The evolution of structured products continues
Celebrating year two of the BMO Strategic Equity Yield Fund
July 2024
The BMO Strategic Equity Yield Fund (SEYF) enables Advisors to unlock cash flow, mitigate risk, and stabilize portfolios amid market volatility. Now, as it begins its second year, Sara Petrcich, Head of ETF and Structured Solutions, and Acushla Vestby, Managing Director and Head, Structured Solutions and National Accounts, discuss the driving force behind SEYF and its new sister strategy—the BMO Strategic Fixed Income Fund.
Key takeaways:
- The BMO Strategic Equity Yield Fund (SEYF)—the flagship of BMO GAM’s suite of structured solutions—simplifies Advisors’ portfolio construction process by making structured notes accessible (through replication) in a familiar mutual fund format, with a target yield of 8% (for the F series)
- Based on Advisors’ needs, BMO GAM recently launched a fixed income-focused sister fund: the BMO Strategic Fixed Income Yield Fund
- BMO GAM’s structured solutions suite also includes equity buffer and accelerator ETFs, which enable Advisors to dial down risk or dial up equity performance, respectively
One year ago, BMO GAM opened a new chapter in the evolution of the structured product space with the launch of the BMO Strategic Equity Yield Fund (SEYF). Now, SEYF has been joined by a new sister strategy: the BMO Strategic Fixed Income Yield Fund.
As we mark this significant milestone, Sara Petrcich, Head of ETF and Structured Solutions, and Acushla Vestby, Managing Director and Head, Structured Solutions and National Accounts, sit down to reflect on BMO GAM’s vision for structured solutions, how Advisors have been using SEYF, and the introduction of the new fixed income-oriented yield strategy.
On our mission to democratize structured products
SP Before I joined BMO Global Asset Management almost two years ago, I spent many years in Capital Markets with a background in structured products trading. Bringing that experience to GAM and working with our team to develop the BMO Strategic Equity Yield Fund was a natural fit. In speaking with Advisors, there’s been a great deal of demand for modern solutions that are well-suited to the current market environment. Higher-for-longer interest rates and the inverted yield curve create uncertainty, and clients are seeking downside protection with reliable upside. SEYF takes the concept of structured notes, which some Advisors are already familiar with, and makes them accessible in a familiar mutual fund format by replicating their performance with derivatives. It is actively managed on an evergreen basis by our investment team, and it helps Advisors avoid the complexity and time requirements of managing a portfolio of structured note by themselves.
In speaking with Advisors, there’s been a great deal of demand for modern solutions that are well-suited to the current market environment.
AV My background is in selling structured notes and traditional fixed income, and for years, we heard from Advisors that they were looking for an evergreen, cash flow-generating solution to slot into their model portfolio. The feedback we’ve received on SEYF is that it does just that—it can make an Advisor’s life easier. For example, when I was on the bond desk, there was one Advisor that I worked with closely. After years of buying traditional fixed income, he switched to structured notes because he was looking for enhanced yield and access to equity markets, as well as some downside protection. In truth, he might have been my favourite client, because he was buying 10-20 notes per month! But that led to line-item fatigue. SEYF has enabled him to streamline his workflow and make it more scalable across his entire book. Another Advisor I know has a client out in the Prairies who was a farmer approaching retirement. After the client sold his farm, he needed stead cash flow. SEYF’s 8% target yield (for the F series) provided the ideal solution for that client.
Shopping for the best price: how we achieve an 8% target yield
SP We arrived at an 8% target yield for SEYF (for the F series) through a comprehensive evaluation of structured note pricing and Advisor and client needs. Markets are dynamic, and the coupon on notes can change as volatility rises and falls. Today, 8% appears to be the sweet spot—a target yield that satisfies the cash flow needs of clients while being sustainable in the short and intermediate terms. Currently, the coupons we’re obtaining are actually above 8%, but we want to be anticipatory of any changes in the market that could cause coupons to decline. Coupled with the cash flow is built-in, 15 to 20% contingent downside protection,1 which makes SEYF appealing on both the upside and the downside.
AV Another key feature of SEYF is counterparty diversification—we go out to various dealers or counterparties to get exposure to structured notes. That’s a significant competitive advantage compared to portfolios of notes sources from a single dealer.
SP Rather than having too much concentration with any single counterparty, we have ongoing relationships with between a half-dozen and dozen sell-side dealers.2 This gives our investment team the opportunity to shop for competitive pricing, which is what allows us to deliver solid, predictable coupons in the portfolio and achieve our 8% target yield (for the F series).
The BMO Strategic Fixed Income Yield Fund seeks to replicate the outcome of structured interest rate notes to potentially generate an above-market coupon without added credit risk.
You ask, we listen
AV I’ve spent much of the past year on the road speaking with Advisors about SEYF, and one thing we often hear is: “I love the Strategic Equity Yield Fund. Is there any way you could come up with a fixed income equivalent?” That’s what led to the creation of the new BMO Strategic Fixed Income Yield Fund, which launched in early July.
SP With traditional fixed income, investors seeking a higher yield typically have to accept slightly more credit risk. The BMO Strategic Fixed Income Yield Fund seeks to replicate the outcome of structured interest rate notes to potentially generate an above-market coupon without added credit risk. Plus, the Fund’s tactical management by our investment team makes it suitable for various interest rate environments.
Structured solutions: providing more than just cash flow
AV In addition to cash flow-oriented funds like SEYF and the BMO Strategic Fixed Income Yield Fund, our suite of structured solutions also includes equity buffer and accelerator ETFs, which offer Advisors a different type of defined return.
Whether your goal is to generate cash flow, maximize growth, or mitigate risk, we have a cutting-edge strategy to meet your client’s needs.
SP Advisors often ask me, “how do BMO’s Buffer and Accelerator ETFs fit into my client’s portfolio?” In essence, they’re an extension of the covered call concept—a conservative approach to add to portfolios when you want a predictable outcome. Our Accelerator ETFs are constructed to offer twice the upside over a defined period, so they’re ideal if you think markets are going to rally slightly. On the other hand, if you think markets will trend negative or in a narrower range, you can purchase our Buffer ETFs, which provide downside protection with a known upside cap. Whether your goal is to generate cash flow, maximize growth, or mitigate risk, we have a cutting-edge strategy to help meet your client’s needs.
Funds at a Glance
| Fund | Code | Series Code MER(%) | Risk Rating4 |
|---|---|---|---|
| BMO Strategic Equity Yield Fund – F Series | BMO95290 | 0.73 | Low-Medium |
| BMO Strategic Fixed Income Yield Fund – F Series | BMO95341 | 0.603 | Low |
BMO Strategic Equity Yield Fund – Performance
| Fund | 1 mo | 3 mo | 6 mo | YTD | 1 yr | 3 yr | 5 yr | 10 yr | Since inception |
|---|---|---|---|---|---|---|---|---|---|
| BMO Strategic Equity Yield Fund – F Series | -0.3% | 0.6% | 3.2% | 3.2% | 3.3% | - | - | - | 2.7% |
As of June 30, 2024.
Please contact your BMO Global Asset Management wholesaler for any additional support and guidance.
1 Contingent buffered protection: the note provides principal protection at or above a principal protection level. Below the principal protection level, the note begins experiencing a loss. The loss profile is always less than the underlying reference asset’s loss.
2 Subject to change without notice.
3 The listed target Management Expense Ratio (MER) are estimated. As the series of funds are less than one year old, actual MER costs will not be known until the fund financial statements for the current fiscal year are released.
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This article was published on Friday, July 29.
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