Podcast: ‘Higher for Longer’ is Back - April 24, 2024
The higher-for-longer narrative continues. In today’s episode, Portfolio Managers Matt Montemurro, Omanand Karmalkar, and your host, Mckenzie Box, analyze the rate-cut delays and where central bank policy expectations are diverging. They also discuss the Canadian dollar, oil, longer-duration bonds, and covered call strategies.
McKenzie Box is Vice President of Product Management and Strategy at BMO Global Asset Management. She is joined on the podcast by Matt Montemurro and Omanand Karmalkar, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, April 24, 2024.
Policy Divergence
The Bank of Canada’s expectations of when a rate cut might happen are coming closer, while the Fed’s expectations are moving further out into 2024. The sheer number of cuts has also dropped meaningfully, with potential more headwinds to come. For three months, Canadian CPI has printed below what economists had expected. In the U.S., economic growth continues to be robust and is largely unfazed by higher interest rates. The first cut in the U.S. is now being priced into November, with 1.6 hikes this year. In Canada, there is a 61% chance of a rate cut in June.
- BMO Mid Corporate Bond Index ETF (Ticker: ZCM), BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF (Ticker: ZSU), BMO Mid-Term US IG Corporate Bond Index ETF (Ticker: ZIC)
- BMO Ultra Short-Term Bond ETF (Ticker: ZST), BMO Ultra Short-Term US Bond ETF (USD Units) (Ticker; ZUS.U)
Oil & Gas
On the supply side, OPEC plus, a group of countries that control oil output, remain steadfast in their commitment to restricting supply. If tensions in the Middle East escalate, it could result in more sanctions on Iran and that could put further stress on the supply side. Furthermore, we’ve seen Russian oil refining facilities being attacked again, which have heightened concerns for a potential disruption of oil flows. On the demand side, global demand for oil has remained resilient. The US has shown strong economic indicators, ample credit market liquidity in the credit, which has kept demand for oil at an all time high.
- BMO Covered Call Energy ETF (Ticker: ZWEN)
- BMO Equal Weight Oil & Gas Index ETF (Ticker: ZEO)
Fixed Income
With the Bank of Canada seeming to be moving towards rate cuts this summer, it has some investors pondering whether now is the right time to start adding duration to their portfolios. There are concerns on the horizon; if the geopolitical concerns continue to get escalated investors may also want some credit protection. You could add modest duration with high quality credit BMO High Quality Corporate Bond Index ETF (Ticker: ZQB) or BMO Aggregate Bond Index ETF (Ticker: ZAG) for aggregate exposure.
Income & Growth
Given the inflationary period we are in, income has been on the top of the list for investors within the equity portion of their portfolios. Utilizing covered call strategies can be a smart way to blend that steady income with growth potential. Anchoring a portfolio with blue chip stocks and complimenting it with a covered call strategy, investors can achieve a reliable stream of income while retaining exposure to the upside. At BMO ETFs, we cover 50% of the portfolio to allow the other 50% to fully participate on the upside. The other benefit is that option premium income is taxed as capital gain rather than income. BMO ETFs have been managing the covered call solutions for more than a decade. So we have the understanding of nuanced intricacies and inherent risks that come in managing such a solution to ensure a smoother client experience.
- BMO Global Enhanced Income Fund ETF Series (Ticker: ZQWT)
1 Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).
ZWEN, total returns as at 2024/03/28: 1yr: 20.57%
ZEO, total returns as at 2024/03/28: 1yr: 26.25%, 3yr: 30.46%, 5yr: 14.94%, 10yr: 1.41%, SI: 1.65%
ZQB, total returns as at 2024/03/28: 1yr: 5.17%, 3yr: 0.40%, SI: 1.16%
Annualized Distribution Yield: This yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.
Weighted Average Yield to Maturity: The market value weighted average yield to maturity includes the coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.
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