Why did BMO’s Low Volatility ZLB ETF stop outperforming?

When putting together a Canadian stock portfolio one could argue that there is no better approach than low volatility. That’s what Norm Rothery’s research shows. And from inception, the BMO Low Volatility ZLB has outperformed the TSX (Canadian equities market) by a very wide margin. But that outperformance reversed course with the arrival of the first modern day pandemic in 2020. The pandemic created and spread inflation around the globe. Trump took power in the U.S. and stoked inflation fears and uncertainty with tariff wars and a switch to on-shoring and protectionism. Compared to ZLB, the TSX has greater exposure to inflation-friendly sectors, and the banks. The TSX has been outperforming from the COVID correction of 2020.

When I compare the total returns of ZLB vs XIC based on the charts on their website I find that from inception of October 2011 ZLB turned $10,000 into $54,872. For the same period the TSX XIC turned $10,000 into $39,937. That’s 37.4% more.

All tickers are found on the TSX – Canadian dollar ETFs.

Check out the ZLB page and the XIC page.

The long-standing win for low volatility equities

BMO’s research and that of Norm Rothery shows that the the Canadian low volatility outperformance goes back well beyond 2011. This is a long-standing trend. The outperformance was interrupted by economic regime change in 2020. We don’t have the data but I would guess that low volatility stocks would have also greatly underperformed the TSX during the stagflation era of the 1970’s into the early 80’s as well. During stagflation, inflation-fighters such as gold (gold mining stocks), commodities and oil and gas stocks soared. Those are not traditionally low volatility sectors.

Recent performance

From February of 2020 to the end of November 2025 we see the outperformance of the TSX Composite.

And from portfolio visualizer, the outperformance mostly arrives in 2023, 2024 and 2025.

The general inflation fear has been mixed with the regime change effect in the U.S. The more Trump does, and the more he speaks, the greater the uncertainty and fear. Trump’s tariff wars and isolationism also stoke the ongoing inflation fears. Gold loves Trump. If I were to be cheeky and kill my chances of crossing the border this March to go watch the Blue Jays’ Spring Training I might write that the Trump regime has achieved to …

Make Gold Great Again!

It’s ironic that Canada and the Canadian equity markets have a built in Trump-hedge with gold and precious metals. Let’s throw in Canadian oil and gas stocks as well. Cut The Crap Investing readers who took to the idea of gold in a balanced portfolio, plus Canadian oil and gas stocks (and modern gold – bitcoin) were rewarded handsomely in the 2020’s.

The inflation fighters

On this blog, from 2018 inception I have suggested (not advice) that retirees and those in the retirement risk zone consider portfolio inflation fighters. You can get a very nice basket of inflation fighters in the one-stop shop, the Purpose Real Asset ETF – PRA.

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Inflation fighters typically consists of gold, other precious metals, commodities stocks, real estate and oil and gas stocks. These are real, non-financial assets. As they say, taking a swing at central bankers and federal finance ministers …

You can’t print gold and silver

And over the last three years we see gold and the gold producers moving to new highs.

Within the iShares XMA Materials ETF we would hold the Canadian gold miners and companies that produce other precious metals and useful materials such as copper. Copper is experiencing a noticeable tailwind thanks to AI’s infrastructure needs, plus the slow but ongoing energy transition to renewables, plus increasing hybrid and electric vehicle adoption.

The TSX Composite has much greater allocations to gold and materials. The TSX also has much greater concentration in the Canadian banks.

Own the Canadian Banks, Don’t let them own you.

The banks are on quite the run.

The TSX Composite Sector Allocation

The BMO Low Volatility Sector Allocation

Historically, we see the TSX dominated by financials, energy and materials. Canadian Low Volatility indices typically find the lowest volatility financials, plus the very defensive consumer staples and utilities including the modern utilities (telcos/communication services).

Is BMO ZLB still a good portfolio asset?

ZLB is still a wonderful ETF IMHO. Will it return to outperformance? Nobody knows that answer of course, but if we were to return to a mundane low inflation and disinflationary (when the inflation rate is falling) environment with the tariff and Trump threats removed, there’s a good chance.

All said, an investor can still hold a Canadian low volatility ETF such as ZLB as their core Canadian equity holding and tack on an inflation-hedge. You can control your ratio of low vol to inflation fighting. Once again, not advice, but that’s how I approach portfolio management in retirement. For the record I’m semi-retired, my wife is likely to retire within the next three years. She’s in the retirement risk zone, so we prepare in advance.

While outperformance is great, I’m more looking for the low volatility effect. I want portfolios will hold up better than market in a major correction and recession. I don’t fear inflation – we hold an inflation hedge.

Global equities + low volatility slant + inflation hedge + cash/bonds/bitcoin

And of course we should always consider U.S. and International diversification. That fills the portfolio holes. Canada makes for a terrible investment on its own or in concentrated fashion.

You can learn from the asset allocation models in the asset allocation ETFs and on Cut The Crap Investing’s Model ETF Portfolio page.

More Sunday Reads

At MoneySense Jonathan Chevreau takes a look at annuities, those super bonds.

Unlocking the annuity puzzle: Why Canadians avoid what might be the perfect retirement vehicle.

Thanks to Jon for the links and mentions of Retirement Club. Jon is a Retirement Club member. You can join us, and Jon for the 2026 sessions.

At Booming Encore – What does “investing time” really mean when it comes to preparing for life after work?

As always, what’s going on with Dividend Hawk’s portfolio?

From the Loonie Doctor and Benjamin Felix a podcast covering – Pensions for Canadian business owners.

Just for fun, Kyle at Million Dollar Journey looks back at market predictions for 2025.

I found this recently in the Globe & Mail, looking at the market forecasts of the last three decades.

Wall Street forecasts were off by an average 14.1 percentage points annually. In other words, on average, the error was more than 50% bigger than the forecast.

The mistakes were so large that they were like predicting warm, sunny weather before the arrival of a major blizzard.

Nobody knows that’s going to happen. Once again, get an investment plan and stick to it like glue.

At Stocktrades YouTube, Dan says that Canadian banks will face a hangover in 2026.

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