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The Evolution of Structured Products for the Modern Era

During the past decade, the availability of structured products has proliferated. Now, it is time for a new chapter in the evolution of this product space. In this article, Bill Bamber, Chief Executive Officer, and Sara Petrcich, Head of ETF & Structured Solutions, introduce BMO Global Asset Management’s Strategic Equity Yield Fund and how it brings Capital Markets tools to a wider swath of Canadians.

October 2023

Bill Bamber

Chief Executive Officer, BMO Global Asset Management

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Sara Petrcich

Head of ETF & Structured Solutions

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By Bill Bamber, Chief Executive Officer, BMO Global Asset Management

When Deland Kamanga became the Group Head of Wealth in late 2021, this set in motion a new chapter for BMO Wealth in general and BMO Global Asset Management in particular. Given Deland’s background in both Wealth Management and Capital Markets, this brought to the fore the concept of better uniting products and ideas that have typically resided on the Capital Markets side of the business and the beneficial capabilities offered by an asset management platform.

As we know, the Advisory model has undergone transformational change over the past decade as more and more advisors moved from being ‘commission-based’ to being ‘fee-based’. Most would agree that for both Advisor and client alike this change has been beneficial. That said, some popular products, like structured notes, are still very much geared towards the commission-based model. At BMO GAM, we felt it was time to adapt the most popular product in the structured note space for those who sought a well-managed, efficient solution that worked well for fee-based Advisors and, by extension, their clients. Enter the BMO Strategic Equity Yield Fund (SEYF).

The SEYF, simply put, replicates a portfolio of autocallables that are representative of the most popular autocallable structured note offerings in the Canadian marketplace, with an investor-centric twist. As Advisors know, the Canadian structured note market is dominated by the ‘Big Six’ Canadian bank issuers. These issuers have served the market very well and offered an incredible array of notes throughout the years. Juxtaposed against the migration to a fee-based model, however, the array of transactions required to manage a portfolio of Notes can become taxing in time and effort. “Line-item fatigue” is an often-used phrase to describe the build-up of a large number of singular note positions across an Advisor’s book. The solution is a one-ticket strategy—namely, an allocation to the SEYF. The concept of a fund holding and/or replicating a portfolio of notes is not necessarily new; some of the first ones emerged in the 1990s abroad, but it is a newer concept in Canada. Much like the emergence of bond funds, a fund focused on replicating autocallable notes is new to many, but here to stay.

Much like the emergence of bond funds, a fund focused on replicating autocallable notes is new to many, but here to stay.

At any given time, there are between 150 and 200 notes available in the Canadian market. The sea change that the BMO Strategic Equity Yield Fund represents is that it recreates that exposure in an evergreen, one-ticket solution. Instead of having to do the considerable leg work associated with structured products yourself, an Advisor can leave it to our experienced Portfolio Managers, buying the Fund whenever it makes sense for clients and adding to your client’s position when needed. The Fund also satisfies investors’ ongoing hunt for yield with an attractive 8% target and low-to-medium risk rating.1 For Advisors who already utilize structured notes for some clients, it can serve as a time-saving solution—you could, for instance, continue to customize notes for larger clients while utilizing the SEYF for other clients who would benefit from a similar exposure.

Our team is composed of highly tenured experts with a combined 100+ years of experience in capital markets. Guided by this expertise, BMO GAM is prepared to fully harness forward-thinking solutions like the BMO Strategic Equity Yield Fund and bring unique solutions to investors nationwide.

By Sara Petrcich, Head of ETF & Structured Solutions, BMO Global Asset Management

I began my career in Capital Markets over 20 years ago. My focus then was on building custom solutions for a select group of investors—now, my goal is to bring those types of tools to a wider swath of Canadians.

One of the primary advantages of bringing Capital Markets tools into a mutual fund or ETF is, as Bill mentioned, the evergreen nature of the format. Whereas Capital Markets are transactional, there’s a certain permanence to investment funds—Canadians could potentially remain invested in the SEYF for decades to come, with the flexibility to adjust their position whenever necessary.

Whereas Capital Markets are transactional, there’s a certain permanence to investment funds—Canadians could potentially remain invested in the SEYF for decades to come

In my view, the three key benefits of the BMO Strategic Equity Yield Fund are convenience, cost, and accessibility. Unlike most structured outcomes products, you don’t need to be a large institution or put down a large minimum investment in order to access the fund—the SEYF is available at an MER of 0.73%2 and lower purchase minimums compared to buying an individual structured note. For IIROC Advisors, the Fund is a one-ticket alternative to building a portfolio of structured notes and makes it easy to invest new assets with consistency. For MFDA Advisors, it offers access to an entirely new asset class and yield profile, all in a familiar mutual fund format.

Our newly merged ETF & Structured Solutions team, which I am honoured to lead, prides itself on collaboration and innovation. With both our experienced PMs and Structured Solutions professionals all under one roof, we strive to lead the market with cutting-edge ideas that lead to valuable solutions for Advisors and investors.

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

1 For the F series. Risk is defined as the uncertainty of return and the potential for capital loss in your investments. Estimated Distribution Yield was calculated by using the expected annualized distribution yield (which may be based on income, dividends, return of capital, and option premiums as applicable) of the underlying portfolio and excluding any capital gains from portfolio turnover, less expenses. The distribution rate is based on the starting NAV of $10. Distribution yield is not an indicator of overall performance and will change based on market conditions, NAV fluctuations, and is not guaranteed.

2 For the F series. The listed target Management Expense Ratio (MER) is estimated. As the fund is 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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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).

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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.

Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by current net asset value (NAV). Distributions are not guaranteed, may fluctuate and are subject to change and/or elimination. Distribution rates may change without notice (up or down) depending on market conditions and net asset value (NAV) fluctuations. The payment of distributions should not be confused with a BMO Mutual Fund’s performance, rate of return or yield. If distributions paid by a BMO Mutual Fund are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO Mutual Fund, and income and dividends earned by a BMO Mutual 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.

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 they prefer to receive cash distributions. For further information, see the distribution policy for the applicable BMO Mutual Fund in the simplified prospectus.

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