I recently looked at BMO’s Low Volatility ETF, ticker ZLB. The investment approach or methodology is also available as an F-series mutual fund. The post created great interest. What’s not to like with a brief history of better returns with less risk? But does the fund make for a suitable core Canadian equity investment?
Original post – A look at BMO’s low volatility ETF and mutual fund.
A few Cut The Crap Investing readers were more than curious. With better returns and less risk, “why not use this as a core Canadian holding” was the question put to me. Of course I can’t answer for any other investor. We all have to do our own research and come to our own conclusion. We are all at different stages of the wealth building and wealth protecting process. We all have our unique circumstances and appetite for risk.
BMO’s Low Volatility Sector Breakdown
ZLB is a Canadian dollar ETF that holds Canadian companies.
On the surface it appears that we get a little more sensible sector allocation. The Canadian financials are at 21.8% compared to 31% for the Canadian Composite Index.
And the popular TSX 60 will take the Canadian financials up to 36.5%. Here’s the breakdown for the Composite by way of the overview for iShares ETF XIC.
BMO’s Low Volatility fund fixes a couple of ‘shortcomings’ for the Canadian market. First it brings the REIT exposure up to that 10% level that is recommended by many portfolio builders. Also, utilities are known to perform very well. They pay out big juicy dividends that are supported by long term contracts. The utilities allocation is more than generous. Consumer staples and consumer discretionary companies are know to hold up much better than many other sectors, and they can hold up better than the total market. They are more than well represented in ZLB. The consumer sectors are perhaps where they should be in a sensible fund that represents the Canadian market.
I had explored sectors and how they held up in that last 2 recessions. Here is The Lowest Volatility Sectors For Retirees. And of course it’s not just retirees who like to invest in lower volatility stocks. Many investors are looking for better risk adjusted returns.
That ZLB fund also brings the Communications Sector and those oligopoly telco’s up to a very reasonable level. Hey, we all send too much money to Bell, Telus, Rogers or Shaw every month, right? Families typically spend more on communications stuff compared to electricity, water and heat.
ZLB is also good at removing the cyclical crap that continually trips up Canadian investors. OK I’ll call you out by name – energy producers and metals and other resource stuff.
How many times are you going to let Suncor and Crescent Point and Canadian Natural Resources break your heart?
I could go on; obviously I like what it does for sector allocation but we should remember that with only 45 companies we have concentration ‘risks’. Many will suggest that to cover a region or country 20-25 companies is ‘enough’ if you’re sticking to larger cap successful and profitable ventures. Once again, I’ll leave that to you as to ‘how many does it take’. Like Mark Seed of myownadvisor, I am an index skimmer. For the US market I hold 18 companies. My 15 dividend achievers essentially track that large cap and cap-weighted index, US ticker VIG.
What do the experts think of ZLB as core?
I checked in with a few money manager friends and bloggers within the investment community. Here’s what they had to say.
Arthur C. Salzer, Chief Executive Officer and Chief Investment Officer at Northland Wealth Management, likes and uses ZLB for clients in concert with that XIC.
We use ZLB and XIC as core holdings. Depending on our viewpoints, we go from 25%-75% ZLB/XIC. It’s inexpensive and value added (return vs risk).
Arthur had also stated that ZLB was used as the core holding in 2014 and 2015.
Jonathan Chevreau of Findependencehub also is in that pairing camp.
Makes sense for many: I have owned these in the past though not sure as Core now, given the rise of the AA ETFs.
While the fees for ZLB are a little higher that a typical core fund, Jonathan also adds that may be worth the price if you seek lower volatility.
Mark Seed of myownadvisor offered …
I like ZLB overall, a great fund, consider it almost like an “equal weight” fund as it applies to Canadian sectors like financials, utilities, consumer staples, and telco’s. If our oil and gas industry makes you queasy, this is a great fund to own.
Robb Engen of Boomer and Echo had suggested that it’s hard to argue with the results and he’s not surprised that investors are drawn to that low volatility handle. Like many, he finds it curious that this factor would would deliver absolute outperformance.
And here’s the link to the full site of BMO Low Volatility ETFs that includes US and International offerings. Yes you could be a Low Vol investors ‘across the board’ if that’s your wish.
More Weekend Reads
Of course, you’re already on your way as I’ve linked to the sites of our friends who have commented on ZLB. For more links, this post from Mark Seed will also help the cause.
In the Globe and Mail Clare O’Hara reported on new amendments enacted by the CSA, aimed to make advisors accountable for their recommendations.
Investor-rights advocate Ken Kivenko suggested on LinkedIn…
These amendments don’t mean squat if the CSA continues to allow discount brokers to receive trailing commission or advisers to sell DSC funds. It’s hard to see how either of these can co-exist with these provisions as lightweight as they are.
And here’s an area that will get more attention on Cut The Crap Investing, using reverse mortgages and HELOC’s as an income option for retirement funding. I’ve been exploring the concept for quite some time. Retirement specialists please send me your thoughts and studies on the topic.
And here’s a terrible post and study on living off of the dividends in retirement, and why that’s bad. Wow, if you’re going to study living off of the dividends in retirement, you’d think you might have a look at how retirees actually live off of the dividends. They typically don’t buy the S&P 500 index funds, ha.
And check out The Dividend Guy’s 2-year report card and update.
And here’s an interesting post from milliondollarjourney – running out of HELOC space for the Smith Maneuver.
A big question that I get is what about the HELOC payments? Wouldn’t that crimp your cash flow? To get around this cash flow problem you can capitalize the interest. Essentially, this is where you use a loan to make the loan interest-only payments. In this case, you can use the existing HELOC to make the HELOC payments. Confusing? It’s not as bad as it sounds.
On Seeking Alpha I offered up on that Balanced Growth Model and those better risk adjusted returns through the last market cycle.
And I have to give a public shout out to Ellen Roseman for inviting me to guest speak at her investment class at U of T. I had an absolute blast.
Have a great weekend. Please, please, please hit those social media share buttons for this post. And have a great long weekend. We can chat here or follow me on Twitter.