How Snowbirds Can Earn $3,000 Per Month in U.S. Income
Portfolio managers Jeff Sutcliffe and Steve Xu discuss how the BMO U.S. Dollar Monthly Income Fund can help snowbirds meet their regular expenses—and avoid exchange rate-related surprises.
- The BMO U.S. Dollar Monthly Income Fund can be an ideal solution for snowbirds
- The Fund benefits from an active approach to asset allocation, guided by BMO’s Multi-Asset Solutions Team and Five Lenses strategy
- Asset mix adjustments have enabled it to mitigate some of the negative impact from rising interest rates and higher inflation
1. With markets volatile, exchange rates fluctuating, and snowbirds potentially going back and forth between the U.S. and Canada on a regular basis, what kind of plan can Advisors execute on behalf of their clients?
SX For snowbirds, it’s best to avoid rolling the dice on exchange rates—if the Canadian dollar declines relative to the US dollar (USD), suddenly trips south can get a lot more expensive. The BMO U.S. Dollar Monthly Income Fund is designed precisely for snowbirds and other Canadians who require USD cash flow. Call it an all-American solution—both entry and exit, including distributions, are entirely in USDs. With that kind of strategy, investors are able to completely avoid exchange rate risk. When it comes to series and purchase options, the best solution depends on how Advisors are structuring their client business. For fee-based investors, we’ve got a Series F option, which is very competitively priced. We also offer an Advisor series option, which is great for that space. Either way, the BMO U.S. Dollar Monthly Income Fund is well-suited for clients looking for monthly income and the potential for capital gains without incurring foreign transaction fees.
A common question we hear is—with the greenback as strong as it is right now, wouldn’t it make sense to wait for it to come back down to earth before investing in USD solutions? The key point we emphasize is that Canadians who regularly travel between the U.S. and Canada would either have a USD pool of funds so the exchange rate would not be an issue, or they would not be buying USD solutions all at once. They would start a position but then build it gradually over time. This means that in the long run, costs will average out to a reasonable entry point.
2. What is the biggest benefit of the BMO U.S. Dollar Monthly Income Fund for snowbirds?
SX The USD purchase option is a huge plus. But compared to other strategies available, the number one feature for investors is the Fund’s active asset allocation. Most other funds in the space operate with a static asset base, where your percentage of equities and bonds is essentially fixed and all the alpha comes from the securities themselves, or else it’s the investment house’s equity team making all the macro-level asset allocation decisions. At BMO, our Multi-Asset Solutions Team (MAST) specializes in the kind of meticulously-researched active asset allocation that investors expect. MAST, of which Jeff and I are a part, drives the Fund’s investment decisions AND drives alpha with cross-asset decisions, such as our current strategic overweight to cash. Using our Five Lenses strategy, we examine not only the mix of stocks and bonds, but also geographic tilts, credit duration, sector bets, and more. In 2022, that kind of 360-degree approach is a game-changer.
3. If a snowbird couple needs, say, $3,000 per month in USD income, how much would they need to have invested in the Fund?
SX If an investor were to come into a fee-based plan—our Series F ticker, which generates about 5% yield annually—they would need to invest around $717,000 to generate a monthly income of US$3,000, or a yearly income of US$36,000. Distribution occurs monthly, as the name of the Fund indicates.
4. How has the Fund been impacted by the Fed’s aggressive interest rate hikes?
SX No question that inflation has run rampant this year, and the Federal Reserve (Fed) has thrown down the doomsday gauntlet, so to speak, with its hawkish messaging and aggressive interest rate increases. All of a sudden, the Fed went from being a friend to risk assets to the guy that took the punch bowl away at a party. It’s been a challenging year from an asset allocation perspective. But it’s also been a good year, because it highlights the benefits of active management. One trend we’ve seen this year is yields moving meaningfully higher across the curve. That means that U.S. bonds, which are included in the Fund’s portfolio, are now earning a pretty healthy yield compared to what they were making at the beginning of the year. We’ve responded accordingly. Same with cash: we made the call to overweight cash like never before as we took our foot off the gas with respect to equities and bonds. The Fund is now positioned more conservatively than it has been in over a decade, which has been the right call. “Cash is trash” is the old saying—but 2022 is different. This year, because of the Fed’s actions, it’s been among the top performing asset classes. We’ve been able to max out our cash allocation at just under 10%, while asset managers who operate with a static mix are out of luck.
5. Looking ahead, how is the fund positioned to withstand inflation and a potential recession?
SX Inflation is a thorn in the side of risk assets. But the BMO U.S. Dollar Monthly Income Fund is built from the ground up to be a bit more defensive—we think of it as a balanced solution with a total return approach with a yield tilt. Over the years, we’ve made a number of changes to the asset mix to enhance our positioning. We trimmed our U.S. REITs and S&P 500 exposures and reallocated to dividends and low volatility, both of which have outperformed in the current inflationary environment. Those adjustments were made even before inflation took off. And in 2022, as Steve mentioned, we’ve de-risked the portfolio by shifting from bonds and equities to cash. That’s bolstered the Fund’s defences and gives us the dry powder necessary to reallocate to a more risk-on posture when markets start to rebound.
6. Jeff and Steve, one last question for you. We like to end by asking for book recommendations that have shaped the way you think. What would you suggest for our Advisor audience?
SX My first recommendation would be Superforecasting: The Art and Science of Prediction by Philip E. Tetlock and Dan Gardner. The most challenging part of our job is developing a kind of internal crystal ball, and if I can improve my hit rate by just a couple of percentage points, I know I’m ahead of the game. The second book I’d highlight is The Lessons of History, a collection of essays by Pulitzer Prize-winning historians Will and Ariel Durant. History provides crucial context for what we do, and in an era where geopolitics have gotten so heated, it’s important to understand the factors that led to particular conflicts in order to understand day-to-day developments.
JS My first pick is The Ascent of Money by Niall Ferguson. It traces how, even though we’ve gone from clay tables to computers, we tend to encounter many of the same challenges over and over. In the current economic environment, we’re probably facing many of the issues that societies faced hundreds or even thousands of years ago. I’d also recommend The Intelligent Investor by Benjamin Graham, which is a seminal work on value investing. And finally, Cathy O’Neil’s Weapons of Math Destruction, which is a fascinating look at unintended biases from the perspective of a quant scientist. She examines algorithms and applies her findings to investing and other areas.
Please contact your BMO Global Asset Management wholesaler for any support and guidance.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. 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.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
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 without any kind of notice. 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.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/TM Registered trademarks/trademark of Bank of Montreal, used under licence.
Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. Please refer to the distribution policy for BMO Mutual Fund set out in the prospectus.
Distributions, if any, for all series of securities of a BMO Mutual Fund (other than ETF Series) are automatically reinvested in additional securities of the same series of the applicable BMO Mutual Fund, unless the securityholder elects in writing that that they prefer to receive cash distributions. For ETF Series securities of a BMO Mutual Fund, distributions, if any, may be paid in cash or reinvested automatically in additional ETF Series securities of the applicable BMO Mutual Fund and the ETF Series securities will be immediately consolidated such that the number of outstanding ETF Series securities following the distribution will equal the number of ETF Series securities outstanding prior to the distribution. If a securityholder is enrolled in a distribution reinvestment plan, distributions, if any, will be automatically reinvested in additional ETF Series securities of the applicable BMO Mutual Fund pursuant to the distribution reinvestment plan. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.
* As compared to an investment that generates an equivalent amount of interest income.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate. Certain of the products and services offered under the brand name, BMO Global Asset Management are designed specifically for various categories of investors in a number of different countries and regions and may not be available to all investors. Products and services are only offered to such investors in those countries and regions in accordance with applicable laws and regulations. BMO Financial Group is a service mark of Bank of Montreal (BMO).
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. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing.
Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund facts or prospectus of the relevant mutual fund before investing. Mutual 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 Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds 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 Life Assurance Company is the issuer of the BMO Segregated Funds individual variable insurance contract referred to in the Information Folder and the guarantor of any guarantee provisions therein. The BMO GIF Information Folder and Policy Provisions provide full details and govern in all cases. BMO GIF products are offered through BMO Life Assurance, a separate legal entity than BMO Global Asset Management and wholly owned by BMO Financial Group. Segregated funds are only available for sale by individuals with appropriate insurance licences and are not considered a mutual fund. Segregated fund fees are higher than mutual funds as they include insurance fees to provide for the guarantees on deposits at maturity or on death.
Legal and regulatory disclosures
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this Website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.