BMO ETFs expands in foreign equities and fixed income

Rudy Luukko 12 November, 2014 | 6:00PM
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BMO Asset Management Inc. today added four exchange-traded funds to its extensive line-up, of which three will employ rules-based strategies in foreign equity categories. The fourth new ETF is a fixed-income mandate that will have an equity kicker. With the newcomers that began trading today on the Toronto Stock Exchange, BMO now offers 62 ETFs.

The four newest are:

BMO MSCI USA High Quality Index (ZUQ), designed to provide exposure to growing and financially sound U.S. companies. The ETF's reference index is the MSCI USA Quality Index, whose constituent holdings are selected from the market-capitalization-weighted MSCI USA Index of large- and mid-cap stocks. The MSCI USA Quality Index screens for high returns on equity, stable year-over-year earnings growth and low financial leverage.

BMO MSCI All Country World High Quality Index (ZGQ), which invests in both developed and emerging markets. The ETF's reference index is a subset of the market-cap-weighted MSCI ACWI Index. The screening techniques are similar to those of the MSCI USA Quality Index. The BMO global-equity ETF may employ sampling techniques as an alternative to holding each of the constituent securities of its benchmark index. (So can the new U.S. ETF, though BMO states in the prospectus that it does not expect to do so.)

Weighting of holdings for the global and U.S. "high-quality" ETFs will be based on a combination of their market capitalizations and their quality scores as determined by the MSCI methodologies. These are subject to a maximum weighting of 5% per holding. The indexes are rebalanced semi-annually, as of the close of the last business days of November and May.

BMO International Dividend (ZDI), whose mandate is to invest in large- and mid-cap overseas companies with sustainable dividend yields. This ETF is managed internally by the BMO Asset Management team led by Rob Bechard, head of ETF portfolio management.

Securities selection will be based on a rules-based methodology whose criteria include the three-year dividend-growth rate, dividend yield and payout ratios. The underlying portfolio will be rebalanced in June and reconstituted in December.

BMO Equity Linked Corporate Bond ETF (ZEL), which along with investment-grade Canadian corporate bonds will invest in equity-market options that are linked to broad indexes such as the S&P/TSX Capped Composite Index. This ETF, also managed by the BMO Asset Management team, will use a portion of the bonds' interest payouts to buy options.

The fixed-income component may consist of direct bond purchases or ETFs. The options may be based on the BMO S&P/TSX Capped Composite Index ZCN, directly on a broad Canadian equity index or on individual stocks.

According to the prospectus, the ETF may employ a long-call spread strategy. This strategy involves buying call options at a lower strike price, while selling call options at a higher strike price.

ETF Symbol Mgmt fee
BMO MSCI USA High Quality Index ZUQ 0.30%
BMO MSCI All Country World High Quality Index ZGQ 0.45%
BMO International Dividend ZDI 0.40%
BMO Equity Linked Corporate Bond ZEL 0.40%
Source: BMO Asset Management Inc.

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About Author

Rudy Luukko

Rudy Luukko  Rudy Luukko is a freelance writer who contributes to Morningstar.ca 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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