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Superior Smart Beta


Smart Beta or factor-based investing has become an industry buzzword, but it is a strategy that has been utilized by institutions since the 1970's. It is defined as any weighting methodology that tilts towards a specific factor. Methodologies can range from rules based strategies that place an emphasis on specific factors such as volatility or dividends. Smart beta solutions provide the flexibility to invest in factors that provide targeted exposures and the potential long term outperformance.

BMO ETFs smart beta suite delivers market exposure with thoughtful portfolio construction that can be implemented as a core portfolio holding. BMO ETFs superior smart beta solutions deliver the right factor exposures to aid in effective portfolio construction. Learn more about BMO ETFs smart beta strategies:


  • Low Volatility
  • Quality
  • Dividend
  • Equal Weight
  • Value

Low Volatility


Target Low Risk Broad Market Exposure

The trade-off between risk and return remains at the heart of portfolio construction and investing. Particularly following the market downturn of 2008, investors have become more aware of portfolio risk levels in addition to returns. They are questioning how much risk is in their portfolio and how it will affect their returns. Our low volatility strategy allows investors to target a specific portfolio risk level that is lower than the broad market.


History has shown that less volatile or defensive stocks have outperformed the broad market over the long-term, as less volatile stocks may benefit from a smaller decline during market corrections while still increasing during advancing markets. Additionally, low volatility stocks tend to be more mature and have a higher dividend yield. Conversely, higher volatility stocks underperform over time, as investors are willing to pay a premium for "lottery tickets", high risk, high reward stocks that often do not meet expectations. Investors have been attracted to these stocks, preferring short-term big winners over long-term steady performers.

Focusing on Beta

To develop the low volatility strategy, we focus on the beta of a security. Beta is defined as the stock's sensitivity to broad market movements, where the broad market is assigned a value of 1.00. A lower beta, where the beta is less than 1.00, is viewed as less risky than the broad market. Beta is a smarter portfolio construction tool when compared to standard deviation (stock's volatility relative to itself) because it does a better job at sheltering investors from large market events. As the following charts illustrate, the low volatility strategy has outperformed the broad market over longer time periods. The strategy had less of a decline than the broad market during the major correction of 2008. It is for these reasons, the BMO low volatility strategy can be used as a core, long-term investment or a complimentary equity holding.


BMO Exchange Traded Funds

Low Volatility Strategy

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One of the most appealing smart beta factors is quality investing. Quality based investing is built to identify market leading companies, providing access to long term industry leaders with sustainable business models and growing competitive advantages. These quality companies have historically outperformed the broad market with lower volatility. Quality companies are positioned to respond to positive market conditions, as well as provide support to market contractions.

Quality Methodology

BMO ETFs quality suite provides an innovative approach to investing by selecting companies with high quality scores based on three fundamental variables: high return on equity, stable earnings growth and low financial leverage.


High ROE – Indicates a business with a sustainable competitive advantage, efficient operations and profitability.


Stable Earnings Growth – Demonstrates durability and stability of a company's business model.


Low Financial Leverage – Determines if returns are based on underlying operations and protects on the downside.


Each variable on its own is not necessarily an indicator of a quality company. For example, high ROE could be an abnormal spike at one point in time or a result of high leverage. The three variables in combination provide a more accurate assessment. The methodology aims to not only capture the performance of high quality companies, but to ensure reasonably high trading liquidity and to moderate security turnover while staying cost effective. BMO ETFs quality suite is designed to be a core equity options providing effective exposures throughout the entire market cycle.

BMO Quality Investing



  • High Return on Equity: Companies that put capital to good use
  • Low Financial Leverage: Protection from downside, Returns based on underlying operations
  • Stable Earnings Growth: Consistent companies with growth capture
BMO Quality ETFs

Making Sense of Quality Investing

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Not all dividend strategies are created equal. The BMO ETFs dividend strategy is a custom solution that combines high yield with sustainable growth. It identifies higher yielding dividend paying equities, while screening for both the historical growth rate of dividends and the sustainability of the dividends. The final result is a suite of dividend ETFs that are core income solutions for investors seeking portfolio diversification and increased income.


Advanced Screening

Unlike some other dividend strategies that only focus on yield, the BMO ETFs dividend strategy focuses on sustainability. The first screen in the BMO ETFs dividend strategy is the three year dividend growth rate. The second screen is the five year analysis of the dividend payout ratio. The choice to focus on the three year dividend growth rate and the dividend payout ratio over five years is deliberate – these screens are sensitive enough to measure changing company conditions, but do not overreact to short-term anomalies. They also have the added benefit of reducing overall portfolio turnover.


The three year dividend growth rate illustrates a company's willingness to pay dividends and grow them over time. Something that could be missed with a purely yield focused measure. Similarly, the sustainability screen of the dividend payout ratio for the past five years monitors the balance sheet over time not just one point in time. It measures a company's ability to pay dividends.

The analysis is weighted to the most recent year, combined with consideration of the forward looking expectations of the dividend payout ratio. The volatility of the dividend payout ratio is also important. It is typically impacted by earnings volatility as the dividends paid are more stable. Higher volatility will result in a higher probability that the security will be screened out.


The BMO ETFs dividend strategy also considers a share buyback program. This is a tax effective way to deploy excess cash on the balance sheet as it does not result in income for shareholders. Instead it creates upward pressure on prices, by reducing the outstanding share float.

Benefits of Screening

  1. Evaluates willingness to pay dividends
  2. Gauges ability to pay dividends
  3. Assessment over a longer period of time
  4. Additional forward looking measures
  5. Volatility also considered



BMO Dividend ETFs

Portfolio Construction Methodology

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Equal Weight


Equal weighting is powerful tool to help mitigate security concentration and to effectively diversify sectors exposures. In particular, Canadian sectors have much higher concentrations than U.S. or global markets. An equal weight strategy can remove biases inadvertently introduced by market cap weighting and can provide a purer sector or market exposure.


BMO ETFs equal weighting strategy is effective for concentrated exposures. At certain times, markets may not be fully efficient and the strategy can help avoid asset bubbles.

Why equal weighting makes sense

By overweighting the smaller cap companies and underweighting the large cap companies, the strategy provides additional growth potential of smaller cap stocks.

At rebalance, the strategy trims stocks that have outperformed back to equal weight – effectively a value tilt looking to capitalize on the future growth of underperforming stocks.


Both small cap and value investing have historically proven to outperform over the long-term. Important to the strategy is to control portfolio turnover, which is accomplished with semi-annual rebalancing. This results in comparable turnover to market cap strategies.




BMO MSCI Canada Value Index ETF (ZVC)







Value factor investing- the pursuit of low cost securities relative to their fundamental value- is an investing style employed by active managers. While the premise may be similar not all value strategies are the same. Factor based value investing takes traditional value style investing a step further by selecting a more concentrated segment of the investable universe and adjusting security weights by the value score. BMO Value ETFs provide a rules-based methodology while being cost effective.

Identifying the Value Factor BMO Value ETFs seek to remedy flaws found in traditional value investing such as sector bias, concentration of highly leveraged companies and reliance on metrics that are subject to distortion. Therefore these ETFs use three core metrics: Price-to-Book (P/B), Price-to-Forward Earnings (P/E) and Enterprise Value-to-Cash Flow from Operations (EV/CFO). Low values in all three ratios signal a company which is performing as well as it peers, but is less expensive. This “sale price” is where the value factor is found: once the market reprices, the investor captures the appreciation.

Portfolio Construction The selection universe begins with a neutral parent index (ZVC- MSCI Canada Index, ZVU- MSCI USA Index, ZVI- MSCI EAFE Index), then adjusts towards the value factor by using equal weights of the three core metrics to compute a composite z-score. The z-score is scored by sector, producing a final value score which is multiplied by the market cap. The maximum security weight in each index is capped at 10%. The index targets 50% of the parent market cap coverage. The weight of each sector is the same as the sector weights within the parent index. For the MSCI EAFE Enhanced Value Region Neutral Capped Index, region neutrality is achieved by maintaining identical region weights to that of the MSCI EAFE Index. The portfolios are rebalanced and reviewed semi-annually. This methodology aims to not only identify value companies, but to ensure high trading liquidity and to moderate security turnover while staying cost effective. BMO Value ETFs are designed to be core equity options.

BMO Value Investing
BMO Value Investing




Enterprise Value reflects all sources of capital, debt and equity. Therefore, evaluating Enterprise Value will screen our companies which have high financial leverage.



Low P/B


Low P/B reflects companies who are less expensive than their peers but have similar common equity available to shareholders.



Low forward P/E


Forward earnings projections provide a more accurate representation of future price than trailing earnings.


Innovative Solutions


BMO ETFs are at the forefront of developing and providing innovative solutions to investors. Through industry leading strategies such as Covered Calls and Preferred Share, investors have access to unique institutional type strategies. Learn more about our innovative suite of ETFs:

Benefits of laddering


To further diversify a preferred share portfolio against a rising interest rate environment, an investor can structure rate reset preferreds in a staggered manner. BMO ETFs achieves this by organizing the portfolio in a ladder, similar to a bond or a guaranteed investment certificate (GIC) ladder. In this structure, the portfolio is divided by calendar years, or term buckets. Within each term bucket, there will be a number of individual rate reset preferred share issues which have a reset date in the same year. Once the particular issue has reset, it will move to the back of the ladder, again grouped with other individual issues with a reset date of the same year. By doing this, each year a portion of the portfolio will be reset to reflect the current interest rate levels.


A laddered process spreads the issues evenly across different terms. This reduces the chances that a large portion of the portfolio will be redeemed and will have to be reinvested. Redemption risk is further mitigated by holding a number of preferred shares at each reset year.

BMO Laddered Preferred Share Strategy



  • Laddering spreads preferred share investment over different terms
  • Each step in the ladder contains multiple preferred shares
  • Reduces the chance of large scale redemption
  • Rate reset preferreds adjust to reflect current interest rate environment

Preferred Share


In recent years, preferred shares (preferreds) have become increasingly popular as investors strive to meet their income needs. Preferreds combine the characteristics of both equity and fixed income securities and are chosen by investors to provide their unique balance of security and yield.


Not all preferreds are equal when it comes to interest rate sensitivity. When rates rise, this could place pressure on straight perpetual preferred shares, which are more interest rate sensitive given their long duration. Rate reset preferred shares, on the other hand, are more adaptable in a rising rate environment since their dividends are reset on a periodic basis, adjusting to reflect the current interest rate environment.


The rate reset market has grown significantly in recent years - new issuers and new issues. ETFs are now able to deliver convenient and well-constructed portfolios built around rate reset preferreds.


Covered Call


Income Generation

BMO ETFs covered call strategy is implemented by writing a call option contract while owning the equivalent shares of the underlying stock. The purpose of the strategy is to provide additional income and reduce the risks of stock ownership.


Instead of stretching for additional yield with fixed income investments (and increasing risks), the covered call strategy effectively creates an additional income stream from equity investments. Additionally, it also has the added benefit of reducing equity risk making it a valuable portfolio construction tool.


BMO ETFs covered call strategy generates income from two sources. First and foremost, is the dividend yield from the underlying assets. Next is the overlay of premium income generated from selling the call options. By already having a strong income base from the underlying, we can employ a lighter touch with the call option overlay to better protect investor's capital.


BMO ETFs sell out-of-the-money call options which cap the return of the portfolio at the option strike price until the option expires. For BMO ETFs, option expiries are generally 1-2 months out.


Historically, covered call strategies have provided similar overall return to the underlying portfolio with a significantly lower risk level.



Covered Call Option Strategy Download (418 KB PDF)

Comprehensive Fixed Income


It is essential for investors to understand the importance of strategically positioning fixed income in their portfolios and not just concentrating on equities. The days of buying only traditional full market exposure have passed, as portfolios now have both targeted positions and non-traditional exposures to complement existing broad market holdings.


BMO ETFs comprehensive suite of fixed income solutions provides investors with the flexibility to gain broad market exposure or target specific credit qualities, durations, and sectors based on their investment objectives. BMO ETFs provide the most complete set of targeted exposures for fixed income, having built an innovative suite that segments the investment grade market by both term and credit exposure. This allows investors to either build a portfolio, or tilt an existing portfolio, based on their outlook for both interest rate changes and credit spreads.


BMO Targeted Fixed Income ETFs


Segmented Fixed Income


BMO Government Bond Index ETF


BMO Corporate Bond Index ETF


BMO Short-Term Bond Index ETF



BMO ETFs now offer a suite of segmented Canadian fixed income ETFs which offer more focused exposures than the traditional broad market. The BMO Government Bond Index ETF (ZGB), the BMO Corporate Bond Index ETF (ZCB) and the BMO Short-Term Bond Index ETF (ZSB) will allow investors to access these specific exposures in a low-cost and efficient way.


ZGB gives investors access to Canadian government bonds- federal, provincial and municipal- across all maturities. ZCB provides access to Canadian corporate bonds from all sectors and maturities. ZSB gives investors the ability to hold short-term bonds (1-5 years) which are diversified among corporate and government bonds. Using BMO’s segmented fixed income ETFs, investors have the ability to invest in a focused segment of the fixed income market, and then diversify among durations, credit qualities and industries.

Effective Broad Market


BMO ETFs is committed to providing an efficient suite of core solutions that represent the right indices and are effectively priced.



Core investments typically reflect a range of broad asset classes, including Canadian equities, U.S. equities, international equities and fixed income. They also represent the full gamut of ETF benefits – flexibility, diversification and efficiency.


Core ETFs are the essential building blocks of a portfolio that provide the foundation for long-term growth. They are critical in the decision to stay invested through the market cycle. They allow investors to supplement with regional or other asset classes (core satellite strategy) while maintaining a low cost portfolio.


BMO ETFs simplify the process of acquiring broad exposures and provides instant diversification. Not all broad market investments are equal - a core BMO ETF generally has a longer list of holdings.

The Right Indices


Investors expect recognized indices. They also expect ETFs with performance that will match the returns of the indices. The right indices are the universally accepted benchmarks for the various broad asset classes. Having the right index is important because investors are familiar with the index and understand the exposure. Furthermore, information is widely available and regularly reported.


Typically, the right core investment indices are weighted by market cap. This allows the index to capture the entire marketplace and all market influences.

BMO ETF Core Solutions



  • Market leading indices you know and want
  • Flexibility to execute investment strategy
  • Instant diversification
  • Cost efficiency

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