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 offer many benefits to investors, including diversification, liquidity, low fees, flexibility, transparency, and tax efficiency.
Frequently Asked Questions
- Efficient access to core investments and focused market segments.
- Access to institutional strategies by retail clients.
- Provide intraday liquidity through buying and selling during the trading hours of the stock exchange.
- Flexibility to buy on margin or sell short.
- Diversification offers potentially lower risk than individual securities.
- Ability to have exposure to a portfolio of stocks or bonds.
- Portfolio transparency on a daily basis.
- Cost-efficient due to relatively low management fees.
- Tax efficient, with potential for relatively low capital gains distributions1.
1ETF units are primarily bought and sold between different investors. This means that there are typically fewer realizations of capital gains and losses with ETFs than with other investment products
Shares of BMO ETFs can be bought and sold during normal trading hours through registered brokers and dealers in the province or territory where you reside. ETFs are not purchased directly from the ETF provider. To trade BMO ETFs, you can use any online, discount or full-service brokerage account. Your broker will charge their usual commissions or fees.
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 a client receives the end of day net asset value (NAV), an ETF client trades on the intra-day price on the exchange.
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, something which can be very important in volatile markets.
It’s important to note that if the market moves away from a limit, an investor may consider revisiting the limit price, otherwise the limit order will not be executed.
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.
BMO ETFs are designed to serve the needs of all types of investors, whether they are institutional or self-directed investors, or deal with a financial advisor.
Yes, all BMO ETFs are RRSP, RRIF, RDSP, and TFSA eligible. In general, BMO ETFs that qualifies as a mutual fund trust and that are listed on an established market index are eligible for registered plans, you should consult with your own broker or tax advisor regarding your personal circumstances.
BMO ETFs are offered through a prospectus filed in accordance with Canadian securities laws and regulations. Neither the securities of the ETFs nor the ETFs are registered with the United States Securities and Exchange Commission, or in any other jurisdiction. Generally, persons that are non-residents may invest through a broker by placing purchase orders on the Toronto Stock Exchange.
ETFs and mutual funds are both designed to provide easy access to a variety of investment options, and both can be used to build an optimal portfolio that is right for each client. By expanding its range of investment products to include ETFs, BMO is giving investors additional choices so that they can make appropriate investment decisions tailored to meet their specific needs, whether it is on their own or with the assistance of a financial advisor.
BMO ETFs look at each portfolio separately and selects the most appropriate weighting methodology for that ETF. Market capitalization weighting for broad markets and diversified exposures provide the expected return of well followed indexes. Smart beta* or strategic weighting increases an ETF’s exposure to the desired factor, such as low volatility, higher income, or quality. Equal weighting removes concentration risks where sectors and industries can be skewed by high concentrations in one or two larger companies.
In general, ETFs usually follow an index by investing in a collection of securities that mimics the index’s makeup. The fund manager tries to match the index’s performance by purchasing and holding the same assets in the same proportions. This ensures that the ETF’s value mirrors the movements of the tracked index. Investors can trade ETF shares on the stock exchange, offering a convenient means to participate in the overall performance of the underlying index.
Tracking error is the performance difference between an ETF and its benchmark index.
Whenever holdings are traded in a currency other than the Canadian Dollar, currency movements are a key factor in total returns. BMO ETFs may have exposure to the local currencies where the underlying holdings are traded, or they may be currency hedged to remove most of the currency returns from the underlying holdings. BMO ETFs that are currency hedged generally have “Hedged to CAD” included in the ETF name.
The BMO Covered Call ETFs provide call premium income in addition to the dividend income on the portfolio. This strategy involves selling call options against the underlying holdings, where a premium is received in exchange for the excess upside return of the holding. This strategy is most effective when the underlying portfolio is expected to be range bound (limited expectations of large price movements). The covered call strategy is considered to be defensive as the additional income partially offsets potential portfolio decreases while removing the participation in large market upswings.
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.
Fixed Income ETFs
Fixed income ETFs incorporate all of the benefits of a typical ETF – diversification, liquidity, and cost effectiveness, and are effective core holdings in a portfolio. A fixed income ETF may also be appropriate for those investors who wish to take an active role in positioning their fixed income portfolios to reflect their own economic expectations. With BMO ETFs, investors can use long or short positions, as well as target specific fixed income durations or credit risks.
The interest paid on a bond is known as the coupon rate. The weighted average includes all of the underlying holdings in the portfolio.
Unlike equities that have no maturity, bonds have a fixed maturity; the return to that date can be measured using current prices. Yield to Maturity (YTM) is the discount rate that equates the present value of a bond’s cash flows with its market price (including accrued interest). The weighted average includes all of the underlying holdings in the portfolio.
Duration measures the approximate sensitivity of a bond’s price to a change in interest rates, where bond prices are inversely related to interest rates. A duration of 3, for example, means that the price of the bond would increase by approximately 3% if the interest rate decreased by 1%. The weighted average includes all of the underlying holdings in the portfolio.
*Smart Beta: ETFs that deliver factor exposures combined with effective portfolio construction. Smart beta ETFs use a rules-based approach to select and weight securities in the fund. The rules are usually based on a set of quantitative factors that have been shown to generate excess returns over the long term.
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.
This material 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.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
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