ETFs have made investing in the inventory-based bond market less onerous. “Pooling the underlying bonds is a lot more efficient,” says Alfred Lee, director and portfolio manager of BMO ETFs. Lee shares his thoughts on why fixed income ETFs are a smart move these days.
In today’s market environment, what are some benefits of fixed income ETFs?
Lee: Rates are becoming lower and more volatile. Credit spreads are more volatile as well. In the macroeconomic picture, information comes out faster and markets react faster. As a result, part of your portfolio needs to be more tactical. Many people have a consensus that we’re nearing the end of an economic cycle or going into its later stages. Whenever you get an equity market sell-off, people become more cautious.
At any time, why is this product a key part of portfolio construction?
Lee: For the most part, stocks and bonds move in opposite directions. Fixed income is a good counterbalance to equity volatility and, as mentioned, ETFs are an effi cient way to access the bond market.
Within BMO’s fi xed income ETF suite, you’ve introduced Canadian corporate, government and shortterm bonds. What’s their appeal?
Lee: ZCB, the corporate bond, is good for yield-oriented investors who want the safety of investment-grade bonds. With the ZGB government bond, we’re fi nding that—given that we’re later in the cycle—many investors have fl ed all the way to safe-haven trades, which government bonds offer. And the ZSB short-term bond tends to be less volatile compared to the overall bond market. Being the largest fi xed income ETF provider in Canada gives us competive advantages as well. It allows us to get better pricing and better relationships on the street.
What other advantages do these core ETFs offer?
Lee: This is the happy medium that allows you to focus on specific parts of the fi xed income market without getting too granular. As bond yields decline, cost also becomes more relevant. One way to give more to investors is by moving to lower-fee products. That way, we compare well to the market leaders.
Look for timelier ETF advice from BMO Asset Management in the October issue of Investment Executive and Finance et investissement.
Director and Portfolio Manager of BMO ETFs
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