Portfolio Building Blocks: Core Equity ETFs

ETF providers have pushed out new products at a fast pace over the last few years, with over 1300 tickers in Canada alone (Source: Morningstar Mar 2023), as new providers look to enter the market and as existing providers look to add new options. Sometimes we need to remind ourselves, at the core of this success lies the broad market equity exposures that represent easy to trade, low cost to hold, and known tickers that investors are comfortable with holding for the long term. Core equity ETFs cover Canada, U.S., International, and Emerging Markets exposures.

When ETFs first gained acceptance in the marketplace, it was on the back of these broad market ETFs, giving investors an easy-to-use product with instant diversification in a single ticket, offered at a very effective price. This hasn’t gone away, there’s just a lot of other stories out there waiting to be told. We need to revisit the core from time to time. The benefits are well understood, but what about performance?

Broad market ETFs are positioned as passive exposures and building blocks, with active managers entering the space, and factor-based alternatives also deserving of attention, performance is a valid question. While core equity ETFs provide the benefit of delivering the return of markets, fully participating in market appreciation, have they kept up with the competition?

With BMO ETFs first entering the market in 2009, we have several ETFs with over ten years of performance history, demonstrating that these ETFs deliver returns for investors.

As of Feb 28 2023 Ticker 1 Year Annualized Performance 3 Year Annualized Performance 5 Year Annualized Performance 10 Year Annualized Performance
BMO S&P/TSX Capped Composite Index ETF ZCN -1.24% 10.82% 8.82% 7.83%
BMO S&P 500 ETF (CAD) ZSP -0.95% 12.40% 10.79% 14.96%
BMO MSCI EAFE ETF ZEA 4.02% 6.86% 3.93%
BMO MSCI Emerging Markets ETF ZEM -8.99% 1.41% -0.55% 4.01%

Source: Morningstar, February 28, 2023

We can then look at peer group percentiles to show that these ETFs also show well against competitors.

As of Feb 28 2023 Ticker 1 Year Percentile 3 Year Percentile 5 Year Percentile 10 Year Percentile
BMO S&P/TSX Capped Composite Index ETF ZCN 61% 37% 18% 34%
BMO S&P 500 ETF (CAD) ZSP 34% 15% 12% 13%
BMO MSCI Emerging Markets ETF ZEM 52% 48% 41% 27%

Source: Morningstar, February 28, 2023

An interesting observation to make is that in the U.S., known as the most efficient market, ZSP ranks within the first quartile on time periods of three years or longer, showing how difficult it is to beat the market consistently over time. In other markets that are less efficient than the U.S., these core ETFs all still rank within the first two quartiles on periods of three years or longer.

Overall, the easy-to-use low cost core ETFs make sense to use as diversifying portfolio building blocks, and as we look at longer term performance, they have the track record to support performance comparisons as well. Sometimes the most obvious choice is the right one.



Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF .  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 Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and  portfolio manager and separate legal entity from Bank of Montreal.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.S&P®, S&P/TSX Capped Composite®, S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and “TSX” is a trademark of TSX Inc. These trademarks have been licensed for use by S&P Dow Jones Indices LLC and sublicensed to BMO Asset Management Inc. in connection with the ETFs. The ETFs are not sponsored, endorsed, sold or promoted by S&P Dow Jones LLC, S&P, TSX, or their respective affiliates and S&P Dow Jones Indices LLC, S&P, TSX and their affiliates make no representation regarding the advisability of trading or investing in such BMO ETF(s).

The viewpoints expressed by the Portfolio Manager 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.

Mark Raes

Managing Director, Head of Product Management

© 2022 BMO Global Asset Management All rights reserved.