Four Strategic Ways to Invest in U.S. Stocks Using BMO ETFs

As of May 31, 2024, the U.S. stock market accounts for approximately 70% of the MSCI World Index1, making it a significant component of global equity markets—and likely a substantial portion of your investment portfolio as well.

While Canadian investors often favour domestic stocks for tax efficiency and lower currency risk2, incorporating U.S. stocks can enhance exposure to sectors where the Canadian market, predominated by financials and energy, falls short, particularly in technology and healthcare.

For Canadian investors looking to tap into the U.S. market affordably and without the hassle of currency conversion, there are numerous ETF options available. Here are four strategic ways to build a U.S. stock portfolio using BMO ETFs, catering to different investment objectives.

Low-cost broad exposure

If your objective is to gain exposure to a broad swath of U.S. stocks that reflect the overall market composition, the S&P 500 index is your quintessential tool.

This longstanding and highly popular benchmark comprise 500 large-cap U.S. companies, selected through a rigorous, rules-based methodology combined with a committee process, and is weighted by market capitalization (share price x shares outstanding).

The S&P 500 is notoriously difficult to outperform—recent updates from the S&P Indices Versus Active (SPIVA) report highlight that approximately 88% of all large-cap U.S. funds have underperformed this index over the past 15 years3.

This statistic underscores the efficiency and effectiveness of investing in an index that captures a comprehensive snapshot of the U.S. economy.

For those interested in tracking this index, BMO offers two very accessible and affordable options: the BMO S&P 500 Index ETF (ZSP) and the BMO S&P 500 Hedged to CAD Index ETF (ZUE), both with a low management expense ratio (MER) of just 0.09% and high liquidity.

While both ETFs aim to replicate the performance of the S&P 500 by purchasing and holding the index’s constituent stocks, they differ in their approach to currency fluctuations.

ZSP, the unhedged version, is subject to the effects of fluctuations between the U.S. dollar and the Canadian dollar. This means that if the U.S. dollar strengthens against the Canadian dollar, it could enhance the ETF’s returns, but if the Canadian dollar appreciates, it could diminish them.

On the other hand, ZUE is designed for investors who prefer not to have exposure to currency movements. It employs currency hedging to neutralize the impact of USD/CAD fluctuations, ensuring that the returns are purely reflective of the index’s performance, independent of currency volatility.

Large-cap growth exposure

What if you’re seeking exposure to some of the most influential and dynamic tech companies in the U.S. stock market, often referred to as the “Magnificent Seven”?

For investors looking to capture the growth of these powerhouse companies in a single ticker, ETFs tracking the NASDAQ-100 Index offer a prime solution. As of June 27, all of these companies are prominent members of the index’s top holdings4.

The NASDAQ-100 Index is a benchmark comprising the largest 100 non-financial companies listed on the NASDAQ stock exchange. This index is heavily skewed towards the technology, consumer discretionary, and communication sectors, from which the “Magnificent Seven” hail.

BMO offers two ETFs that track this index: the BMO Nasdaq 100 Equity Hedged to CAD Index ETF (ZQQ) and the BMO Nasdaq 100 Equity Index ETF (ZNQ). Both funds charge a management expense ratio (MER) of 0.39%. Again, the key difference between them lies in their approach to currency fluctuations.

Low-volatility defensive exposure

You might commonly hear that “higher risk equals higher returns,” but an interesting phenomenon known as the “low volatility anomaly” challenges this traditional finance theory.

Research shows that over time, stocks with lower volatility have often produced returns comparable to, or better than, their higher-volatility counterparts, contradicting the expected risk-return trade-off.

For defensive investors or those with a lower risk profile, this presents a valuable strategy to remain invested in U.S. stocks without enduring the stomach-churning ups and downs often associated with equity markets.

For this, two ETFs worth considering are the BMO Low Volatility US Equity ETF (ZLU) and the BMO Low Volatility US Equity Hedged to CAD ETF (ZLH), each with a management expense ratio (MER) of 0.33%.

Neither of these ETFs is tied to a conventional index. Instead, they employ a proprietary rules-based methodology to select the 100 U.S. stocks with the lowest beta5 during each November reconstitution, with a rebalancing occurring in May.

Beta is a measure of a stock’s volatility relative to the overall market; for example, the S&P 500 has a beta of 1. A stock with a beta lower than 1 is less volatile than the market, making it a suitable and universal metric for identifying low-volatility stocks.

Another second for investors who are looking to take some risk off the table is our suite of Buffer ETFs (eg. BMO US Equity Buffer Hedged to CAD ETF – July, Ticker: ZJUL).  These ETFs can complement or substitute your core equity positions, providing a built-in cushion on the downside while keeping you invested in broad U.S. equities (S&P 500 hedged to CAD).

These buffer strategies help you protect against market declines (buffer up to -15%) and participate in the upside to a pre-determined level (cap). If the underlying reference asset falls, you have a buffer zone to mitigate losses. In a nutshell: you trade in some upside for the added downside protection.

The buffer zone and cap on market participation is set at the start of the Target Outcome Period and only applies at the end of the Target Outcome Period.  We have a series of four ETFs you can choose from depending on your desired outcome period and investment needs.  Learn more here.

Monthly dividend income exposure

Most dividend stocks and some ETFs typically distribute their dividends on a quarterly basis. However, for investors seeking more frequent income, monthly dividend-paying ETFs can offer an attractive alternative.

For those interested in U.S. stocks that provide monthly dividend income, consider the BMO US Dividend ETF (ZDY) and the BMO US Dividend Hedged to CAD ETF (ZUD), both of which have a management expense ratio (MER) of 0.33%.

Similar to ZLU and ZLH, these ETFs are not tied to a traditional index but instead utilize a proprietary rules-based methodology to select their holdings.

We have a dedicated whitepaper6 that delves into the details of how these ETFs operate, but in essence, both ZDY and ZUD employ a multi-step selection process that includes:

  • Screening for dividend growth to identify companies with a strong track record of increasing dividends.
  • Ranking by yield to prioritize higher-yielding stocks.
  • Screening for payout sustainability to ensure dividends are maintainable.
  • Weighting by yield to enhance income potential.

These rules are crafted to focus on three foundational pillars of dividend investing: growth, yield, and quality. Additionally, to promote diversification and manage investment risk, these ETFs cap individual stock exposure at 10% and undergo rebalancing in May and reconstitution in November.

1 https://www.msci.com/www/fact-sheet/msci-world-index/05830501

2 https://www.bnnbloomberg.ca/canadian-investors-have-too-much-of-a-home-bias-vanguard-1.2089151

3 https://www.spglobal.com/spdji/en/research-insights/spiva/

4 https://www.nasdaq.com/solutions/nasdaq-100

5 Beta: A measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.

6 https://www.bmo.com/assets/pdfs/gam/BMO-GAM-Dividend-ETFs.pdf

 

Disclaimers:

This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

Risk Profile – Comprised of a client’s risk tolerance (i.e. client’s willingness to accept risk) and risk capacity (i.e. a client’s ability to endure potential financial loss)Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

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

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BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal. ETF Series of the BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

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