ETF Spotlight higher yields lower risk

What does diversification really mean to today’s investors? The growth of exchange-traded funds (ETFs) reflects an evolution in attitudes.

“The way people put together portfolios has changed,” says Alfred Lee, director and portfolio manager of BMO ETFs. “Ten years ago, people thought a 30-stock portfolio was diversified. Today, it’s about diversification not just within but across asset classes.”

This is the first in a five-part series on ETF trends and opportunities for investors. The experts at BMO Asset Management will share their insights.

As Lee notes, ETFs have given investors efficient access to bonds, preferred shares and alternative asset classes. The ETF universe keeps expanding. That includes an entry launched in February: BMO Ultra Short-Term U.S. Bond ETF (ZUS.U).

Lee says the new fund appeals to investors who hold U.S. dollar cash in their accounts and desire a higher yield.

A first for Canada, ZUS.U provides exposure to a diversified mix of short-term U.S. fixed income asset classes, with a term to maturity of less than one year or reset dates within one year. The duration means virtually no interest rate risk.

The fund invests predominantly in U.S. investment-grade corporate bonds and T-bills, and is rebalanced based on the portfolio manager’s fundamental analysis, relative strength indicators and risk-adjusted yield expectations.

There are two versions of the TSX-traded fund. ZUS.U offers a monthly income, with the coupons earned on the underlying bonds paid out. ZUS.V has accumulating units. Instead of being paid monthly, the coupon accrues within the portfolio.

With increasing ETF options, Lee says it’s important for investors to hone in on what works for their goals.

“Investors have to understand the exposure, how the product is getting it and whether it provides benefits for their portfolios.”

Look for timely ETF advice from BMO Asset Management in the April, May, September and October issues of Investment Executive and Finance et investissement.
Alfred Lee

Alfred Lee,
Director and Portfolio Manager of BMO ETFs

BMO Global Asset Management

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