Fund Spy: BMO Balanced ETF vs. BMO Retirement Balanced Fund

Which of the two holds up over the long term?

Michael Dobson 10 February, 2023 | 1:58AM
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Michael Dobson: Last year was terrible for the 60-40 portfolio strategy. And though diversification didn't hold up, something else did – funds that offer downside protection. Many Canadian funds explicitly tried to contain downside protection using complex and non-conventional strategies, and it's worked in 2022. But what about the longer term? To find out, we compared the performance of two BMO funds, one traditional and the other not so much, and found that while the more complex approach did well last year, it lagged over the long term.

Let's take a look at the traditional approach first. The BMO Balanced ETF Portfolio (BMO95703) is a well-diversified 60-40 portfolio comprised of cheap and passive ETFs. It's slightly underperformed its Morningstar Category Index in 2022. Managers, Sadiq Adatia and Steven Shepherd, added a few new members last year to the team, and the introduction of shorter-term positions in 2021 should strengthen the strategy moving forward. All these changes need time to settle, which is the driving force behind the Neutral rating.

The second strategy approaches risk in a different way. The BMO Retirement Balanced Fund (BMO95225) uses derivatives to protect against downside moves. Portfolio managers, Chris Heakes and Chris McHaney, target risks that diversification alone cannot cover. An options strategy, the collar, caps both the upside and downside of its underlying positions, while the credit default swap pays off when perceived bankruptcy risks rise. 2022 proved a vindicating year, as the fund beat its Morningstar Category Index by almost 1%. However, options contracts can be tricky, and the strategy typically fell behind its peers. In fact, last year's performance was only the second calendar year since inception, where it outperformed BMO Balanced. 2022 gave the clear advantage to the BMO Retirement Balanced Portfolio. But 2022 was also an abnormal year where bonds behaved like stocks. Waiting for that to happen again and potentially falling behind peers for years isn't prudent for a retirement portfolio. It's hard to beat simplicity.

For Morningstar, I'm Michael Dobson.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
BMO Balanced ETF Portfolio F15.08 CAD0.14Rating
BMO Retirement Balanced Portfolio F13.43 CAD0.04Rating

About Author

Michael Dobson  Michael Dobson is an Associate Manager Research Analyst at Morningstar Canada

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