Building an Income & Growth Portfolio with ETFs · • BMO ETFs & Resources for Investors •...
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Building an Income & Growth Portfolio with ETFs
Transcript of Building an Income & Growth Portfolio with ETFs · • BMO ETFs & Resources for Investors •...
Building an Income & Growth Portfolio with ETFs
Agenda
• BMO ETFs & Resources for Investors • Complementary solutions to enhance your portfolio• Adding income to portfolios with covered call ETFs
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BMO Exchange Traded Funds
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Over20%
#1ETF providers worldwide with listings in Europe and Hong Kong5
in Canadian net new assets 8 years in a row1
of Canadian ETF AUM growth in 20182
#1
1, 2,3, Bloomberg January 2019. 4, 5 ETFGI Industry Report – December 2018. 6 ETFGI ETF and ETP Smart Beta Insights: Global – December 2018.
Top 10global fixed income ETF providers based on AUM4
most precise fixed income suite in Canada3
Top 12
Top 20
global smart beta ETF providers based on AUM6
Canadian ETF Market
Asse
ts $
bn
020406080
100120140160180
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
BMO ETFs AUM
Investors seeking income in a low rate environment
• Investors in a low interest rate environment must take bigger risks if they want to equal returns of two decades ago.
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Common Mistakes
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Hypothetical DIY Portfolio
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• Assumptions:
• $100,000 investment
• 3 year investment
• Equal weight basket of stocks
Complementing these holdings, with a disciplined, diversified, index-like Asset Allocation ETF, will help smooth volatility and capture market returns while still
allowing for investors to go after thematic and timely investments.
BMO Asset Allocation ETFs – Engineered to complement a portfolio
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ZCON ZBAL ZGRO
To complement a portfolio
Choice based on your risk
Basket of Broad Index ETFs
Quarterly rebalancing
Low cost 18 BPS Mgt fee
Complementary Solutions - ZGRO
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BMO Growth ETF (ZGRO)
• Engineered to complement your holdings
• Adds index based market exposure
• Disciplined risk differentiated asset allocation ETFs with quarterly rebalancing
• Low cost, index driven, diversified solution
Source: MorningStar Dec 31 2018. Hypothetical performance of ZGRO is based on underlying ETFs in previous slide, ZGB’s returns from January 2014–May 2018 are derived from the Bloomberg Barclays Canadian Treasury and Government Related Index, to show returns prior to the inception date of ZGB. ZEA’s returns from January 2014–February 2014 are derived from the MSCI EAFE GR Index (CAD) to show returns prior to ZEA’s inception.
ZZZD BMO Tactical Dividend ETF Fund (Now an ETF)
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Low cost Active Management 70 bps Mgt Fee
Various types of ETFs all in one
Source: Morningstar Direct. As at December 31st, 2018. 3 Year rating of 5 stars. Overall Morningstar Rating of 4 stars. The Fund received a Morningstar Rating of 4 stars over 5 years (221 funds rated). Past performance is no guarantee of future results. Category is Morningstar Tactical Balanced Category. Morningstar Rating is for the Series F only; other classes may have different performance characteristics. © 2017 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 2. Source: ETF Capital Management Weekly Report, September 28th, 2018. Benchmark is relative to the broad market. 3. Source: ETF Capital Management Weekly Report, September 28th, 2018. Benchmark is relative to the broad market. 4. Source: Morningstar Direct, as at August 31st, 2018. Volatility measured by standard deviation. 5. About the Fundata FundGrade A + Rating FundGrade A+® is used with permission from FundataCanada Inc., all rights reserved. The annual FundGrade A+® Awards are presented by Fundata Canada Inc. to recognize the “best of the best” among Canadian investment funds. The FundGrade A+® calculation is supplemental to the monthly FundGraderatings and is calculated at the end of each calendar year. The FundGrade rating system evaluates funds based on their risk-adjusted performance, measured by Sharpe Ratio, Sortino Ratio, and Information Ratio. The score for each ratio is calculated individually, covering all time periods from 2 to 10 years. The scores are then weighted equally in calculating a monthly FundGrade. The top 10% of funds earn an A Grade; the next 20% of funds earn a B Grade; the next 40% of funds earn a C Grade; the next 20% of funds receive a D Grade; and the lowest 10% of funds receive an E Grade. To be eligible, a fund must have received a FundGrade rating every month in the previous year. The FundGrade A+® uses a GPA-style calculation, where each monthly FundGrade from “A” to “E” receives a score from 4 to 0, respectively. A fund’s average score for the year determines its GPA. Any fund with a GPA of 3.5 or greater is awarded a FundGrade A+® Award. For more information, see www.FundGradeAwards.com. Although Fundata makes every effort to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Fundata. The FundGrade A+ Awards and the FundGrade Ratings being referenced are calculated based on comparisons of performance of investment funds within a specified category established by the CIFSC.
Complementary Solutions - ZZZD
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BMO Tactical Dividend ETF Fund
(ETF Series: ZZZD)
• Innovative approach that can adjust to be defensive or offensive depending on the markets
• Focused primarily on dividends – underlying ETFs seek to generate a gross yield of approximately 4%
Source: Morningstar, as of Jan 31 2019.
Since Inception (Aug 12 2013) return of BMO Tactical Dividend ETF Fund is 6.08%
Typical DIY Portfolio with BMO Tactical Dividend ETF Fund
$93,765$106,962
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Stock Basket
SB + BMO TacticalDividend ETF Fund
Innovation of ETFs
Market Cap:
ZSP- BMO S&P 500 Index ETFZSP.U- BMO S&P 500 Index ETF USDSPY- SPDR S&P 500 ETF
Fixed Income:
ZAG- BMO Aggregate Bond Index ETFXBB- iShares Core Canadian Universe Bond Index ETF
Sectors: (e.g. Utilities & COMM)• ZUT/ XUT - Utilities ETFs • COMM/ XLC – New Communication Sector ETFs
Duration YTM Coupon
ZAG 7.45 yrs 2.69% 3.19%
XBB 7.47 yrs 2.76% 3.17%
Ticker Base Currency
Annual Return2015
Annual Return 2016
Annual Return 2017
AnnualReturn 2018
ZSP CAD 20.2% 8.2% 13.6% 3.4%
SPY USD 1.3% 11.8% 21.7% -4.56%
ZSP.UUSD 1% 11.5% 21.3% -4.77%
Source: Morningstar, as of Dec 31 2018. Since Inception Return (Nov 14 2012) for ZSP is 18.58%, since inception return (Nov 14 2012) is 13.59% for ZSP.U
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Innovation of ETFs - Smart Beta
Lower Risk• ZLB- BMO Low Volatility Canadian Equity ETF• TLV- Invesco S&P/TSX Composite Low Vol ETF
More Income• ZDV- BMO Canadian Dividend ETF• ZWH- BMO US High Dividend Covered Call ETF• RCD- RBC Quant Canadian Dividend Leaders ETF
Factor Focused – (e.g. Quality)• ZGQ- BMO MSCI All Country World High Quality
Index ETF• VXC- FTSE Global All Cap ex Canada Index ETF
Beta Treynor RatioTicker 1 Yr 3 Yr 5 Yr 1 Yr 3 Yr 5 YrZLB 0.7 0.6 0.5 -5.75 10.02 18.04TLV 0.7 0.7 0.6 -11.39 7.59 9.38TSX 1 1 1 -10.03 5.64 3.29
Annualized Distribution YieldZDV 5.2%ZWH 5.8%RCD 4.6%
S&P 500 1.5%
1 Yr Return 3 Yr ReturnSince
Inception
ZGQ 0.38 7.08 11.61
VXC 3.18 9.02 9.87
Source: Morningstar, as of Dec 31 2018
Source: Morningstar, as of Dec 31 2018
Source: Morningstar, as of Dec 31 2018
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Add Growth with Quality ETFs
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The Benefits of Quality Investing For Growth
• There is a sustainable long-term return premium attached to quality stocks
• Historically, Quality companies have offered a return premium relative to the broad market with better risk-adjusted returns
Source: MorningStar Direct, August 2018
How do BMO ETFs identify a High Quality Company?
• High ROE
• Stable Earnings Growth
• Low Financial Leverage
Broad Market
Quality
6.00%
7.00%
8.00%
9.00%
10.00%
11.00%
10.00% 12.00% 14.00% 16.00% 18.00%
Annu
aliz
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etur
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Annualized Risk
Historical Performance (Jun 1994 – Jan 2019)
Trade Idea: U.S. High Quality
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Jin Li , VP & ETF Research Analyst BMO Capital Markets
• U.S. investors adjusted to the post-QE environment by underpinning investment decisions with quality and debt service metrics. Companies with good debt service abilities outperformed the S&P 500.
• Price momentum’s sharp pullback did little to help our value bucket. Low PB & low PE remain in a 2-year downtrend.
• Rising rates and growth concerns weigh on earnings momentum. The group fell out of favour with investors and produced a steep downtrend.
• BMO MSCI USA High Quality Index ETF (ZUQ)
Dividend ETFs
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Canada/US/International Equity Universe
Dividend Payout Sustainability
Yield Weighted
How do BMO ETFs identify a High Dividend Company?• Combine high yield with sustainable growth• Screen for historical dividend growth rate• Screen for sustainability of dividends
The Benefits of Dividend Investing For Income• Consistent income• Ability to participate in price
appreciation as well
Source: MorningStar Direct, August 2018
Broad Market
Dividend
6.00%6.50%7.00%7.50%8.00%8.50%9.00%9.50%
10.00%10.50%
10.00% 12.00% 14.00% 16.00% 18.00%
Annu
aliz
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Annualized Risk
Historical Performance (Jun 1994 - Jan 2019)
What are You Trading Off for Income? – Look Under the Hood
• Overweight in certain sectors• More interest rate sensitivity• Potentially less opportunity for capital appreciation
SPY / ZSP (S&P 500 ETFs) ZDY BMO US Dividend ETF
Source: BMO Global Asset Mgmt. December 31st, 2018
Dividend Yield*- 1.5%
1 Year Performance- 3.44%
3 Year Performance- 7.85%
Dividend Yield*- 2.8%
1 Year Performance- 3.95%
3 Year Performance- 9.69%
*Please note yields will change from month to month based on market conditions.17
Enhanced Income Investing – Covered calls
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BMO GAM is the industry leader in covered call ETFs
Source: ETFGI
Low Volatility ETFs
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• Over 5 years ZLB doubled the performance of ZCN (proxy for S&P/TSX Composite)
• Demonstrates the power of “low volatility” to guard against downturns and keep you in a strong position when equity prices recover
Source: Stockcharts.com as of Dec 31 2018
Risk
Management
Growth
& Income
What’s the right mix for me for the current markets?
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• Start with asset allocation
• Consider your risk tolerance given current markets
• Swap in Low Volatility solutions to reduce risk to meet your risk tolerance
• Use the remaining funds to allocate towards Growth or Income
ZLB BMO Low Volatility
Canadian Equity ETF
ZLU BMO Low Volatility US
Equity ETF
ZLIBMO Low Volatility
International Equity ETF
ZLEBMO Low Volatility Emerging Markets
Equity ETF
ZLU.UBMO Low Volatility US Equity ETF (U.S. Dollar
Units)
ZLDBMO Low Volatility
International Equity ETF Hedged to CAD
ZLHBMO Low Volatility US Equity ETF Hedged to
CAD
Trade Idea: Low Volatility
• Indicators such as the Morgan Stanley U.S. Cycle Index suggest we are at or very near the peak of the business cycle
• Exposure to low volatility strategies such as BMO Low Volatility Canadian Equity ETF (ZLB) and the BMO Low Volatility U.S. Equity ETF (ZLU) is a prudent way for investors to obtain defensive growth characteristics in a portfolio
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Morgan Stanley U.S. Cycle Index Historical levels levelsCurrent reading:
0.49
Trade Idea: Covered Call US Banks
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Chris McHaney
Director, Portfolio Manager BMO ETFs
• Accelerated dividend growth story and a play on US economic growth over Canada• Many US banks are well-positioned to benefit from rising rates in the form of
higher net interest margins and greater profits• Tax reform – roll back of Dodd-Frank, Consumer Protection Act• Consolidation in US Banks an added may provide additional growth• US banks pay 10x the amount of dividends they paid at the end of 2009.• BMO Covered Call US Banks ETF (ZWK)
Source: Bloomberg, as of Dec 31 2018
How to Implement Sector Investing
Economic cycles drive the market and market cycles drive sector rotation.• Economic Cycle
– Fluctuations within economic cycle consists of contractions (recessions) and expansion (growth)
• Market Cycle – Defensive sectors (also known as counter-cyclical sectors) such as Utilities, and Health
Care tends to perform well during recession and economic troughs– Cyclical sectors such as Financials, Industrials, and Information Technology tend to do well
when the economy is expanding.
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Defensive
Cyclical
Utilities
Industrials
Financials
REITs Health Care
Energy
Telecommunications
Materials
Consumer Staples Consumer Discretionary
Information Technology
Trade Idea: Canadian Banks
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• Valuations of the Big 6 Canadian banks have hit a 10-year low, relative to their average, technical indicators are showing an excellent buying opportunity
• Banks historically benefit from the early stages of a rising rate environment• Exposure to the Big 6 Canadian Banks is available in the BMO Equal Weight
Canadian Banks ETF (ZEB) offering potential for growth and income stability or with an enhanced yield component in the BMO Covered Call Canadian Banks ETF Fund (ZWB)
Trade Idea: US Health Care
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Steven Shepherd, CFADirector and Portfolio ManagerBMO Global Asset Management
• Recent sell off in pharma stocks due to Congressional inquiry into drug pricing unlikely to result in any major policy changes, given split congress and other policy focus
• Acceleration of net income growth for the sector since its lows of 2016, with forward P/E roughly one standard deviation below the 5 year average
• Represents single largest sector share within S&P500 of total offshore cash that can be repatriated for share buybacks
• Offers a measure of defense against core cyclicals should economic momentum falter.• BMO Equal Weight U.S. Health Care Index ETF (ZHU/ZUH [hedged])
Source: Bloomberg as of Dec 31 2018
Disclaimer
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds and ETFs. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund or ETF before investing. The indicated rates of return are the historical annual compounded total returns including changes in share or unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss.
BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.
®/™Registered trade-marks/trade-mark of Bank of Montreal, used under licence.
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BMO ETFs are engineered for stability in uncertain markets.Visit etfs.bmo.com
