A New Trio of High-Yielding, Low-Cost Funds Built for Today’s Income Investor
Three new mutual funds from BMO GAM allow for efficient market access at attractive yields, and even more attractive costs.
May 2023
Bonds are back. That’s a refrain we hear a lot now—and with good reason: yields across the curve have rebounded to levels not seen in years, opening up opportunities to establish long-term fixed income positions that can generate solid cash distributions.
As any seasoned Advisor can tell you, investors experienced an extended period where many looked at what bonds were offering and balked, seeking alternative investments promising higher returns to compensate for what little their fixed income holdings produced. In order to meet those expectations and satisfy client mandates, there was a need to venture at times into unconventional products.
But with interest rates resetting higher, that need is transforming more into a want from investors who have an appetite and understanding of investments beyond just stocks and bonds. Alts are back to being an option rather than a necessity. For clients who don’t possess that desire nor knowledge, fixed income portfolios are at last delivering stable mid-single digit returns, and in some cases, more.
The main challenge has turned to providing clients with fixed income exposures that meet their specific needs. And that’s exactly what we’ve done by introducing three new cost-effective options—one of which is the least expensive bond fund in the country1—that represent a complete Canadian fixed income allocation at industry-leading MERs.
Total market access
The newly launched BMO Aggregate Bond ETF Fund and BMO Corporate Bond ETF Fund give Advisors efficient access to the $200-billion Canadian fixed income market with a cost structure that provides them with flexibility, and should more than exceed client expectations.
Let’s start with the former, which invests exclusively in the BMO Aggregate Bond Index ETF (ticker: ZAG). With $6 billion in assets under management in the underlying exchange-traded fund that boasts a decade-long track record2,3, it is designed to be a core building block in any well-diversified Canadian portfolio. The fund invests primarily in safer federal, provincial and municipal bonds as well as some corporate exposure on notes rated BBB or higher. That diversification as well as a monthly income yield of approximately 3.5% is available for just 0.09% MER (management expense ratio) on F class series —or 86% lower than the industry average4, 6.
- F series target MER of 0.09%4
- Invests 100% of assets into BMO Aggregate Bond Index ETF (ticker: ZAG)
- Get broad government bond exposure at an 86% discount to the industry average
- Ideal pairing with active global mandates or higher yield options
- Single-ticket, diversified Canadian corporate bond exposure with a target MER of 0.17%4
- Invests 100% of assets into BMO Corporate Bond Index ETF (ticker: ZCB)
- Offers investors a good entry point for those seeking shorter duration and higher yields
- Excellent pairing opportunity with ZAG to add diversification
ZAG is a one-ticket solution. But one of my suggestions to many Advisors has been to use this new fund to meet their clients’ Canada exposure and then pair it with an actively managed global product or an alternative investment to generate a blend of upside and downside protection as well as cash flow.
Still, for a more complete allocation across the Canadian bond market, we suggest BMO Corporate Bond ETF Fund as a complementary fixed income holding. The Fund provides access to the BMO Corporate Bond Index ETF (ticker: ZCB), which has delivered a yield premium at a very attractive cost since its inception in March 20182, while rounding out a total Canadian fixed income allocation. ZAG could represent the core holding, while ZCB is the corporate-credit exposure that provides shorter duration, a lift in yield and overall, some additional strategic or tactical capability. That’s how I would put a Canadian bond allocation together.
Yield enhancer
As mentioned above, some clients want complementary exposures that offer fixed income-like stability and downside protection, but target bigger cash flows using options strategies. The BMO Premium Yield ETF Fund, which invests in the underlying ETF, the BMO Premium Yield ETF (ticker: ZPAY), is another cost-effective income generator that we’ve recently launched, which fits that description to a tee6.
- Target F series MER of 0.73%4
- Enhanced income with lower volatility than traditional U.S. Equity investments
- Invests 100% of assets in BMO Premium Yield ETF (ticker: ZPAY)
- Cash flow solution for clients looking for alternative exposure
- Ideal for clients looking to reduce U.S. equity exposure and cash flow without increasing U.S. fixed income allocation
Since launching in January 2020, ZPAY has leveraged BMO GAM’s leading Covered Calls strategy to generate reliable monthly income for investors. It’s a very suitable holding for cash-flow strategies, offering alternative exposure and a different return profile to the other two funds, but is also constructed to distribute a bond-like stream of money. The BMO Premium Yield ETF Fund is very much a complementary holding alongside conventional fixed income exposures. In many respects, this fund is the kind of yield-enhancing product that investors who have optimized their fixed income cost structures can then shift those savings into, in order to gain access to potentially higher returns.
Complete the circle
These three newly launched funds represent another page in what BMO Global Asset Management has been doing for more than a decade. We’ve been educators for Advisors in tactical ways to effectively integrate cost-effective investments into overall portfolio management for clients.
And as we launch more solutions as mutual funds, we continue to bring more innovation to both IIROC and MFDA Advisors, freeing them to concentrate on relationship building and strengthening their overall business. Introducing these products in multiple series and purchase options provides Advisors with the flexibility and value proposition that leads to successful book building.
By pairing the BMO Aggregate Bond ETF Fund and BMO Corporate Bond ETF Fund, an Advisor can create a Canadian bond portfolio at costs that are amongst the most competitive in the industry. Layering in the BMO Premium Yield ETF Fund completes what we see as a virtuous circle that can generate overall yields and cash flows that should meet the needs of today’s fixed income investors.
ZAG, ZCB, ZPAY historical return performance
| Underlying ETF | YTD | 1-year | 3-year | 5-year | 10-year | Since inception | Inception date |
|---|---|---|---|---|---|---|---|
| ZAG | 3.18%* | -2.09% | -1.75% | 0.77% | 1.70% | 2.65% | 01-19-2010 |
| ZCB | 2.72%* | -1.09% | 0.32% | 1.28% | - | 1.33% | 03-02-2018 |
| ZPAY | 8.72%* | 6.09% | 7.81% | n/a | - | 5.83% | 01-15-2020 |
*As of March 31, 2023. Past performance is not a guide to future performance. Performance is shown net of fees, in the currency of the respective share class with dividends reinvested.
Source: BMO Global Asset Management, Bloomberg.
1 Morningstar as of February 28, 2023.
2 See chart above with ZAG, ZCB and ZPAY historical performances.
3 AUM: BMO Global Asset Management, as of March 31, 2023. Largest Fixed Income ETF in the country: Canadian ETF Association (CETFA), March 31, 2023.
4 BMO Global Asset Management, Bloomberg, as of March 31, 2023. The average Canadian Fixed Income F series fund is 0.65%, or over seven times more expensive than the F series (target 0.09%).
5 BMO Global Asset Management, Bloomberg, as of March 31, 2023.
6 Target MER – Management Expense Ratio is an estimate only as the fund is less than one year old.
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