What are ETFs?
ETFs are open-ended funds that are listed and traded on a stock exchange, and can be bought or sold directly during trading hours, much like a stock. They typically represent a basket of securities which may consist of stocks, bonds, or other assets such as commodities. ETFs can offer many benefits to investors, including diversification, liquidity, cost effective, transparency and tax efficiency.
How does an ETF work?
ETFs are listed and traded on a stock exchange in the same way as an ordinary stock. Index ETFs closely tracks a specific market index and can be based on a variety of different indexes covering asset classes such as equities or bonds, whole regions or single countries and industry sectors. The aim of the ETF is not to out-perform the index but to track the index as closely as possible.
What are the similarities and differences between an ETF, a mutual fund and a stock?
ETFs combine some features of both mutual funds and stocks. An ETF is similar to a mutual fund as it is a collection of stocks or bonds and like a stock, an ETF can be bought and sold on an exchange throughout the day when the stock market is open.
Shares/units in mutual funds are bought directly from the fund and generally only priced once in a day based on the Net Asset Value (NAV). Shares in an ETF however, are generally created or redeemed by an Authorised Participant.
The liquidity of an ETF is not guaranteed, the NAV of an ETF may not be the same as the market price of the ETF, so investors may receive returns that are different to the NAV performance.
How does an ETF follow an Index over time?
ETFs position their underlying holdings to generally provide the return of the Index as closely as possible, less the ETFs expenses. Typically, an ETF will trade its holdings whenever the Index rebalances, such as quarterly, monthly, or daily, or whenever a corporate action occurs. Whenever the Index adds or subtracts holdings during periodical rebalances, the ETF will generally complete the same activity.
What is tracking error?
Tracking error is the performance difference between an ETF and its index.
How do I buy ETFs?
ETFs can be bought and sold on a stock exchange during normal trading hours through registered brokers. BMO ETFs are listed on the London Stock Exchange and cannot be purchased directly from BMO Global Asset Management.
How is the price of an ETF determined?
The trading price of an ETF is approximately equal to the value of the underlying holdings in the portfolio and any other asset or liabilities, such as cash and dividends receivable. The price of the ETF will move up and down during the trading day with supply and demand, but will generally reflect the price movements in the underlying holdings. Unlike a traditional mutual fund where an investor receives the end of day net asset value (NAV), an ETF investor can trade on the intra-day price (also known as an indicate NAV) on the exchange.
When placing a trade for an ETF, should I place a Market Order or Limit Order?
In general, it may be advisable to consider using limit orders when trading any security, including ETFs, especially with large amounts. This allows investors to control the price, at which they are willing to buy or sell.
What determines the Bid and Ask of an ETF?
The bid and ask for an ETF are similar to a stock, where the bid reflects what investors are willing to pay to buy units, and the ask reflects what investors are willing to sell units for. Unlike a stock, ETFs are open ended, meaning that supply and demand is not limited, so that a large order can result in the creation or redemption of ETF units. The bid and ask will reflect the average bid and ask of the underlying portfolio, and in addition, natural liquidity between buyers and sellers of the ETF may narrow the bid-ask spread.
How does BMO Global Asset Management’s entry into the ETF market impact its existing investment solutions business?
ETFs are designed to provide easy access to a variety of investment strategies and can be paired with our existing investment solutions to build an optimal portfolio that is right for each investor. By expanding our range of investment products to include ETFs, BMO Global Asset Management is giving investors additional choices so that they can make appropriate investment decisions tailored to meet their specific needs.
How can BMO ETFs fit into an investor's portfolio?
The range of physically-replicated BMO UCITS ETFs has been developed to meet investor demand for alternative solutions in low yield and high volatility environments as they seek more sophisticated solutions that provide better risk-adjusted returns. BMO has a proven track record of bringing new, innovative and client-focused concepts to the market and we have built on our experience managing ETFs in Canada and Hong Kong to develop this European ETF range.
The BMO equity ETFs form an ‘Income Leaders’ ETF range focused on generating high quality income for investors. Together with MSCI, BMO Global Asset Management has developed new equity indices, the methodology of which is to apply filters to select the companies with the highest quality scores and higher than average dividend yields. By identifying quality, the strategy aims to select the leading companies with long-term sustainable business models and clear competitive advantages. Screening for higher than average dividend yields means having the potential to provide investors with a sustainable income stream. Higher quality companies also tend to be less volatile than the broad market. BMO Global Asset Management’s ETFs track this methodology. The five equity ETFs invest in the UK, US and Europe ex-UK and come with hedged and unhedged portfolios.
The BMO Fixed Income ETFs are global corporate bond ETFs designed to help investors diversify their exposure to global investment grade corporate bonds and high yield bonds. These are the first ETFs to offer global investment grade corporate bond duration options of 1-3 years, 3-7 years and 7-10 years, allowing investors to position their bond portfolios precisely in anticipation of rising interest rates. The four fixed-income ETFs are based on a newly created subset of the Barclays Global Aggregate Index that selects the most liquid bonds in the Barclays universe and applies filters to exclude more illiquid bond issues. All fixed income ETFs are offered hedged to the Pound Sterling (GBP).
BMO Global Asset Management expects to add more currencies over time as it expands its footprint in Europe.
Who are BMO's Index Providers?
BMO has partnered with leading index providers to create innovative indices.
- MSCI - For equities BMO has partnered with MSCI, a global leader of both traditional market capitalization and smart beta indices, to create the MSCI Select Quality Yield indices, designed to represent the performance of companies that have relatively higher dividend yield with high Quality scores within the Parent Index universe of securities. BMO has launched the Income Leaders ETF suite benchmarked to these newly created indices, introducing an innovative approach to income investing.
- Barclays – In the fixed income space, BMO has partnered with Barclays, a global leader in fixed income indices who offer unmatched market coverage. Our suite of precise corporate ETFs are benchmarked the Very Liquid Index (VLI), a subset of the Barclays Global Aggregate Index. The VLI filter offer investors diversified, global, fixed interest exposure with the added flexibility of maturity banding.
Will BMO ETFs have any currency exposure?
Some of our ETFs are hedged at the share class level. On select ETFs investors can choose if they want exposure to the base currency or if they want a hedged option.
Are you developing more ETFs?
BMO Global Asset Management is committed to developing a significant presence in the European ETF market. Our goal is to deliver a comprehensive line-up of BMO ETFs that meet the current and future needs of ETF investors. To do this we will be evaluating our ETF line-up on a regular basis and making additions as we identify opportunities.
Bond investing via ETFs
Fixed income ETFs are poised to take a bigger role in institutional portfolios. As the same time that individual bonds have become harder to trade on the back of new regulation, liquidity in fixed income ETFs has risen dramatically, making them a logical option to help institutional investors efficiently implement strategic and tactical shifts within their portfolios.
What are the benefits of Fixed Income ETFs?
Fixed income ETFs can incorporate all of the benefits of a typical ETF - diversification, liquidity and cost effectiveness, offering investors a powerful and flexible tool to gain and manage their exposure to different segments of the global fixed income markets. Whether as a core portfolio component or within a “core-satellite” portfolio allocation, fixed income ETFs can offer investors additional benefits:
- Broader and easier access to global fixed income markets
- Often at lower costs than alternative types of index tracking vehicles
- Portfolio holdings transparency
- Exchange traded
- Price discovery improvements
- Intra-day order book two-way pricing supported by dedicated market makers
What are the tax considerations for BMO ETFs?
Potential investors in BMO ETFs should consult their own advisors as to the tax consequences of the purchase, ownership and redemption.
UK investors should note it is the intention that the ETFs will apply for reporting fund status (for certain Classes) from HM Revenue & Customs. The share classes that have reporting fund status will be included on the HMRC list of reporting funds available at this link. Investors should refer to their tax advisors in relation to the implications of the Funds obtaining such status.
Please refer to the prospectus for more details, or seek professional independent advice.
What is the frequency of distributions, and is there a schedule?
BMO ETFs pay distributions out of their income in cash. Generally, the greater the income in the fund, the higher the distribution frequency. For more on distribution details please visit the ETF fund page.
The foregoing is very general information. BMO Global Asset Management does not provide tax, accounting, regulatory or legal advice to its clients, and all investors are advised to consult with their tax, accounting, or legal advisers regarding any potential investment.
Exchange Traded Funds
If you have questions about specific terms or questions not answered here, please contact us at firstname.lastname@example.org