Skip to Main Content

How to Save 86% on Your Core Fixed Income Fees*

After building a 10-year track record and amassing over $6 billion in assets under management, Canada’s largest fixed income ETF, is now available as a mutual fund. Portfolio Manager Matt Montemurro introduces the new BMO Aggregate Bond ETF Fund.

May 2023

Photo of Matt Montemurro

Matt Montemurro

Portfolio Manager, Exchange Traded Funds

Read bio

Key Takeaways

  • An all-in-one fixed income solution at a target MER of 0.09% for the F-Series2
  • An effective core portfolio building block for your fixed income sleeve
  • Invests in all domestic investment grade bonds with full-term exposure
  • Fund invests 100% of assets in the BMO Aggregate Bond Index ETF (Ticker: ZAG), which provides consistent monthly income, with an annualized distribution yield of 3.47%, as of April 6, 20233

A decade ago, our ETF team launched the BMO Aggregate Bond Index ETF (ticker: ZAG). What is the rationale for offering this strategy in a mutual fund version? And why now?

MM Over time, ZAG has become a leader in the Canadian fixed income space. With more than $6 billion in assets under management, it’s recognized as the largest fixed income ETF in the country—and I think that speaks volumes.4 Now, investors who want the mutual fund wrapper can get that same aggregate bond exposure at the cost of nine basis points for the F-Series.1 That’s an 86% discount to the Canadian industry average,1 so the BMO Aggregate Bond ETF Fund is well positioned relative to our peers. Opening the door to the mutual fund investor base is something we’ve wanted to do for a long time. We saw tremendous volatility in fixed income during the past two years, and many investors were caught on the wrong side of a yield or duration trade. But the importance of diversification came back into the limelight, as did a focus on cost efficiency, and the time seemed ripe to ensure Canadians continue to get the best of both ETFs and mutual funds.

“Canadian Fixed Income” is the third largest mutual fund category by assets. It is a core portfolio building block. How does this mandate improve on what’s already available?

MM For clients who are looking for an aggregate bond exposure, the Fund provides a great landing spot—and that’s coming from a cost, allocation and size perspective. We diversify by sector, maturity and credit, so there are elements of the portfolio that will perform well in any environment, and that’s really what you want from your core positions. Depending on what the market is doing, you could then complement the core to be more tactical in the current climate. Getting exposure at the lowest cost in the category, at just nine bps for the F-Series, allows you to complement with more attractive, potentially more costly, satellite holdings. Essentially, ZAG can provide low-cost beta in your portfolio for that foundational building block of fixed income allocation.

What about Advisors who prefer an active fixed income approach?

MM It’s not necessarily active versus passive. At BMO Asset Management, we look at the two parts as being complementary to each other. And what’s great about this is that we can pair active and passive where we see the value. That’s where ZAG can really be beneficial. Getting the core of your fixed income portfolio at a low cost allows you to make more active decisions or take bigger risks around the periphery and be more tactical.

For example, as a portfolio manager, if you believed the market was undervaluing an opportunity in Canadian corporate bonds, you could simply add a tactical sleeve like the BMO Corporate Bond ETF Fund to implement that viewpoint. Or if you wanted to reach for higher yields through options strategies, using something like the BMO Premium Yield ETF Fund, you could dial that exposure up or down as the market changes. In either case, the core of your portfolio would remain broadly diversified, providing a counterbalance to your active positions.

As mentioned, the Fund invests 100% of its assets into ZAG. Can you provide an overview of the types of bonds held within the underlying ETF?

MM Absolutely. ZAG invests in a diversified portfolio of Canadian federal, provincial, municipal and corporate bonds. From a quality perspective, it’s 100% investment grade—that’s a BBB rating and above. As a whole, the average credit quality of the Fund is AA, so you’re getting very high-quality exposure. The allocation skews heavily towards government issuances—you generally get about 40% federal, 30% provincial and municipal combined, with the remaining 30% corporate. To summarize the weighted average duration, you’re getting about 7.3 years.5 The Fund invests in bonds of all maturity levels: long, mid and short.


Source: BMO Global Asset Management, Bloomberg, as of April 1, 2023.

The portfolio tracks over 1,400 bonds across Canada. Can you break down the process for selecting what goes into the portfolio?

MM At the end of the day, our job is to track the underlying index to the best of our ability. The portfolio currently has about 1,478 bonds, whereas there are about 1,662 in the index. To align with the benchmark, we look at several metrics—including duration, sector, subsector, yield, key rate, quality and issuer risk—and create a threshold for each characteristic to ensure we are not too overweight or underweight in any individual aspect. The way the underlying index works is that there is a daily rebalance. Anytime an issue comes to market, as a management team, we must decide whether it will benefit the portfolio from a tracking perspective. That’s how we deliver value for clients—by constantly looking for ways to add new securities and provide the most index-like exposure possible.

The last few years have been a rollercoaster for fixed income investors. How has the underlying ETF performed recently?

MM Last year was an extremely challenging time for many investors, as the Canadian fixed income universe saw the worst returns on record. We saw stocks and bonds go down simultaneously, an event that has only happened three times in 150 years. From a tracking perspective, ZAG was very tight to the index. As we look forward, however, there are a lot of opportunities in the space—some, that we haven’t seen in a while. To think, the last time we saw credit yielding where it is today was in 2007. During that year, the Canadian Bond Universe returned 3.68% while the S&P/TSX Composite also delivered gains of approximately 9.83%. However, in the following year, the equity index saw a significant negative return, whereas the fixed income index was largely positive. Year to date, we have seen a bounce back in fixed income performance, with the Canadian Universe returning 3.4% in just over four months (as of April 21, 2023). We are also starting to see stability in interest rates, with the Bank of Canada pausing hikes, which should lead to some strong performance for the remainder of the year. With exposure to corporates and the long end of the curve, we believe ZAG is well positioned for the environment ahead.

Source: BMO Global Asset Management, Bloomberg, December 31, 1990 - December 30, 2022.

Matt, one last question. We often ask our portfolio managers to provide a book or podcast recommendation that they think our Advisor audience would enjoy. What has piqued your interest lately?

MM I think Young Forever: The Secret to Living Your Longest, Healthiest Life by Dr. Mark Hyman is a must-read for anyone looking to improve their quality of life as a driven professional. How we eat and exercise supports sustainable health practices, creating simple rules to live by, and helping us de-stress after a long day. Finding the right balance can set us up for success throughout the week, particularly when life gets busy. Remember, health is wealth.

Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.

*1 Morningstar as of February 28, 2023.

2 Target MER – Management Expense Ratio is an estimate only as this fund is less than one year old.

3 Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year-end distributions) annualized for frequency, divided by current NAV.

4 AUM: BMO Global Asset Management, as of March 31, 2023. Largest Fixed Income ETF in the country: Canadian ETF Association (CETFA), March 31, 2023.

5 BMO Global Asset Management, Bloomberg, as of April 14, 2023. Duration: A measure of sensitivity of bond prices to changes in interest rates. For example, a 5-year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by % if interest rates fall 1%. Generally, the higher the duration the more volatile the bond’s price will be when interest rates change.

Disclosures:

IMPORTANT DISCLAIMERS

FOR ADVISOR USE ONLY. No portion of this communication may be reproduced or distributed to clients as it may not comply with Sales Communications requirements.

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.

The information in this trade idea 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 portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

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.

This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment.

The payment of distributions is not guaranteed and may fluctuate. The payment of distributions should not be confused with an Exchange Traded Fund’s performance, rate of return or yield. If distributions paid by the Exchange Traded Fund are greater than the performance of the Exchange Traded Fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an Exchange Traded Fund, and income and dividends earned by an Exchange Traded 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 Exchange Traded Funds, distribution policy in the prospectus.

Commissions, management fees and expenses (if applicable) may be associated with investments in mutual funds and exchange traded funds (ETFs). Trailing commissions may be associated with investments in mutual funds. Please read the fund facts, ETF Facts or prospectus of the relevant mutual fund or ETF before investing. Mutual funds and ETFs are not guaranteed, their values change frequently and past performance may not be repeated.

For a summary of the risks of an investment in BMO Mutual Funds or BMO ETFs, please see the specific risks set out in the prospectus of the relevant mutual fund or ETF. 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 Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate entity from Bank of Montreal. 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.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

®/™Registered trademarks/trademark of Bank of Montreal, used under licence.

* 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.