A look at the BMO Low Volatility ETF and mutual fund.

In 2019 BMO introduced a mutual fund option for their Canadian low volatility index. That ‘s thanks to the popularity of the BMO Low Volatility ETF – ticker ZLB. That fund has an incredible history of beating ‘the market’ and also delivering much better risk-adjusted returns. Think of it as winning by losing less. While the BMO Low Volatility ETF was launched in 2012, the beat for the index goes back decades.

I saw this piece on Investment Executive, New fund offers growth with less risk. And hey, isn’t that what most investors are looking for? Very few of us truly embrace volatility, even in the accumulation stage when those lower prices are great for our longer term total return prospects. So many investors have told me that they would take lesser returns for a more easy ride. That’s why most investors will choose that Balanced or Balanced Growth model.

As I observed in this post in January, Canadian ETF investors do sit comfortably in that sweet spot.

Using a lower volatility fund such as the BMO Low Volatility ETF can potentially lower the risk profile even to a greater degree. You can certainly combine lower volatility equities with those bonds that work like shock absorbers. My readers will know that I am a fan of, and I do acknowledge smart beta or factor investing. Lower volatility index investing is one of the core approaches that has been well studied. It is a misstatement that we have to always take on more risk to get greater returns.

ZLB might be the top option for a core Canadian equity ETF.

The low volatility fund has delivered on its promise

Courtesy of test.folio here’s the lower volatility ZLB fund vs the TSX Composite. The outperformance is over 4.0% annual. Truly incredible.

We see incredible outperformance, plus much less volatility (as advertised) and much lesser draw down (decline) in the modest stock market pull backs into 2016 and the Mr. Grinch Christmas Correction of 2018. BMO ZLB low volatility held up much better in the COVID correction in 2020, as well. That Sortino ratio frames the level of better risk adjusted returns. Again, holders of this fund have experienced much less price risk and have been rewarded with greater total returns.

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Here’s the returns by calendar year. This chart is from portfoliovisualizer, and from a previous post in February 2024. That site no long allows us to go back more than 10 years. In 2024 ZLB is up 18.7% vs 15.8% for the TSX 60.

Keep in mind that ZLB has not outperformed over the last 5 years, a period of great disruption and unexpected inflation.

The index methodology

The key components are large cap and lesser volatility. It is rules based, but in the end it is the market makers that decide what stocks will make their way into the index and into the fund. It is the active managers who do the majority of buying and selling of the individual Canadian stocks. These are the large cap holdings where the active managers have ‘more confidence’. They do not buy and sell them as much as other high flyers and more cyclical stocks such as energy and materials.

Here’s the sector breakdown for the fund.

I’d suggest that the fund is doing a lot of things right in Canada with respect to what works in Canada, and avoiding most of the cyclicals. It’s more along the lines of the famous Connolly Report, a dividend newsletter that had a verified performance trouncing of the Canadian large cap indices.

That said, I did put Canadian oil and gas stocks on the table in 2020. That is still a core holding for us.

The allocation to financials is more measured, and it allows meaningful exposure to REITs, Utilities, Consumer Staples and Communication Services. I like to call those Telco’s the new utilities. Most of us make a monthly habit of sending Bell, Telus, Rogers or Shaw too much money. Those are regular bills and services that we will not do without. Many families send those Telco’s more monies compared to heat and electricity utility payments.

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That said, the big dividend space has certainly come under pressure in 2022 into 2024 thanks to the higher rate (borrowing costs) environment.

And here is the top 15 in August of 2024. We see it is not dominated by the big dividend payers, and that is the outperformance secret sauce.

Metro, Loblaw, Empire, Hydro One, Waste Connections, TMX Group, Fortis, George Weston, Thomson Reuters, Intact Financial, Quebecor, Dollorama, BCE, Emera and Barrick Gold.

Canadian stock markets may be only a small slice of International equities, but we are unique in that we have many oligopoly sectors such as banking and financial, Telcos and Grocers (with pharma retail add on) and Railways.

Creating low volatility stock portfolios

I have also penned on how one might create their own Canadian oligopoly or wide moat portfolio. As an add on I also suggested Brookfield Asset Management and Alimentation Couche-Tard as honourary wide moat stocks.

Waste Connections will also be added to the wide moat list in the next update. That said, the stock is very expensive.

All said, the Canadian wide moat stock portfolio has outperformed BMO ZLB, by just over 1% annual.

I also track the market-thrashing Norm Rothery (Globe & Mail) low volatility portfolio. Here are the holdings in August of 2024.

Bank of Nova Scotia, Canadian Utilities, Enbridge, Fortis, Great-West Lifeco, Hydro One, Intact Financial, Metro, Pembina Pipeline, Royal Bank of Canada, Sun Life Financial, TD Bank, Waste Connections, TMX Group, Keyera, Loblaw, McCan Mortgage Corp, TC Energy, Thomson Reuters, Toromont Industries.

Lower volatility found those wider moats

I have often questioned, or joked, as to why no one has created a Canadian wide moat fund, it may be that this is ‘the answer’ to that question. The fund went looking for lesser risk and perhaps it should not be a surprise that it found those oligopolies and wider moats that can make the active managers a little less itchy on the trigger finger.

For more on factors I’d suggest that your read the author Ploutos on Seeking Alpha. You can start with his article on the low volatility effect. In that article Ploutos points to 3 decades of data that shows outperformance of lower volatility S&P 500 constituents vs the broader market.

You might access that lower volatility index by way of that ETF. If you’re a mutual fund investor you might suggest your advisor give that new mutual fund F series a look.

Update: There was a lot of interest in this post and on US and International versions of low volatility ETFs.

Here’s an interesting post from ETF.com as iShares US Low Volatility fund is an ETF of the week in August and attracts considerable assets. This Min Vol Fund is on a roll. There are some interesting charts in there including the style evaluation; the fund is overweight Quality, Momentum, Yield and of course that Low Volatility factor.

From that post …

USMV’s strong performance has helped pull in assets too. This minimum volatility fund has risen 17.7% year to date, compared with VOO’s 14.7% rise, proving that taking a low-vol approach doesn’t always mean sacrificing return (read: “Why Low Vol ETFs See Big Demand“).

Low Volatility. may be a good option for those who are looking to avoid the high valuation levels for the U.S. market (S&P 500).

To gain that much needed international diversification a popular route is to use a Global Ex-Canada ETF such as ishares XAW or Vanguard’s VXC. You can add one of those to your wonderful Canadian Low Volatility or Wide Moat stock portfolio.

Of course, add bonds, cash and gold to reduce risk to stay within your risk tolerance level.

Here’s why retirees hold bonds, cash and GICs.

For those who want low-fee ETF portfolios, advice and financial planning, I’d suggest you check out Justwealth – Canada’s top Robo Advisor.

Justwealth is also a great shop for RESP investing. They offer target date funds that adjust the risk level as the student approaches the education start date.

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