Combat the chaos with a proven approach: The low-vol strategy

Low volatility, or “low-vol” equity strategies were built for times like these. Capital allocation into holdings that may exhibit strong economic fundamentals over prolonged periods of time alongside consistent earnings growth and a lower beta to the broad market is precisely what we advise for investors amid substantial macro uncertainty like the kind we are experiencing now.

Our Multi-Asset Solutions Team (MAST) is overweight on those opportunities, both within and outside U.S. equity markets as tit-for-tat trade wars between the United States and myriad other countries threatens to disrupt trade flows, push costs higher for households and generally drag down growth.

Let’s review the North American economic backdrop and how investors can maintain prudent equity exposure in the present environment. We’ll then examine the historical performance of low-vol strategies over time.

North American backdrop

For the U.S. economy, the rearview data—household and corporate balance sheets, job growth and other fundamentals—were constructive. What’s in front of us is decidedly not. The new U.S. tariff regime should halt in its tracks what’s been a remarkable economic run in that country in recent years, with potentially significant implications for stocks.

Chart 1. U.S. recession probabilities in 2025 (Polymarket)

Source: Polymarket, as of April 25, 2025.

Odds of a U.S. recession in 2025 are elevated, with a 55% likelihood as of late April according to betting markets (see Chart 1). What happens to hiring and investment decisions for companies grappling with new tariff complexities, for example? Tariffs are also injecting a rare kind of macro concern: stagflation, something investors have not seen since the 1970s. As much as Trump wants to make U.S. manufacturing great again, global supply chains are a real concern for businesses, and existing manufacturers now face material operational struggles alongside macro uncertainty. The paperwork around tariff compliance isn’t trivial, either, adding more friction that is negative for growth.

The policy environment continues to be fraught with uncertainty—and we doubt we are done with that just yet even if talks of trade deals are emerging. The good news is, bouts of U.S. policy uncertainty tend to be short-lived (see Chart 2). We are cognizant that Trump changes policy positions quickly, and a further weakening of data could trigger a lowering of additional tariffs. There is still almost certain to be sustained duties, but ones less damaging to the economy. Tax cuts and deregulation later this year could help boost the market, as well. But at present, downside risks abound, and the holdings that led the way up are likely to lead on the way down.

If market nervousness persists—a likely scenario—our expectation is for many high-flying valuations (think Tech) to be at the forefront of declines. By contrast, names like Johnson & Johnson, IBM Corp. and General Mills Inc., firms with strong balance sheets and long track records, should see more resilient relative valuations. Those names are among the top holdings in the BMO Low Volatility U.S. Equity ETF Fund.²

Chart 2. U.S. policy uncertainty

Source: Bloomberg, BMO GAM, as of April 3, 2025.

The recession risk is greater for Canada than in the U.S. given the relative starting point of the domestic economy, and trade dependence. On paper, 25% tariffs on motor vehicles alone are enough to be worried about. Thankfully, compliance to USMCA’s (United States-Mexico-Canada Agreement) country-of-origin means the effective tariff rate is lower.

Nevertheless, the labour market continues to be lacklustre amid weak productivity gains, all within a less-than-favourable policy environment for the private sector. Amid this backdrop—and increased recession risk—conventional low-vol equities, including the “big three” grocers (Metro Inc., Empire Co. Ltd. and Loblaw Cos. Ltd.) and other downturn-resistant stocks, such as Waste Connections Inc. and Hydro One Ltd. should likely exhibit earnings and valuations stability. Those firms are top holdings in the BMO Low Volatility Canadian Equity ETF Fund.³

Historical performance

For many investors, exposures to both U.S. and Canadian low-vol equities should reside somewhere within the core of the portfolio, given the tenure and relative performance of such strategies. A glance at the movements within the underlying exchange-traded funds (ETFs) for both the BMO Low Volatility U.S. Equity ETF Fund and BMO Low Volatility Canadian Equity ETF Fund over the previous five years underscores this. In the case of each mutual fund, investors have experienced capital appreciation in step with market rallies, while limiting downside performance when markets declined.

The U.S. fund has gained 55% of the broad-market rise on average during positive swings in stocks, compared to participating in just 29% of the market declines during drawdowns. Figures for the Canadian equivalent fund are 71% on the upswings, and 52% during selloffs, respectively—meaning unitholders experienced approximately half the paper losses compared to the broad market.¹

In short, investors in BMO’s low-volatility strategies have experienced much shallower declines during bouts of market instability, while ensuring their portfolios benefitted from long-term equity market exposure. It is something of a trade off—lower highs, yet shallower lows. But in times such as now, investors may well appreciate the performance profile offered by a low-vol approach.

Performance (%)

Bloomberg, as of March 31, 2025. Inception for the BMO Low Volatility U.S. Equity Index ETF Fund = August 17, 2020. Fund code: BMO 95109. Inception for the BMO Low Volatility Canadian Equity Index ETF Fund = May 16, 2019. Fund code: BMO 95772.

¹Morningstar 5-year upside and downside capture ratios, as of March 31, 2025.

² As of March 31, 2025.

³As of March 31, 2025.