Clarity in the U.S. Brings Cautious Optimism for Manager

How BMO's medalist fund manager is positioning his portfolio for a good forecast

Diana Cawfield 14 January, 2021 | 4:28AM
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U.S. Capitol Building

When it comes to mirroring the returns of the S&P 500 in the Bronze-medalist BMO U.S. Equity ETF D mandate, Chris Heakes is cautiously optimistic on the outcome for 2021. Heakes is director and portfolio manager of exchange-traded funds at BMO Global Asset Management in Toronto.

“I think clarity with the U.S. government,” says Heakes, “continued stimulus from the government, and the vaccine being rolled out, I think those are all the big picture items that are playing out.” 

As to the new government with Joe Biden and Kamala Harris, Heakes thinks that by the end of January there will be a pretty clear vision on what the government’s going to look like, following the run-off Senate elections.

The passively-managed fund invests up to 100% of its assets in securities of BMO S&P 500 Hedged to Canadian dollars. The goal is to remove the impact of currency movement. “But it’s not always going to be the case, says Heakes, “that by hedging you’re reducing volatility.”

Stocking up on Technology
The weightings in the Index change over time. For example, information technology has seen a steady increase in weight from approximately 16% in 2015 to almost 28% today. “This has mirrored the rise of technology in general,” says Heakes, “and as this work-from-home Covid environment took hold, and an increase in online shopping, it’s taken another step in the importance of our lives.” Those underlying technology stocks have also had very good returns this year, and “investors are seeing the value there.”  

As to the valuations, some segments of the technology may be overvalued but as an overall sector, Heakes thinks the valuations are at the upper end. “For example,” says Heakes, “the NASDAQ, which is a tech-heavy index, is up about 40% this year, but probably we’re not going to see that again.”

Holding Steady Around Financial and Healthcare Uncertainty
The approximate 13% weighting in financials has been relatively steady, although it dropped markedly in 2020. According to Heakes, financials have underperformed during the COVID selloff. Yet, he says that as we look forward to 2021, with political stability and stimulus, along with the vaccine rollout, this could improve the fundamentals for financials, and they could potentially outperform next year.

The health care weighting, representing approximately 15% of the Index, has remained relatively steady. With the new U.S. government assuming the Oval Office in January, investors have some concern around the increased regulation in the space and the impact on the profitability of health care companies. Heakes says the investment team has a neutral view for this sector because the demands for health care and innovations in the sector are tempered somewhat by the prospect of higher regulation.

Apple Inc. (AAPL) is the top holding in the Index, and has been the top holding, or near the top, for a number of years. “Generalizing,” says Heakes, “the adoption of technology and the rise of smartphones is obviously a big thing with Apple in terms of the iPhone. The product is user friendly and works well.” As well, the company is not limited to phones and includes offerings in music service and other entertainment services. “So Apple has established itself as a very dominant company in the industry.”

Amazon.com Inc. (AMZN) is also characteristic among the top holdings. “Online shopping,” says Heakes, “a big trend over the last few years, has accelerated with Covid. It’s another good example of where the stock price has gone up significantly and then correspondingly a bigger weight in the Index.”

Don't Forget the Essentials
In the consumer space, an example in the top 10 holdings is Johnson & Johnson (JNJ). “Certainly the economy has been challenging for a lot of people,” says Heakes, “but we still need our soap and consumer products to go about our lives. So Johnson & Johnson has always been a powerhouse in this space.” 

According to Heakes, the hallmark of index investing, but not all ETFs, is usually the benefit of diversification and lower fees. There’s transparency as well, in terms of investors knowing exactly what they’re investing in.

When considering the mandate, “as an equity investor,” says Heakes, “you’ve got a higher amount of risk compared to fixed income. But if you’re invested in equities and you’re looking for growth as a portion of your portfolio, this fund makes a lot of sense. When you’re investing in equities, you want to make sure that you’re diversified between markets and between companies and the U.S. is the largest equity market in the world.”

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Amazon.com Inc3,376.07 USD1.68Rating
Apple Inc149.32 USD0.46Rating
Johnson & Johnson165.75 USD1.02Rating

About Author

Diana Cawfield

Diana Cawfield  Diana Cawfield is an award-winning writer who has been a regular Morningstar contributor since 2000. Her numerous publication credits include the Toronto StarAdvisor's Edge and Chatelaine, as well as the Canadian Securities Institute's online educational services.

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