Archive for March, 2009

Revisiting BMO Exchange-Traded Funds

March 24, 2009


Thank goodness for eagle-eyed readers! My initial enthusiasm for a new clutch of ETFs from BMO has evaporated based on reader feedback to yesterday’s post. I initially thought the BMO US Equity ETF and the BMO Emerging Markets Equity ETF fill gaps in the Canadian ETF lineup but I was mistaken. Here are the problems that readers have pointed out:

The BMO US Equity ETF is a total market ETF but it does not provide currency diversification as any US dollar exposure is hedged. Investors wanting a hedge already have plenty of options through iShares and Claymore ETFs. But investors wanting an unhedged, Canadian dollar denominated ETF for the US market still have to turn to US-listed ETFs.

Investors will have plenty of allocation to the Canadian market already through stocks, mutual funds and ETFs. In addition to providing redundant exposure to Canada, the BMO International ETF is expensive at 0.475%. Note that the TD International Index e-Series mutual fund charges almost exactly the same MER but requires no trading commisions or bid/ask spreads.

The BMO Emerging Markets ETF provides exposure to just one BRIC country — Brazil. Conspicuous by their absence are three major emerging market economies — Russia, India and China. Reader Chris noted that if all four had been left out, at least the fund could have been a nice complement to Claymore’s BRIC ETF!

The bottom line is that BMO is essentially coming out with some “me-too” ETFs that don’t fill existing holes in the Canadian ETF lineup. This is especially ironic considering that in the ETF industry the first mover has enormous advantage and newcomers have to compete by offering either (a) lower price or (b) innovative products. The new BMO ETFs fail on both counts.

Exchange-Traded Funds from BMO Asset Management

March 23, 2009


In last weekend’s column in The Globe and Mail, Rob Carrick noted that Bank of Montreal has filed papers to introduce new ETFs in Canada. So, I went digging on Sedar and sure enough, found the preliminary prospectus. BMO is planning to introduce seven new ETFs:

  1. BMO Canadian Bond ETF (Ticker: ZGB; MER = 0.325%) tracks the Citigroup Canadian Government Bond Index. I couldn’t find a webpage on this obscure index but it sounds like a broad market index of Canadian Government bonds of medium duration.
  2. BMO Canadian Equity ETF (Ticker: ZCN; MER = 0.15%) tracks the Dow Jones Canada Index and provides a broad-market exposure to the Canadian stock market.
  3. BMO US Equity ETF (Ticker: ZUE; MER = 0.23%) tracks the Dow Jones U.S. Index, which is represents “the top 95% of U.S. companies based on float-adjusted market capitalization, excluding the very smallest and least-liquid stocks”.
  4. BMO International Equity ETF (Ticker: ZDM; MER = 0.475%) tracks the Dow Jones World Developed-Ex U.S. Index and provides exposure to Japan, UK, France, Germany, Switzerland and Australia.
  5. BMO Emerging Markets Equity ETF (Ticker: ZEM; MER = 0.535%) tracks 22 emerging markets.
  6. BMO Global Infrastructure ETF (MER = 0.525%) tracks 90 stocks that “exhibit strong infrastructure characteristics”. Enbridge (TSX: ENB) is one of the top five holdings.
  7. BMO Dow Jones Industrial Average ETF (Ticker: ZEJ; MER = 0.23%) tracks the famed Dow Jones index of 30 large-cap, US stocks.

Some of the new BMO ETFs are likely to be of interest to Canadian investors. The BMO US Equity ETF is significantly more expensive than the Vanguard Total Market ETF (VTI) but is likely to be a significant competitor to the iShares CDN S&P 500 Hedged to Canadian Dollars Index Fund (XSP). Unfortunately, the BMO International Equity ETF has additional exposure to our stock market making it less attractive to Canadian investors. The BMO Emerging Market ETF is again more expensive than the Vanguard Emerging Markets ETF (VWO) but provides an interesting, Canadian-dollar denominated alternative for Canadian investors worried about US estate tax implications.

It is interesting to see that Bank of Montreal is jumping back in the ETF market abandoned by TD Bank some years back. It would be interesting to see if these new ETFs take off in a meaningful way.

Updated on 2009/10/26 with ticker symbols. More information available on the BMO ETFs website.

Investing in a period of high inflation

March 22, 2009


In response to the credit crisis, central banks authorities and governments around the world have taken unprecedented action in providing massive fiscal and monetary stimulus. Warren Buffett, in a recent interview with CNBC, said that such actions have the potential to be “very inflationary”. In the same interview Buffett had some suggestions for investors for preparing for any spike in inflation in the future:

But we are certainly doing things that could lead to a lot of inflation, and the best asset during inflation is your own earning power. Anything you do to improve your own talents and make yourself more valuable will get paid off in terms of appropriate real purchasing power. If you do something well, whether you’re a major league baseball player, you know, whatever it may be, if you’re a good assistant, whatever it may be, that’s the best asset. The–in my view, the second best asset is a good business. And you might own one yourself, but you might own it through equities.

He expanded on why he thinks stocks will be the second best asset class:

You know, if the dollar becomes way–worth way less, we will sell See’s Candy for more money. I mean, it won’t be more real dollars, but we–if somebody’s willing to give up 15 minutes of their labor or half to buy a pound of this or to buy six cans of this, they’ll do the same thing and it won’t make any difference whether shark’s teeth are being used for money, basically.

But, as Jeremy Siegel notes in Stocks for the Long Run, “neither stocks neither stocks nor bonds nor bills are good short-term hedges against inflation”. Over the long-term, though, “the real returns on stocks are virtually unaffected by the inflation rate”. The reason, as Buffett pointed out in his interview is that stocks are claims on the earnings of real assets “whose value is intrinsically related to labor and capital”.

There is evidence that other asset classes such as gold (over the long-term) and real estate provide some measure of inflation protection. The Canada Pension Plan also lists infrastructure among its inflation-sensitive holdings.

There will be one clear loser if inflation does spike in the future: traditional Government bonds. Retirees depending on portfolio income for maintaining their standard of living may want to consider keeping a large portion of their bond portfolio in real return bonds, which provide a perfect hedge against inflation. Interestingly, while long-term Canada bonds are yielding just over 3.5%, real return bonds are currently yielding a real return of 1.9%.