bmo etf portfolio strategy report · portfolio strategy report third uarter 2015 2 67 68 69 70 71...

7
BMO ETF Portfolio Strategy Report 0.7 0.9 1.1 1.3 1.5 1.7 1.9 2.1 2.3 Jun-2010 Aug-2010 Oct-2010 Dec-2010 Feb-2011 Apr-2011 Jun-2011 Aug-2011 Oct-2011 Dec-2011 Feb-2012 Apr-2012 Jun-2012 Aug-2012 Oct-2012 Dec-2012 Feb-2013 Apr-2013 Jun-2013 Aug-2013 Oct-2013 Dec-2013 Feb-2014 Apr-2014 Jun-2014 Aug-2014 Oct-2014 Dec-2014 Feb-2015 Apr-2015 Relative Implied Volatility (V2X/VIX) V2X Index / VIX Index 15 16 17 18 19 20 21 22 Jan-2010 Apr-2010 Jul-2010 Oct-2010 Jan-2011 Apr-2011 Jul-2011 Oct-2011 Jan-2012 Apr-2012 Jul-2012 Oct-2012 Jan-2013 Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014 Oct-2014 Jan-2015 Apr-2015 China Required Reserve Ratio (RRR) In this report: Recent Developments ............... 1 Things to Keep an Eye on .......... 2 Changes to the Portfolio Strategy .................... 3 Stats and Portfolio Holdings ................................... 4 Portfolio Characteristics .......... 5 The Good, the Bad, and the Ugly.............................6 All prices or returns as of market close on July 3, 2015, unless otherwise indicated. Alfred Lee, CFA, CMT, DMS Vice President, BMO ETFs Portfolio Manager & Investment Strategist BMO Asset Management Inc. [email protected] In this report, we highlight our strategic and tactical portfolio positioning strategies for the second quarter using various BMO Exchange Traded Funds. Our key strategy changes are outlined throughout the report and in our quarterly outlook on page six. The major focal point driving headlines over the next quarter will likely be the potential Greek exit (“Grexit”) from the European Union (“EU”). Although a Greek default would likely have limited direct impact on Canadian investors, the indirect impact will be felt through weaker global growth and thus lower commodity prices. Continued uncertainty over the Greek crisis will bring back the safe- haven trade (where there will be a flight to quality), despite bond yields rising on the long end of the yield curve over the second quarter. Over the last year, China’s stock market has become disconnected with its underlying economy. The Shanghai Composite Index had a total return of 133.3% (in local terms) in the year ended May 31, 2015 despite the growing concerns of a declining housing market, rising local government debt and expanding consumer credit. The Chinese central bank has taken initiative to increase liquidity by cutting lending rates and required reserve ratios (“RRR”), thereby increasing the use of margin in its stock market. Continued uncertainty in the global economy and its domestic equity market may lead to further de-risking. The geopolitical and macro-economic uncertainty in Europe and China respectively, may give the U.S. Federal Reserve (“Fed”) a reason to delay its “lift-off” of raising its overnight rate for the first time since the “Great Recession.” In the last several Federal Open Market Committee (“FOMC”) meetings, the U.S. central bank has made it clear that it will consider the broader global economy in setting its own monetary policy, despite data points that suggest its own economy continues to improve. With the ongoing market uncertainties, we expect equity volatility to elevate, particularly in Europe. The spread between the VSTOXX 50 Volatility Index (“VSTOXX”) and the CBOE Volatility Index, which measure implied volatility of European and U.S. stocks respectively, has begun to widen. Although we anticipate a broad based European equity market sell-off, the negative investor sentiment, should create some opportunities for long-term investors to participate in higher quality European companies with sound balance sheets (Chart B). The failure of a clear cut resolution between Greece and its creditors should steer the market towards a “risk-off” trade, which will favour longer duration bonds. We note, however, that increased volatility in interest rates and the ongoing unpredictability of central bank monetary policy brings significant risks to long-term bonds, despite their ability to hedge equity market “tail-risk”. A Greek Tragedy Chart A: China RRR Chart B: Implied Volatility Rising Faster in European Equities Source: Bloomberg Source: BMO Asset Management Inc., Bloomberg BMO EXCHANGE TRADED FUNDS Third Quarter 2015

Upload: others

Post on 25-Jun-2020

1 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

BMO ETF Portfolio Strategy Report

0.7

0.9

1.1

1.3

1.5

1.7

1.9

2.1

2.3

Jun-

2010

Aug-

2010

Oct-

2010

Dec-

2010

Feb-

2011

Apr-

2011

Jun-

2011

Aug-

2011

Oct-

2011

Dec-

2011

Feb-

2012

Apr-

2012

Jun-

2012

Aug-

2012

Oct-

2012

Dec-

2012

Feb-

2013

Apr-

2013

Jun-

2013

Aug-

2013

Oct-

2013

Dec-

2013

Feb-

2014

Apr-

2014

Jun-

2014

Aug-

2014

Oct-

2014

Dec-

2014

Feb-

2015

Apr-

2015

Rela

tive

Impl

ied

Vola

tility

(V2X

/VIX

) V2X Index / VIX Index

15

16

17

18

19

20

21

22

Jan-

2010

Apr-

2010

Jul-2

010

Oct-

2010

Jan-

2011

Apr-

2011

Jul-2

011

Oct-

2011

Jan-

2012

Apr-

2012

Jul-2

012

Oct-

2012

Jan-

2013

Apr-

2013

Jul-2

013

Oct-

2013

Jan-

2014

Apr-

2014

Jul-2

014

Oct-

2014

Jan-

2015

Apr-

2015

China Required ReserveRatio (RRR)

In this report:

Recent Developments ............... 1

Things to Keep an Eye on ..........2

Changes to the Portfolio Strategy ....................3

Stats and Portfolio Holdings ...................................4

Portfolio Characteristics ..........5

The Good, the Bad, and the Ugly .............................6

All prices or returns as of market close on July 3, 2015, unless otherwise indicated.

Alfred Lee, CFA, CMT, DMS Vice President, BMO ETFsPortfolio Manager & Investment StrategistBMO Asset Management [email protected]

In this report, we highlight our strategic and tactical portfolio positioning strategies for the second quarter using various BMO Exchange Traded Funds. Our key strategy changes are outlined throughout the report and in our quarterly outlook on page six.• The major focal point driving headlines over the next quarter will likely be the potential Greek

exit (“Grexit”) from the European Union (“EU”). AlthoughaGreekdefaultwouldlikelyhavelimiteddirectimpactonCanadianinvestors,theindirectimpactwillbefeltthroughweakerglobalgrowthandthuslowercommodityprices.ContinueduncertaintyovertheGreekcrisiswillbringbackthesafe-haventrade(wheretherewillbeaflighttoquality),despitebondyieldsrisingonthelongendoftheyieldcurveoverthesecondquarter.

• Over the last year, China’s stock market has become disconnected with its underlying economy. TheShanghai Composite Indexhadatotalreturnof133.3%(inlocalterms)intheyearendedMay31,2015despitethegrowingconcernsofadeclininghousingmarket,risinglocalgovernmentdebtandexpandingconsumercredit.TheChinesecentralbankhastakeninitiativetoincreaseliquiditybycuttinglendingratesandrequiredreserveratios(“RRR”),therebyincreasingtheuseofmargininitsstockmarket.Continueduncertaintyintheglobaleconomyanditsdomesticequitymarketmayleadtofurtherde-risking.

• The geopolitical and macro-economic uncertainty in Europe and China respectively, may give the U.S. Federal Reserve (“Fed”) a reason to delay its “lift-off” of raising its overnight rate for the first time since the “Great Recession.” InthelastseveralFederalOpenMarketCommittee(“FOMC”)meetings,theU.S.centralbankhasmadeitclearthatitwillconsiderthebroaderglobaleconomyinsettingitsownmonetarypolicy,despitedatapointsthatsuggestitsowneconomycontinuestoimprove.

• With the ongoing market uncertainties, we expect equity volatility to elevate, particularly in Europe. ThespreadbetweentheVSTOXX 50 Volatility Index (“VSTOXX”)andtheCBOE Volatility Index,whichmeasureimpliedvolatilityofEuropeanandU.S.stocksrespectively,hasbeguntowiden.AlthoughweanticipateabroadbasedEuropeanequitymarketsell-off,thenegativeinvestorsentiment,shouldcreatesomeopportunitiesforlong-terminvestorstoparticipateinhigherqualityEuropeancompanieswithsoundbalancesheets(ChartB).

• The failure of a clear cut resolution between Greece and its creditors should steer the market towards a “risk-off” trade, which will favour longer duration bonds.Wenote,however,thatincreasedvolatilityininterestratesandtheongoingunpredictabilityofcentralbankmonetarypolicybringssignificantriskstolong-termbonds,despitetheirabilitytohedgeequitymarket“tail-risk”.

A Greek Tragedy

Chart A: China RRR Chart B: Implied Volatility Rising Faster in European Equities

Source: Bloomberg Source: BMO Asset Management Inc., Bloomberg

BMO EXCHANGE TRADED FUNDSTh i rd Quar ter 2015

Page 2: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

Portfolio Strategy Report – Third Quarter 2015 2

67

68

69

70

71

72

73

74

Jun-

2014

Jun-

2014

Jul-2

014

Aug-

2014

Sep-

2014

Sep-

2014

Oct-

2014

Nov-

2014

Nov-

2014

Dec-

2014

Jan-

2015

Jan-

2015

Feb-

2015

Mar

-201

5

Mar

-201

5

Apr-

2015

May

-201

5

Jun-

2015

Jun-

2015

CITI Earnings Growth PureEurope Index

0

0.2

0.4

0.6

0.8

1

1.2

Shor

t Ter

mCo

rpor

ate

Shor

t Ter

mPr

ovin

cial

Shor

t Ter

m F

eder

al

Mid

Ter

mCo

rpor

ate

Mid

Ter

mPr

ovin

cial

s

Mid

Ter

m F

eder

al

Long

Ter

mCo

rpor

ate

Long

Ter

mPr

ovin

cial

Long

Ter

m F

eder

al

Yiel

d to

Vol

atili

ty

3

3.5

4

4.5

5

5.5

6

Jun-

2009

Oct-

2009

Feb-

2010

Jun-

2010

Oct-

2010

Feb-

2011

Jun-

2011

Oct-

2011

Feb-

2012

Jun-

2012

Oct-

2012

Feb-

2013

Jun-

2013

Oct-

2013

Feb-

2014

Jun-

2014

Oct-

2014

Feb-

2015

Mon

thly

Sal

es (M

illio

ns)

U.S. Existing Home Sales(Seasonally Adjusted)

Things to Keep an Eye on...

WiththedurationoftheoverallCanadianbonduniverseincreasing,themajorityofbondinvestorsarenowmoreexposedtomoreinterestrateriskthantheymaydesire.Inthelastdecadealone,thedurationoftheFTSE/TMX Canada Universe Bond Indexhasincreasedfrom6.2to7.4.Thisisaresultofissuerslookingtocapitalizeonlowerinterestrates.ThoughitisunlikelythattheBoCraisesitsovernightrateinthenearfuture,Canada’slongertermmonetarypolicyremainsuncertain,resultinginvolatilityonthelong-endofthecurve.

Recommendation:Despitethevolatilityinthebondmarket,investorsshouldnotbeeliminatingexposuretofixedincomeintheirportfolio.Inthecontextofportfolioconstruction,bondsplayavitalrole.Althoughbondshaverecentlybecomemoreequity-likebothfromareturnsandriskperspective,ETFsallowinvestorstotargetspecificareasoftheyieldcurve.Bydissectingthebondmarketintosegmentsandmeasuringthembasedonyieldtomaturity(“YTM”)tovolatility(yieldtovolatility),investorscanbettertargetareasthatofferbetterrisk-adjustedyield.

CompaniesintheEurozonewillbedirectlyorindirectlyaffectedbytheongoingdevelopmentsinGreece,butthebroaderEuropeanequitymarketshouldnotbepaintedwiththesamebrush.Asell-offintheregioncouldpotentiallycreatebetterentrypointsforlong-terminvestorsinhigherqualitycompanieswithsoundbalancesheets.Blue-chip,multi-nationalcompaniesdomiciledinEuropehaveglobalrevenuestreamsandmorestableearnings.

Recommendation:WhileaGreekcrisismayputpressureonEuropeanequities,wecontinuetobelieveopportunitiesresideinbroaderEurope.EarningsandrevenuegrowthcouldcontinueforEuropeancompaniesshouldthecrisisremainrelativelycontained.ShouldtheEuropeanCentralBank(“ECB”)respondwithmorequantitativeeasing(“QE”)oroutrightmonetarytransactions(“OMT”),accommodativemeasurestendtobefavourableforequities,althoughnegativeforacurrency.BMO MSCI Europe High Quality Hedged to CAD Index ETF (ZEQ)providesequitymarketexposureandhedgestheCAD/EURexposure.

Source: BMO Asset Management Inc., Bloomberg

AlthoughwehavebeendecreasingourexposuretoU.S.equitiesoverthelastseveralquarters,westillremainbullishonU.S.equities.OneareaoftheU.S.equitymarketthatwehaveoverweightedinourportfoliostrategyisitsbankingsector.TheU.S.yieldcurve,whichsteepenedoverthesecondquarterinanticipationofaU.S.FederalReserve(“Fed”)overnightrate“lift-off,”hasbenefittedU.S.banks,whichborrowontheshort-endandlendonthelong-endofthecurve.Thisquarter,wewilllikelyseetheyieldcurvereversecourseintheU.S.asglobalmarketuncertaintieswillpushlongbondpricesupandyieldsdown,whichmayweighonU.S.banks.

Recommendation:Inadditiontoapotentialchangeintheyieldcurve,therearenumberofpush-pullfactorsatplaywithU.S.banks.AstrengtheninghousingmarketandreturningconsumerconfidenceshouldbebeneficialforU.S.banksasawhole,butanumberofU.S.bankshaveglobalexposurewithdirectorindirectexposuretoEurope.Despite,theuncertaintyinU.S.banks,wecontinuetoremainpositiveonthesectorandwecontinuetoholda4.0%positionintheBMO Equal Weight U.S. Banks Index ETF (ZBK).AlthoughtheU.S.banksmaybecomemorevolatile,ZBKhasahighexposuretoregionalbankswhicharemoreexposedtothedomesticU.S.economy.Additionally,theequalweightingstrategy,couldhelpmitigatecompanyspecificrisk.

Source: Bloomberg

Source: Bloomberg

Page 3: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

Portfolio Strategy Report – Third Quarter 2015 3

Changes to Portfolio StrategyAsset Allocation:

• BondmarketvolatilityhasremainedelevatedgiventhehighcompositionoflongdurationbondsintheoverallCanadianfixedincomeuniverse.WiththeGreekdebtcrisiscomingtotheforefront,however,bondsmaybenefitoverthecomingquarterduetothesafe-haventrade.Equitymarketvolatility,whichwaswellbelowlong-termaveragespriortoGreecedefaultingonitsdebtpayment,indicatesthatriskswerenotfullypricedintothemarket.Despitethesignificantdevelopmentsoverthelastmonthintheglobaleconomy,wewillnotbemakingdrasticchangestoourportfoliostrategythisquarter.Ourportfoliostrategyhasalreadybeenpositioneddefensively,wellbalancedbetweenequities,bondsandnon-traditionalassets.

Fixed Income:

• Aspreviouslymentioned,wearebecomingincreasinglyconcernedaboutthesteadilyrisingdurationoftheoverallfixedincomeuniverse.AlthoughtheBMO Discount Bond Index ETF (ZDB)providestaxefficientexposuretotheoverallCanadianbonduniversebymatchingtheportfolio’syieldtomaturityandcoupon,wearedecreasingourexposuretothisETFsinceitseekstomaintaintheoverallcharacteristicsoftheFTSE/TMX Canada Universeandhasadurationof7.4.Thisquarter,wearereducingourweightinZDBby3.0%andallocatingtheproceedstotheBMO Mid Corporate Bond Index ETF (ZCM),whichhasashorterdurationof6.1.

Equities:

• Overthelastseveralquarters,wehaveincreasedourweightingtoEuropeanequitiesthroughboththeBMO MSCI Europe High Quality Hedged to CAD Index ETF (ZEQ)andtheBMO International Dividend ETF (ZDI),andweremaincontentinourgeographicalallocation.Asmentionedonthepreviouspage,ZEQscreensforhigherqualitycompaniesthatexhibithighreturnonearnings(“ROE”),lowyear-over-yearearningsvariabilityandlowfinancialleverage.LookingatthebalancesheetoftheETF’sconstituents,ZDIscreensforstockswithgrowingdividendyieldsandsustainablepayoutratios.WhiledeterioratingsentimentonEuropeanequitiesmaybeanear-termheadwind,webelievethatthe“smartbeta”approachthatthesetwoETFsutilizemaybettermitigatelong-termrisksrelativetotheirmarket-capitalizationweightedcounterparts.

• WhileitisunclearhowmuchcontagionriskaGreekdefaultposes,thepotentialofcontagiontothebroaderEuropeaneconomyismorelikelyshouldItalyand/orSpaindefault.OngoingheadlinesofGreeceincomingmonthswilllikelykeepequityvolatilityhigherthanhistoricalnorms.ThemajorityofourcoreequitypositionsremaindefensivelypositionedwithexposurestoboththeBMO Low Volatility Canadian Equity ETF (ZLB)andtheBMO Low Volatility U.S. Equity ETF (ZLU).UtilizinglowvolatilityETFsshouldhelpmitigatevolatilityshouldmarketsreactnegativelytoheadlineriskandremainequitizedshouldmarketsrallyonaresolutionbetweenGreeceanditscreditors.

Non-Traditional:

• WebelievepreferredsharesofferattractivevaluationsinthewakeofJanuary’sBoCsurpriseratecut.Despiteourexpectationsthatvolatilitywillremainhigherthanhistoricalnorms,preferredsharesofferanattractivecurrentyieldanditsdistributionsaretaxedasdividendsratherthanincome.Wecontinuetoholda5.0%weightingintheBMO S&P/TSX Laddered Preferred Share Index ETF (ZPR),whichholdsrateresetpreferredsharesinaladderedstructure.Rateresetpreferredsharesprovidemitigationagainstrisingrates.WhiletheBankofCanada(BoC)maypotentiallycutitsovernightrateagain,preferredsharesofferattractivecurrentyields.Unlike2008and2009,theweaknessinthepreferredsharemarketisnotsolvencyrelatedbutentirelyinterestraterelated.Preferredsharesoffertaxefficientyieldforthosethatcanacceptthenear-termvolatility.

Sell/Trim Ticker (%) Buy/Add Ticker (%)

BMO Discount Bond Index ETF ZDB 3.0% BMO Mid Corporate Bond Index ETF ZCM 3.0%

Total 3.0% Total 3.0%

Page 4: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

Portfolio Strategy Report – Third Quarter 2015 4

Ticker ETF Name Position Price MER1 Weight (%)

90-Day Vol

Volatility Contribution

Yield (%)*

Yield/Vol

Fixed Income

ZDB BMO DISCOUNT BOND INDEX ETF Debt Core $15.89 0.20% 11.0% 5.3 5.6% 2.1% 0.39

ZIC BMO MID-TERM U.S. IG CORPORATE BOND INDEX ETF Debt Tactical $17.87 0.25% 10.0% 11.1 10.7% 3.7% 0.33

ZCM BMO MID CORPORATE BOND INDEX ETF Debt Tactical $16.37 0.12% 12.0% 5.7 6.6% 3.6% 0.62

Total Fixed Income 33.0% 22.9%

Equities

ZLB BMO LOW VOLATILITY CANADIAN EQUITY ETF Equity Core $26.71 0.35% 8.5% 9.2 7.5% 2.7% 0.30

ZDV BMO CANADIAN DIVIDEND ETF Equity Core $16.55 0.35% 5.0% 9.9 4.8% 4.7% 0.47

ZLU BMO LOW VOLATILITY U.S. EQUITY ETF Equity Core $25.36 0.10% 9.0% 13.2 11.4% 2.8% 0.21

ZDI BMO INTERNATIONAL DIVIDEND ETF Equity Core $20.78 0.40% 11.0% 14.9 15.7% 5.4% 0.36

ZEQ BMO MSCI EUROPE HIGH QUALITY HEDGED TO CAD ETF Equity Tactical $17.03 0.40% 7.0% 15.9 10.7% 2.7% 0.17

ZWB BMO COVERED CALL BANKS ETF Equity Tactical $16.13 0.65% 3.0% 10.3 3.0% 6.5% 0.64

ZEO BMO S&P/TSX EQUAL WEIGHT OIL & GAS INDEX ETF Equity Tactical $11.64 0.55% 3.0% 18.5 5.3% 4.2% 0.23

ZWA BMO COVERED CALL DOW JONES INDUSTRIAL AVERAGE HEDGED TO C$ ETF Equity Tactical $19.46 0.65% 3.0% 11.2 3.2% 5.9% 0.53

ZBK BMO EQUAL WEIGHT U.S. BANKS INDEX ETF Equity Tactical $19.18 0.35% 4.0% 17.0 6.5% 2.1% 0.12

Total Equity 53.5% 68.3%

Non-Traditional/Hybrids

ZFH BMO FLOATING RATE HIGH YIELD ETF Debt Tactical $14.73 0.40% 3.5% 7.2 2.4% 4.7% 0.65

ZPR BMO S&P/TSX LADDERED PREFERRED INDEX ETF Debt Tactical $11.93 0.45% 5.0% 7.4 3.6% 4.9% 0.66

ZEL BMO EQUITY LINKED CORPORATE BOND ETF Debt Tactical $20.05 0.40% 5.0% 5.7 2.7% 3.8% 0.66

Total Alternatives 13.5% 8.7%

Total Cash 0.0% 6.1 0.0% 0.0%

Portfolio 0.32% 100.0% 10.4 100.0% 3.7% 0.361 MER as of July 3, 2015

Ticker Top Holdings Weight

ZCM BMO MID CORPORATE BOND INDEX ETF 12.0%

ZDB BMO DISCOUNT BOND INDEX ETF 11.0%

ZDI BMO INTERNATIONAL DIVIDEND ETF 11.0%

ZIC BMO MID-TERM U.S. IG CORPORATE BOND INDEX ETF 10.0%

ZLU BMO LOW VOLATILITY U.S. EQUITY ETF 9.0%

ZLB BMO LOW VOLATILITY CANADIAN EQUITY ETF 8.5%

ZEQ BMO MSCI EUROPE HIGH QUALITY HEDGED TO CAD ETF 7.0%

ZDV BMO CANADIAN DIVIDEND ETF 5.0%

ZPR BMO S&P/TSX LADDERED PREFERRED INDEX ETF 5.0%

ZEL BMO EQUITY LINKED CORPORATE BOND ETF 5.0%

ZBK BMO EQUAL WEIGHT U.S. BANKS INDEX ETF 4.0%

ZFH BMO FLOATING RATE HIGH YIELD ETF 3.5%

ZWB BMO COVERED CALL BANKS ETF 3.0%

ZEO BMO S&P/TSX EQUAL WEIGHT OIL & GAS INDEX ETF 3.0%

ZWA BMO COVERED CALL DOW JONES INDUSTRIAL AVERAGE HEDGED TO C$ ETF 3.0%

Core 44.5%

Tactical 55.5%

Cash

Alternatives

Equities

Fixed Income

Stats and Portfolio Holdings

Investment Objective and Strategy: The strategy involves tactically allocating to multiple asset-classes and geographical areas to achieve long-term capital appreciation and total return by investing primarily in exchange traded funds (ETFs).

Non-Traditional (11.5%)

Equities (55.5%)

Fixed Income (33.0%)

*Yieldcalculationsforbondsisbasedonyieldtomaturity,whichincludescouponpaymentsandanycapitalgainorlossthattheinvestorwillrealizebyholdingthebondstomaturityandforequitiesitisbasedonthemostrecentannualizedincomereceiveddividedbythemarketvalueoftheinvestments.

**Cashisbasedoffthe3-quarterCanadianDealerOfferedRate(CDOR).

Page 5: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

Portfolio Strategy Report – Third Quarter 2015 5

Portfolio Characteristics

Financials 27.7%

Health Care 7.8%

Industrials 7.5%

Information Technology 3.0%

Materials 4.1%

Telecommunication Services 4.9%

Utilities 10.1%

Consumer Discretionary 10.4%

Consumer Staples 12.0%

Energy 12.4%

Canada 52.5%

United States 29.5%

Europe 15.2%

Asia 2.8%

Federal 9.9%

Provincial 9.0%

Investment Grade Corporate 72.7%

Non-Investment Grade Corporate 8.4%

Weighted Average Term 7.60

Weighted Average Duration 5.94

Weighted Average Coupon 3.5%

Weighted Average Current Yield 3.3%

Weighted Average Yield to Maturity 2.8%

Equity Sector Breakdown

Regional Breakdown (Overall Portfolio)

Fixed Income Breakdown

Utilities

Telecommunication Services

Materials

Information Technology

Industrials

Health Care

Financials

Energy

Consumer Staples

Consumer Discretionary

Cash

Emerging Markets

United States

Canada

WeightedAverageCurrentYield:Themarketvalueweightedaveragecoupondividedbytheweightedaveragemarketpriceofbonds.

WeightedAverageYieldtoMaturity:Themarketvalueweightedaverageyieldtomaturityincludesthecouponpaymentsandanycapitalgainorlossthattheinvestorwillrealizebyholdingthebondstomaturity.

WeightedAverageDuration:Themarketvalueweightedaveragedurationofunderlyingbondsdividedbytheweightedaveragemarketpriceoftheunderlyingbonds.Durationisameasureofthesensitivityofthepriceofafixedincomeinvestmenttoachangeininterestrates.

*Regional Breakdown includes equities, fixed income and alternative sleeves.

Page 6: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

Portfolio Strategy Report – Third Quarter 2015 6

The Good, the Bad, and the Ugly

Conclusion: BothGreeceandChinawilldriveheadlineriskoverthenextquarter,whichwillputpressureonglobalgrowth.Although,thedirectimplicationstoCanadashouldbeminimal,oureconomywouldbeindirectlyaffectedbylowercommodityprices.AnindefiniteresolutionbetweenGreeceanditscreditorsandafailurebythePeople’sBankofChina(PBOC)toengineerasoftlandinginitsstockmarketwillcreateanoverhangonriskassetsandglobalgrowthexpectations.WeexpectthistoputpressureontheBankofCanadatoconsiderloweringitsovernightrate.Defensiveareasofthemarketwilllikelyoutperformoverthequarterwithbondyieldsremainingvolatileastheoverhangremains.

Global-Macro/Geo-Political Fundamental Technical

Good

• DatacontinuestosuggesttheU.S.economicrecoverycontinueswithunemploymentnowat5.3%,constructionspendingontheriseandISMmanufacturingabove50.

• U.S.existinghomesalescontinuestoremainsteadyregistering5.35millionunitsinJune2015.

• Eurozonemanufacturingisstillabove50,whichsuggestsexpansiondespitetheongoingconcernsinEurope.

• OngoingpressureoncommoditieswilllikelykeepinterestrateslowinCanada,whichshouldbenefitCanadians,whichcurrentlyhavehighhouseholddebtlevels.

• DespitethepositiveeconomicdataintheU.S.,theFederalReservemaylookatbroader.economywhendecidingwhentoraiseitsovernightrate.

• LowvolatilitystocksaretradingatapremiuminCanada,butwithongoingmacro-economicconcerns,highervaluationsarejustified.

• TheCanadianREITindustryiscurrentlytradingataP/CFof13.6x,a7.8%premiumtoits10-yearaverage.ApersistentlowinterestrateenvironmentshouldbegoodforREITs,aslongasadeteriorationintheeconomynotweighsignificantlyonoccupancyrates.

• LowerbetastocksinCanadacontinuetogainrelativestrengthagainsttheS&P/TSXCompositeIndex.WeexpectlowvolatilitystockstooutperforminCanada.

• Wecontinuetoexpectcorrelationsbetweenandwithinassetclassestodriftloweroverthelong-term.Amarketsell-off,however,wouldcausecorrelationstoriseintheshort-term.

• Short-termmomentuminEuropeanstocksisdeclining,potentiallycreatingabuyingopportunity.However,arisk-offtradewouldcausecorrelationstoriseovertheshort-term.Overthelonger-term,wearebullishonhigherqualityEuropeanstocks.

Bad

• AGreekexitmaycausedownstreameffectstotheEuropeanUnion.FocusmayshifttootherindebtedmembersoftheEU.

• UnemploymentinCanadacontinuestoholdat6.8%.Weakerglobaleconomycouldpostponeplansforfirmstohire.

• China’sstockmarketfinallylookstobereflectiveoftheunderlyingeconomicconcerns.

• TheHSBCChinaManufacturingPMIIndexagaindippedlowerto49.4%.Avalueoflessthan50%suggestsacontractingmanufacturing.

• ArisingU.S.dollarmaycausetheFederalReservetodelayitsratehike.

• Trailing12monthEPSfortheS&P500CompositeIndexisathistorichighs.Continuedpriceexpansionsareunlikelytobemetwithearningsgrowth.

• ThecurrentP/EratiooftheS&P/TSXComposite is20.0x.Therecontinuestobeadivergencebetweenthevaluationofdefensiveorientedstocksandcyclicalstocks.

• Canadianenergystocksaretrendinglower,currentlytestingprevioussupportlevels.

• OngoingheadlineriskofGreeceandtheU.S.willbenefitthesafehaventrade.ThisshouldbenefittheU.S.dollarandtheJapaneseYen,whichhavebrokenout.

• Equitymarketvolatilityhasrecentlybrokenout,butstillremainlowerthanitslongtermaverage.Furthernegativedevelopmentscouldtakevolatilityhigher.

Ugly

• OurconcernsabouttheCanadianeconomycontinuetomount.Householddebttoincomelevelshavebeenrunningathistorichighs.Acombinationofloweroilpricesandpotentiallyfallingrealestateprices,willplacepressureontheCanadianhousehold.

• OilsupplycontinuestobuildwithasurpluscomingfromOPECandreportedlyCanada.

• ThevaluationoftheAthensStockExchange(ASE) hascomeoffsignificantlyintermsofitsP/Eratio.WithitscurrentP/Estillat23.6x,itsmarketisstilltradingrich,givenitsongoingeconomicconcerns.

• Themargindebt levelscontinuetobeourgreatestconcernasitisatall-timehighs.Asizablemarketsell-offwouldlikelyleadadeleveragingeventmoreseverethanthegreatfinancialcrisisof2008-2009.

• CommodityrelatedcurrenciessuchastheCanadiandollar,NorwegianKronaandtheAustraliandollarwilllikelycontinuetoweakenrelativetotheU.S.dollar.Loweroilpricescouldcauseinterestratestodiverge,thesafehaventradewillputfurtherpressureoncommoditycurrencies.

Page 7: BMO ETF Portfolio Strategy Report · Portfolio Strategy Report Third uarter 2015 2 67 68 69 70 71 72 73 74 Jun-2014 Jun-2014 Jul-2014 Aug-2014 Sep-2014 Oct-2014 Nov-2014 Nov-2014

”S&P®” and “S&P 500®” are trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “TSX” is a trademark of TSX Inc. These trademarks have been licensed for use by S&P Dow Jones Indices LLC and sublicensed to BMO Asset Management Inc. in connection with ZSP, ZIN and ZPR. ZSP, ZIN and ZPR are not sponsored, endorsed, sold or promoted by S&P Dow Jones LLC, S&P, TSX, or their respective affiliates and S&P Dow Jones Indices LLC, S&P, TSX and their affiliates make no representation regarding the advisability of trading or investing in such ETFs.

The Dow Jones Industrial Average Index is a product of S&P Dow Jones Indices LLC and has been licensed for use by the BMO Asset Management Inc. Dow Jones®, Dow Jones Industrial Average®, and DJIA® are registered trademarks of Dow Jones Trademark Holdings LLC (“Dow Jones”), and have been licensed to S&P Dow Jones Indices LLC and and sublicensed for use by BMO Asset Management Inc. in connection with ZWA. ZWA is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, or their respective affiliates, and S&P Dow Jones Indices LLC, Dow Jones and their respective affiliates make no representation regarding the advisability of trading or investing in such ETF.

The exchange traded funds referred to herein are not sponsored, endorsed or promoted by MSCI, and MSCI bears no liability with respect to any such exchange traded funds or any index on which such exchange traded funds are based. The prospectus contains more detailed description of the limited relationship MSCI has with BMO Asset Management Inc. and any related exchanged traded fund.

This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

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.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. The indicated rates of return are the historical annual compound total returns including changes in prices and reinvestment of all distributions and do not take into account commission charges or income taxes payable by any unitholder that would have reduced returns. Please read the prospectus before investing. Exchange traded funds are not guaranteed, their value change frequently and past performance may not be repeated.

® “BMO (M-bar roundel symbol)” is registered trade-mark of Bank of Montreal, used under licence.

Visit bmo.com/etfs or contact Client Services at 1-800-361-1392.

Portfolio Strategy Report – Third Quarter 2015 7