicle. 

Details
BMO Ultra Short-Term US Bond ETF – US Dollar Units (Ticker: ZUS.U)
BMO Ultra Short-Term US Bond ETF – US Dollar Accumulating Units (Ticker: ZUS.V)

A multi-purpose investment tool:

  • Cash Alternative Investment: Generate a more attractive yield for idle U.S. cash positions, by taking slightly more duration and credit risk.
  • Replacement for U.S. bond exposure: Eliminate almost all of duration risk, without sacrificing yield.
  • Strategic and tactical positioning tool for portfolio construction: Allows investors to tactically de-risk a portfolio or use as a long-term replacement for bond positions or alongside cash.  

Recent Developments
According to the national balance sheet accounts, Canadians held CA$76.9 billion in the form of foreign currency cash and deposits, up from $69.9 billion a year previous. This, combined with a move to the near-end of the yield curve, creates a growing need for solutions that help investors earn a higher yield on the idle U.S. dollars while still maintaining liquidity.

In the last year, the U.S. Treasury curve has continued to flatten with the difference in the 10- and 2-year Treasury yield moving from 56.4 to 17.16 basis points (bps). With a flatter yield curve, investors have not been compensated with additional yield by taking duration risk. 

As a result, many investors have been moving to the short-end of the curve, while also trying to maximize yield. As we near the later stages of a credit cycle; however, it will be important for investors to remain in investment-grade bonds, rather than those of more speculative issuers.

A growing number of investors have also moved or considered moving into cash, given equity market volatility and the possibility that the bull market is nearing an end.

etf-dash-feb-2019-canadian-household-en-1200.jpg#asset:2169

Trade Idea – Earn a Higher Yield for U.S. Cash
To help snowbirds put their U.S. cash to work while still having access to it, BMO Ultra Short-Term U.S. Bond ETF (ZUS.U) invests in a portfolio of U.S. investment-grade corporate bonds with a maturity of one year or less diversified across both industries and issuers. This exchange traded fund (ETF) will trade in US dollars and also be available in an accumulating units (ZUS.V).

By holding bonds that mature in one year or less, investors are able to minimize interest rate risk and benefit by allowing them to mature at par value. Not only does the lower term to maturity of the underlying bonds insulate interest rate risk more effectively, but the focus on investment-grade bonds helps investors obtain a more attractive yield without having to take on excessive credit risk.  

While not cash, the very low-duration risk and investment-grade characteristics of the portfolio allow investors to use the ETF as a “cash-plus” instrument to earn a higher yield for idle US dollars.

Alternatively, for those investors that have exposure to U.S. bonds, it allows investors to position themselves in the very short end of the yield curve to remove almost all of the interest rate risk, without having to sacrifice yield or take excessive credit risk. As such, investors can use ZUS.U as a strategic position in a portfolio, by using the ETF as a substitute for U.S. bond exposures. 

ZUS can also be used as a tactical tool in a portfolio. As equity market volatility is expected to reside, investors that exit out of equities and/or ETFs that trade in US dollars can utilize ZUS.U, and collect a higher yield, rather than remaining in cash as they wait out volatility, before re-equitizing their exposure.   

Outlook
Although equity market volatility has been rather complacent in recent years, investors were reminded about how quickly risk assets can fall in the fourth quarter of last year. As the market has become increasingly concerned about headline risk, it is expected that equity markets will experience frequent bouts of volatility going forward.

As we enter the later stages of an economic cycle, some investors are de-risking their portfolios by moving to cash. However, as interest rates remain relatively low, investors are seeking a higher yield for idle cash, without taking excessive risk. 

1 Statistics Canada/Haver Analytics.