BMO's U.S. equity ETF employs Shiller's cyclical price-earnings screens

MSCI value and high-yield index strategies also launched.

Rudy Luukko 11 October, 2017 | 5:00PM
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BMO's sprawling family of exchange-traded funds grew larger today with the launch of five new ETFs, most notably a U.S. equity strategy based on the research of the prominent academic and Nobel laureate Robert Shiller.

BMO Shiller Select US Index (ZEUS) invests in U.S. equities that score well according to the Cyclically Adjusted Price Earnings (CAPE) methodology created by Shiller, a professor of economics and finance at Yale University. The ETF's reference index is the Shiller Barclays CAPE US Single Stock Index, which combines value and momentum criteria.

The CAPE methodology seeks to capture the performance of long-term undervalued U.S. securities, subject to minimum criteria for market capitalization and liquidity. "It is a different approach to value investing and was designed to identify stocks that are well established and relatively forgotten, with a long history of earnings but underpriced in the market," Shiller is quoted as saying in a BMO Asset Management Inc. release.

Shiller's accomplishments include being the co-winner of the Nobel economics prize in 2013. The award was for an analysis of asset prices that Shiller co-authored with fellow Nobel recipients Eugene F. Fama and Lars Peter Hansen.

Shiller's CAPE ratio looks at how current stock prices compared to the company's average inflation-adjusted earnings over 10 years. As described in the BMO prospectus, the indexing process for its ETF involves identifying the top 100 securities with the highest 10-year CAPE yield based on price and sector. A momentum filter is then applied to remove 20 securities with the lowest price momentum over the last 12 months. The remaining securities are equally weighted.

At 0.65%, BMO Shiller Select US Index has the highest management fee of the five new BMO ETFs launched today on the Toronto Stock Exchange. (See table.) BMO's management fees also cover most expenses.

Three other new BMO ETFs -- BMO MSCI Canada Value Index (ZVC), BMO MSCI USA Value Index (ZVU) and BMO MSCI EAFE Value Index (ZVI) -- provide exposure to large- and mid-cap stocks with higher value characteristics than their sector peers in the broad MSCI indexes. Securities selection is based on a formula that factors in three variables: price-to-book value, price-to-forward earnings and enterprise value-to-cash flow from operations.

The three MSCI indexes on which the value ETFs will be based are the MSCI Canada Enhanced Value Capped Index, the MSCI USA Enhanced Value Capped Index and the MSCI EAFE Enhanced Value Region Neutral Capped Index. All three of these indexes apply a 10% cap on the holdings of any one security. In addition, the international equity ETF will rebalance regional weights semi-annually to match the MSCI EAFE Index.

Rounding out BMO's five new ETFs is BMO High Yield US Corporate Bond Index (ZJK). Its reference index, which is weighted according to market capitalization and rebalanced monthly, is the Bloomberg Barclays U.S. High Yield Very Liquid Index.

The index constituents are corporate bonds that are non-investment grade and denominated in U.S. dollars. To be included in the index, each issue must have at least US$500 million outstanding. This BMO ETF expects to make monthly distributions, while the four equity newcomers will distribute income, if any, quarterly.

Today's five launches bring to 95 the total number of BMO ETFs, Canada's second largest ETF provider with total assets of $42.8 billion as of Sept. 30.

Fund Symbol Mgmt fee (%)
BMO Shiller Select US Index ZEUS 0.65
BMO MSCI Canada Value Index ZVC 0.35
BMO MSCI USA Value Index ZVU 0.30
BMO MSCI EAFE Value Index ZVI 0.40
BMO High Yield US Corporate Bond Index ZJK 0.55
Source: BMO Asset Management Inc.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to on topics involving fund industry trends and regulatory issues. He retired in May 2018 from his position as editor, investment and personal finance, at Morningstar Canada, where he had worked since 2004. He has also worked as an editor and writer for various general, specialty and institutional media, and he has co-authored courses for the Canadian Securities Institute. Follow Rudy on Twitter: @RudyLuukko.

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