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CA-EN Advisors

BMO ETF Portfolio Strategy Report (Q1 2024)

January 11, 2024

2024 BMO ETF Desk Investment Outlook: Sticking the Landing

Our last new year outlook outlined how tighter monetary policy and supply-side healing would lead to disinflationary pressures. We expect these forces to continue as we head into 2024, and while central banks have significantly reined in inflation, they still need to stick the landing. The latest Consumer Price Index (CPI) readings are at 3.1%1 and 3.1%2 in Canada and the U.S., respectively. Real rates,3 which we measure as the 12-month T-bill, net of year-over-year CPI, are at their highest levels since 2009 on both sides of the border. Some central bankers expect this to be a drag on the economy, which may be why the market is pricing in aggressive rate cuts in 2024.

Comparing Canada and U.S. Real Rates

A line graph compares Canada and U.S. real rates, which dip in late 2021 and early 2022 and increase into 2023.
Source: Bloomberg, BMO Asset Management Inc. (Real rate taken as 12-month T-bill net of year-over-year CPI).

When Could We See Rate Cuts?

Overnight Index Swaps (OIS) are currently pricing in at least five rate cuts by the U.S. Federal Reserve (Fed) in 2024. With the most recent CPI reading still well above its target range, the Federal Open Market Committee (FOMC) will likely need to see the CPI in the low 2.0% range or lower for a sustained period before feeling comfortable in cutting rates. Additionally, with the U.S. Presidential Elections at the end of the year, the runway for rate cuts may not be as long as the market expects.
In Canada, inflation (when stripping the impact of shelter) is getting closer to the Bank of Canada’s (BoC) target rate. Moreover, household debt remains at record highs, which is why we anticipate rate cuts to be more likely and much sooner than those of its U.S. counterpart. It will be interesting to see whether lower rates will fuel housing prices, making homeownership a further stretch, as Canadians have not seen a meaningful correction in property prices. The path of rate cuts will depend on the economic scenario we find ourselves in and the geopolitical landscape. Below, we also include BMO Global Asset Management (BMO GAM)’s “House View” supplied by the Multi-Asset Solutions Team (MAST).

BMO GAM House View – 2024 Macro-Economic Scenarios: A More Convincing Case for Soft Landing

Here are the four possible scenarios in the order in which we believe are most likely to least likely.
Scenario one: Soft Landing – Peak Fed, rate cuts, cooling growth. Scenario two: Recession – Peak Fed, more rate cuts, mild recession. Scenario three: No Landing – Peak Fed, no rate cuts, resilient growth. Scenario four: Hard Landing – Rate hikes, inflation and growth reacceleration.

There can be no assurance that actual results will not differ materially from expectations.

Source: BMO Global Asset Management (“House view” provided by BMO GAM MAST).

Time to Dial Back Expectations

Currently, the S&P 500 Composite is pricing in an earnings growth rate of 11.8%.4 Combined with the “soft-landing” scenario becoming the market consensus, this seems inconsistent with the aggressive rate cuts on the table. Not long ago, the Fed outlined how higher long-term rates would reduce the need for further rate hikes, only for the long end of the curve to fall significantly in the last quarter. We remain constructive on risk assets in 2024; however, with the significant rally we saw from the reaction to the Fed’s “dot-plot” announcement in December, investors need to dial back.
With rate cuts likely more moderate than the market’s current expectations (in a soft-landing scenario), we anticipate this will encourage investors to venture further out on the risk curve. Lower risk-free rates5 mean equity risk premiums will expand, which will see some asset flows migrate from cash or “cash-like” products, which experienced sizable inflows the previous year. As we highlighted in last year’s outlook report, we are now in an era that will not move back to zero interest rate policies (ZIRP) and quantitative easing, and as a result, rates will be higher this decade than last. This also means portfolio construction needs to be adjusted accordingly from both an asset allocation and selection perspective.

Continued disinflationary pressures should pave the way for central banks to ease monetary conditions. Should central banks stick the landing by taming inflation while keeping economic conditions relatively strong, risk assets should be well-positioned in 2024. The main risks remain geopolitical, with conflicts arising around the globe and a growing political divide in the U.S.

Things to Keep an Eye On

Increasing Need for Alternatives

A line graph illustrates the stock-bond correlation, with episodes of market volatility intensifying the correlation between asset classes.
Source: Bloomberg, BMO Asset Management Inc. (Daily correlation between S&P/TSX Composite and FTSE/TMX Canada Bond Universe).
During the era of low interest rates, traditional balanced portfolios were challenged, as the allocation to fixed income provided few benefits. Lower rates meant less income coming from bonds. It also provided investors with inexpensive funding to leverage. Episodes of market volatility would then lead to margin calls, intensifying the correlations between asset classes. With interest rates returning to more normalized levels over the last 18 months, we have seen a revival of the prototypical 60/40 portfolio.

Recommendation: One positive of the low-interest rates era was using alternative assets to complement traditional portfolios. While traditional balanced portfolios have become more effective with higher rates, alternatives can still improve a portfolio’s overall efficiency. Complementing a portfolio with long-short equity strategies, such as the BMO Long Short Canadian Equity ETF (Ticker: ZLSC) or the BMO Long Short US Equity ETF (Ticker: ZLSU), can help to improve a portfolio’s overall risk/return profile. Gold bullion, which we had on last year’s watch list, can also be a diversifier.  

U.S Banks Are Leveraged to Interest Rates

A line graph shows the U.S. Bank Term Funding Program Reserve usage in millions.
Source: FRED Economic Data, Bank Term Funding Program Reserve – Wednesday Close (in $ millions).

U.S. regional bank stocks experienced some substantial hardships last year. The significant tightening of monetary conditions led to a deterioration of duration-sensitive held-to-maturity (HTM) portfolios. The default of several regional banks led to the creation of the Bank Term Funding Program (BTFP), which allowed troubled banks to exchange high-quality bonds for par value. This program, one of the key tools in calming markets after the collapse of Silicon Valley Bank (SVB), is set to expire in March. 

Recommendation: The U.S. banks—particularly the regionals—will be an area to watch, as the industry will be highly leveraged to interest rates. Multiple rate cuts would likely benefit the regional banks, as it would remove significant pressure from their HTM portfolios. However, if interest rates remain resilient (or even rise, if inflation were to return), the termination of the BTFP may expose them to risk as it eliminates the backstop. Last year, we switched from our BMO Equal Weight US Banks Index ETF (Ticker: ZBK) to the BMO Covered Call Technology ETF (Ticker: ZWT). We believe the technology sector provides investors with upside if rates move lower, without the same degree of risks if rates remain elevated or even reverse course.    

High Yield Bonds Spreads Have Tightened

A line graph from 2018 to 2023 shows high-yield bond spreads have tightened.

Source: Bloomberg, BMO Asset Management Inc.

High-yield bonds have been a forgotten asset class in recent years. Elevated interest rates have made the yields on investment grade bonds more attractive without extending reach into junk bonds. Moreover, lower credit quality issuers face more uncertainty when refinancing is more costly. While we still believe the sweet spot in fixed income to be investment grade bonds, high-yield issuers would benefit significantly from lower yields, provided economic conditions remain robust.

Recommendation: Credit spreads tightened significantly in the last quarter of 2023, as measured by the CDX High Yield Spread Index, with a drop in yields on the long end of the curve. The revealing of the Fed’s dot plots in December also provided further credit spread tightening. This illustrates how spreads in the last year were a second derivative of interest rates, which led to concerns over refinancing rather than a weak economic backdrop. The BMO High Yield US Corporate Bond Index ETF (Ticker: ZJK) will be an interesting exposure to watch in 2024 and see whether flows will return to the asset class.

Changes to Portfolio Strategy*

Sell/Trim
Ticker
(%)
Buy/Add
Ticker
(%)
BMO Equal Weight US Health Care Hedged to CAD Index ETF
4.0%
BMO MSCI USA High Quality Index ETF
2.0%
BMO Canadian Bank Income Index ETF
3.0%
BMO Covered Call Technology ETF
2.0%
BMO Long Short US Equity ETF
3.0%

*The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Asset Allocation:

We remain positive on risk assets for the new year, though we believe the market’s expectations (depending on the economic scenario) for rate cuts could be optimistic. The year could likely begin with strong returns as markets anticipate a dovish Fed. As the year progresses, we may see some rate cuts priced out of the market if economic conditions remain resilient and a soft landing is achieved. Without an economic fallout, it is hard to see how we get to six rate cuts unless disinflation quickly turns into deflation. We favour equities over fixed income and believe there will be a dash from cash in the coming year, as even a rate cut or two would force investors out the risk curve. Given we are already overweight in equities, we will not adjust our asset allocation; however, with intra-market correlation moving lower, there will be opportunities in the coming months to move to more targeted exposure, such as sector ETFs.

Equities:

The last two years showed how market leadership in factors can quickly change. Low Volatility was the factor that outperformed in 2022, with Quality being the laggard. Last year, we saw the opposite occur, with Quality making a significant comeback. While both factors tend to be more defensive growth in nature, they pair well, being complementary from a sector exposure perspective and in combination as a barbell strategy. The two factors combined have been shown to provide insulation in various rate environments. Our core consists of exposures such as the BMO MSCI USA High Quality Index ETF (Ticker: ZUQ) and the BMO Low Volatility US Equity ETF (Ticker: ZLU). Higher beta factors such as value may outperform in the first quarter, so we won’t be surprised to see the BMO MSCI USA Value Index ETF (Ticker: ZVU) be the first to get out of the gates. Over the long haul, however, we still favour defensive growth factors that provide exposure to mature companies and durable balance sheets.

This quarter, we look to eliminate our position in the BMO Equal Weight US Health Care Hedged to CAD Index ETF (Ticker: ZUH). This ETF has been a long-standing position within our strategy; however, we are looking to focus our bets on more interest-rate-sensitive sectors, such as Technology. We will redistribute the 4.0% allocation in ZUH evenly across the ZWT and ZUQ.

We still view Canadian banks to be extremely attractive. We have allocated 8.0% to the BMO Equal Weight Banks Index ETF (Ticker: ZEB), the maximum for a sector ETF. As we believe the BoC to be more likely than the Fed to cut rates multiple times this year, that should be a catalyst for the banks as it would potentially reduce the amount of non-performing loans.

Fixed Income:

As we have likely already seen peak rates in this hiking cycle, investors have gravitated towards long-duration exposure in the last quarter. With the long end of the curve moving lower at the end of last year, exposure to ETFs like the BMO Long-Term US Treasury Bond Index ETF (Ticker: ZTL) have delivered sizable returns. We believe the yield curve will eventually normalize through a combination of lower short-term rates and longer rates potentially moving up. Our barbell strategy of combining the BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF (Ticker: ZSU) with ZTL is well-suited for the current environment, particularly when paired with core exposures, such as the BMO Discount Bond Index ETF (Ticker: ZDB).

Non-Traditional/Hybrids:

We are eliminating our position in the BMO Canadian Bank Income Index ETF (Ticker: ZBI) in favour of ZLSU. We believe this change will provide greater diversification, as the preferred shares and bonds held in ZBI can be attained from other positions in the strategy. Similar to hedge funds, ZLSU can provide diversification to traditional assets without the exorbitant management and performance fees. Furthermore, it can provide some protection as its exposure to short securities can potentially benefit when markets sell off.

For other interesting reads, please check out publications from our colleagues from the MAST team.

Stats and Portfolio Holdings

Investment Objective and Strategy:

The strategy involves tactically allocating to multiple asset-classes and geographies to achieve long-term capital appreciation and total return by investing primarily in ETFs.

Ticker
ETF Name
Sector Positioning
Price
Management Fee
Weight (%) Fee
90- Day Vol
Volatility Contribution
Annualized Distribution Yield(%)**
Yield/ Vol***
Fixed income
BMO Discount Bond Index ETF
Fixed Income
Core
$14.92
0.09%
9.0%
7.9
6.4%
2.5%
0.31
BMO Short-Term US IG Corporate Bond Hedged to CAD Index ETF
Fixed Income
Tactical
$13.24
0.25%
7.0%
5.0
3.2%
3.2%
0.64
BMO Short-Term US TIPS Index ETF (Hedged Units)
Fixed Income
Tactical
$28.70
0.15%
5.0%
2.8
1.3%
3.9%
1.42
BMO Long-Term US Treasury Bond Index ETF
Fixed Income
Tactical
$40.20
0.20%
5.0%
7.8
3.5%
3.6%
0.46
BMO Money Market Fund ETF Series
Fixed Income
Tactical
$50.03
0.12%
3.0%
1.3
0.4%
4.9%
3.69
Total Fixed Income
29.0%
14.7%
Equities
BMO Low Volatility Canadian Equity ETF
Equity
Core
$41.26
0.35%
17.0%
12.6
19.4%
2.7%
0.21
BMO Equal Weight REITs Index ETF
Equity
Tactical
$20.65
0.05%
4.0%
23.1
8.3%
5.4%
0.23
BMO Low Volatility US Equity ETF
Equity
Core
$46.25
0.30%
8.0%
9.9
7.1%
2.3%
0.23
BMO Low Volatility International Equity Hedged to CAD ETF
Equity
Core
$25.49
0.40%
7.0%
9.7
6.1%
2.7%
0.28
BMO Equal Weight Oil & Gas Index ETF
Equity
Tactical
$61.78
0.55%
4.0%
17.9
6.5%
4.8%
0.27
BMO Equal Weight Banks Index ETF
Equity
Tactical
$34.12
0.55%
8.0%
16.9
12.2%
5.1%
0.30
BMO MSCI USA High Quality Index ETF
Equity
Core
$66.59
0.30%
0.30%
12.3
13.3%
0.9%
0.07
BMO Covered Call Technology ETF
Equity
Tactical
$36.41
0.65%
5.0%
17.3
7.8%
4.0%
0.23
Total Equity
65.0%
80.6%
BMO Laddered Preferred Share Index ETF
Hybrid
Tactical
$9.08
0.45%
3.0%
11.3
3.0%
6.0%
0.53
BMO Long Short US Equity ETF
Hybrid
Tactical
$31.75
0.65%
3.0%
6.1
1.6%
0.33
Total Alternatives
6.0%
4.7%
Total Cash
0.0%
0.0
0.0%
0.0%
Portfolio
0.33%
100.0%
11.1%
100.0%
3.2%
0.29
Source: Bloomberg, BMO Asset Management Inc., as of December 18, 2023.

**Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV.

*** Yield calculations for bonds are based on yield to maturity, including coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity and. For equities, it is based on the most recent annualized income received divided by the market value of the investments. Please note yields of equities will change from month to month based on market conditions. The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Fund Performance (%)
1 Mo
3 Mo
1 Yr
2 Yr
3 Yr
5 Yr
SI
Inception Date
4.33
2.02
1.33
-7.80
-11.22
4.58
18.58
February 10, 2014
2.29
1.52
3.58
-2.91
-3.44
6.75
12.77
February 10, 2014
1.00
1.06
2.54
-0.08
4.31
January 20, 2021
7.67
-3.86
-7.13
-32.53
-32.25
-10.87
-12.52
February 28, 2017
0.40
1.28
4.93
6.97
6.98
November 29, 2021
3.47
8.05
8.93
8.53
33.36
65.12
279.97
October 21, 2011
7.28
-6.00
-9.89
-19.28
-0.09
13.05
154.76
May 19, 2010
-0.54
3.90
-3.37
4.34
25.89
54.78
276.59
March 19, 2013
2.37
5.01
12.39
3.76
16.88
29.09
61.49
February 10, 2016
0.51
1.74
1.72
56.35
155.56
93.67
14.55
October 20, 2009
8.43
-0.02
-6.23
-5.59
28.19
39.94
258.69
October 20, 2009
6.09
1.99
23.63
9.83
36.24
100.00
258.94
November 5, 2014
2.34
13.85
64.87
14.00
41.45
January 20, 2021
10.15
9.11
4.48
-11.17
12.13
14.37
5.14
November 14, 2012
October 2, 2023

BMO Global Asset Management, as of November 30, 2023.

Portfolio Holdings†

Ticker
Name
Weight
BMO LOW VOLATILITY CANADIAN EQUITY ETF
17.0%
BMO MSCI USA HIGH QUALITY INDEX ETF
12.0%
BMO DISCOUNT BOND INDEX ETF
9.0%
BMO LOW VOLATILITY US EQUITY ETF
8.0%
BMO EQUAL WEIGHT BANKS INDEX ETF
8.0%
BMO SHORT-TERM US IG CORPORATE BOND HEDGED TO CAD INDEX ETF
7.0%
BMO LOW VOLATILITY INTERNATIONAL EQUITY HEDGED TO CAD ETF
7.0%
BMO SHORT-TERM US TIPS INDEX ETF (HEDGED UNITS)
5.0%
BMO LONG-TERM US TREASURY BOND INDEX ETF
5.0%
BMO COVERED CALL TECHNOLOGY ETF
5.0%
BMO EQUAL WEIGHT REITS INDEX ETF
4.0%
BMO EQUAL WEIGHT OIL & GAS INDEX ETF
4.0%
BMO MONEY MARKET FUND ETF SERIES
3.0%
BMO LADDERED PREFERRED SHARE INDEX ETF
3.0%
BMO LONG SHORT US EQUITY ETF
3.0%
TOTAL
100.0%

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

A pie chart shows the portfolio holdings as follows: 29% Fixed Income, 65% Equities, and 6% Non-Traditional. Of that, 53% is core and 47% in Tactical.

 Source: Bloomberg, BMO Asset Management Inc., as of December 18, 2023.

Portfolio Characteristics

Regional Breakdown (Overall Portfolio)

A pie chart shows the portfolio characteristics as follows: 48% Canada, 45% United States, 4.9% Europe, and 2.1% Asia.

Source: Bloomberg, BMO Asset Management Inc., as of December 18, 2023.

Equity Sector Breakdown

A pie chart shows the Equity Sector Breakdown as follows: 21.93% Financials, 17.22% Information Technology, 10.28% Consumer Staples, 9.85% Real Estate, 7.46% Industrials, 7.34% Health Care, 7.18% Utilities, 6.57% Energy, 5.67% Communication Services, 3.42% Consumer Discretionary, 3.08% Materials.
Source: Bloomberg, BMO Global Asset Management, as of December 18, 2023.

Fixed Income Sector Breakdown

Federal
56.9%
Weighted Average Term
12.01
Provincial
10.5%
Weighted Average Duration
6.19
Investment Grade Corporate
32.0%
Weighted Average Coupon
2.21%
Non-Investment Grade Corporate
0.0%
Weighted Average Current Yield
2.72%
Weighted Average Yield to Maturity
3.78%

Weighted Average Term: The average interest received by a bond investor, expressed on a nominal annual basis.

Weighted Average Current Yield: The market value-weighted average coupon divided by the weighted average market price of bonds.

Weighted Average Yield to Maturity: The market value-weighted average yield to maturity includes coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity.

Weighted Average Duration: The market value-weighted average duration of underlying bonds divided by the weighted average market price of the underlying bonds. Duration is a measure of the sensitivity of the price of a fixed income investment to a change in interest rates.

Weighted Average Coupon: The average time it takes for bonds to mature in a fixed income portfolio.

The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.

Source: Bloomberg, BMO Global Asset Management, as of December 18, 2023.

Other Interesting Reads and Upcoming Webinars:

  • 10 Big Investment Trends for 2024
  • 2024 Outlook: On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.

Footnotes

1 Consumer Price Index. Statistics Canada, December 19, 2023.

2 Consumer Price Index. U.S. Bureau of Labor Statistics, December 12, 2023.

3 The real rate is the observed market interest rate adjusted for the actual or anticipated rate of inflation.

4 FactSet, December 11, 2023.

5 The risk-free rate is the theoretical return an investor can get without assuming any risk.

Disclaimers:

Volatility: Measures how much the price of a security, derivative, or index fluctuates. The most commonly used measure of volatility when it comes to investment funds is standard deviation.

 

Yield curve: A line that plots the interest rates of bonds having equal credit quality but differing maturity dates. A normal or steep yield curve indicates that long-term interest rates are higher than short-term interest rates. A flat yield curve indicates that short-term rates are in line with long-term rates, whereas an inverted yield curve indicates that short-term rates are higher than long-term rates.

 

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

 

The viewpoints expressed by the individuals represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

 

This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

 

ndex returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

The Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by the Manager. S&P®, S&P 500®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”), and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the Manager. The ETF is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.

 

The ETFs referred to herein is not sponsored, endorsed, or promoted by MSCI and MSCI bears no liability with respect to the ETF or any index on which such ETF is based. The ETF’s prospectus contains a more detailed description of the limited relationship MSCI has with the Manager and any related ETF.

 

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. Exchange traded 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 ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs 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.

 

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

 

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

 

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment 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. Please refer to the distribution policy for BMO ETF set out in the prospectus.

 

Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see Distribution Policy in the BMO ETFs’ prospectus.

 

®/™Registered trademarks/​trademark of Bank of Montreal, used under licence.

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