Canada – A Bright Spot in Global Growth

Fred Demers, Director Multi-Asset Solutions, BMO Global Asset Management, takes stock of major forces driving the market – central bank actions, tariffs and trade, and oil prices – providing a primer for Advisor conversations while spotlighting BMO Low Volatility Canadian Equity ETF (Ticker: ZLB) as a uniquely desirable investment in today’s macro environment.
August 2019

Fred Demers

Director, Multi-Asset Solutions


Fred Demers, Director Multi-Asset Solutions, BMO Global Asset Management, takes stock of major forces driving the market – central bank actions, tariffs and trade, and oil prices – providing a primer for Advisor conversations while spotlighting BMO Low Volatility Canadian Equity ETF (Ticker: ZLB) as a uniquely desirable investment in today’s macro environment.


Dealing with Uncertainty

With lingering trade tensions causing a deceleration in global growth, the only thing we can be assured of is uncertainty is ruling the market. Businesses are delaying investment and hiring decisions in the midst of supply chain disruptions, hesitant to make financial commitments with no clear foresight into future demand. Central banks are unsure about the path forward, and oil prices are in flux. What is the best course of action Advisors can take in this confounding macro environment?

Research shows that lower-risk assets deliver superior returns throughout the cycle. For stressed market scenarios in particular, the stable earnings profile of low-beta companies helps protect against downside risk and leads to a greater compounding effect over time. Yet before we delve too far into the quantitative and behavioral insights behind the low-vol phenomenon, Advisors should be cognizant of macroeconomic factors that can negatively impact their clients’ holdings.

Low Volatility vs. Broader Market

Low Volatility vs. Broader Market

Sources: Bloomberg, BMO Global Asset Management.

Macro Uncertainty #1: The Federal Reserve

Without question, the Federal Reserve (the Fed) is a major factor in global economic performance, regardless of whether the trade war ceases. Unlike the 2008 cycle, when central bankers talked optimistically about the market outlook as we were rolling down the cliff, Mr. Powell and company are acting more pre-emptively, rather than waiting for evidence of a major slowdown. It appears they have learned from the past, and will no longer wait to be in the middle of a recession to declare that it’s the time to act. Overall, this quickness to action is supportive of the cycle and risk assets.

The only thing we can be assured of is uncertainty is ruling the market.

Should the central bank’s July 31 decision prove wrong, we may indeed see a bit more inflation, though not enough to negatively impact the global economy. The inflationary dynamic being quite benign is something that gives this cycle extra legs versus previous bull markets. We are in the throes of an unusual recovery that defies the relationship between wage growth and low unemployment. As a result, the Fed continues to have room to engineer a soft landing.

Complicating matters further, Fed Chairman Jerome Powell gave a statement following the decision to cut overnight interest rates, calling it a “mid-cycle adjustment to policy.” due to global weakness, rather than the “beginning of a long series of rate cuts.” Given that financial markets had expected greater clarity on future cuts, his comments left intense confusion about the direction of forthcoming policy moves.


Macro Uncertainty #2: U.S./China Trade War

Of course, it goes without saying that the trade war is another major dynamic with substantial market impact. If resolved, the trade war has potential to reboot the cycle – along with the optimism of investors. Think back to when Trump was elected. The narrative was already developing that we were late cycle. And then, with the aggressive tax cuts Trump’s government implemented, expectations soared, which extended the cycle.

While it is possible for a similar outcome in the event of a trade resolution, it is growing less likely as negotiations break down. Within days of the Fed’s July 31 meeting, President Trump issued a 10% tariff on the remaining $300 billion of Chinese imports. With China set to retaliate, we may see a reduction in the global growth outlook and mounting pressure on the Fed to follow through with additional rate cuts.


Macro Uncertainty #3: Oil Prices

Throwing oil prices into the mix of market volatility, the value of Western Canadian Select is being heavily influenced by the Alberta government’s production cuts and increasing efforts to ship-by-rail. While long term output still hinges on adding pipeline capacity, the previous agreement to secure ample rail capacity is what investors should watch for WTI Crude prices. Another factor is the reduced supply of Venezuelan oil. As economic turmoil within the South American nation has hindered its output, Texas refineries have increasingly looked to Alberta’s heavy crude oil streams as a replacement.

If resolved, the trade war has potential to reboot the cycle – along with the optimism of investors.

Overall, it appears the dynamics of the oil market, like the rest of the economy, haven’t been as bad as we feared, which is why WTI prices are close to $60 per barrel again in spite of concerns that demand would decrease substantially. Though there has certainly been a softening in global crude oil purchases, it is logical to view this as a phase of the cycle and far from a recessionary phase.


The Case for Canadian Low Vol

In this hazy, unpredictable environment we tend to be more optimistic about Canada as an investment destination, especially when compared to U.S. trading partners with current account surpluses – such as Mexico, China or Germany. Our domestic advantage is underscored by last year’s U.S.-Mexico-Canada (USMCA) agreement, which left Canada’s biggest export sectors – energy and industrial goods – untouched in favor of the smaller, but more politically sensitive, agriculture tariffs. In retrospect, these appear as benign and minor concessions relative to the overall trade picture.

While fear over the housing market is a persistent theme in Canada, a solid labour market and 1% population growth are providing resilience to that key sector of the economy. So with mortgage yields trending down, we find that GDP growth may outperform at close to 2% for the next 18 months.

Against this backdrop, the low volatility approach should provide an extra degree of protection.

As stated previously, reducing drawdowns does more than provide comfort during stressed market environments, it also compounds more effectively over time. From a behavioral finance perspective, this connection is often misunderstood due to the psychological tendency to equate higher risk with more attractive returns. Research shows investors frequently overpay for higher risk assets in the belief they will yield more impressive results – which is why low-volatility stocks often capture most of the upside participation as well.

ZLB – One Solution for the Whole Market Cycle

BMO Low Volatility Canadian Equity ETF (Ticker: ZLB) is a 5-star Morningstar-rated fund,¹ FundGrade A+ winner for five consecutive years in the best risk-adjusted return in the Canadian Equity category and the top-performing Canadian Equity Fund over five years.² It is also accessible as a mutual fund, in recognition of the demand for greater portfolio customization.

Name Ticker YTD 1 Year 3 Year 5 Year Since Inception* Period Ending
BMO Low Volatility Canadian Equity ETF ZLB




11.10% 13.69% 31/07/2019
BMO S&P/TSX Capped Composite Index ETF ZCN 16.58%



4.43% 6.83% 31/07/2019


BMO Low Volatility Canadian Equity Strategy Fund Code Estimated MER
ETF (BMO Low Volatility Canadian Equity ETF)

Ticker: ZLB


Series F – Mutual Fund



Advisor Series – Mutual Fund GGF99772 1.53%***

Performance data to July 31, 2019

Management Expense Ratios (MERs) are the audited MERs as of September 30, 2018.

* ZLB Inception Date: October 21, 2011; ZCN Inception Date: May 29, 2009.

**As the series of funds are less than one year old, actual Management Expense Ratio costs will not be known until the fund financial statements for the current fiscal year are published.

***The estimated MER is an estimate only of expected fund costs until the completion of a full fiscal year, and is not guaranteed.

For more information on accessing ZLB in ETF and mutual fund formats, contact your BMO Global Asset Management Regional Sales Representative.

¹ Morningstar Direct. As at June 30, 2019. 5 Year Sharpe Ratio used to determine risk adjusted return. Past performance is no guarantee of future results. Category is Morningstar Canadian Equity Category.
© 2019 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Ratings are subject to change monthly. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three- year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. For more details on the calculation of Morningstar star ratings or quartile rankings, please see The star ratings and numbers of Canadian Equity funds for the BMO Low Volatility Canadian Equity ETF (ZLB) for each period are as follows: for three years 5 stars (108 funds), five years 5 stars (127 funds). BMO Low Volatility Canadian Equity ETF (inception date October 21, 2011) performance over 1 year (11.79%), 3 Year (9.36%), 5 Year (11.48%), and Since Inception (13.72%).

² FundGrade A+® is used with permission from Fundata Canada Inc., all rights reserved. The annual FundGrade A+® Awards are presented by Fundata Canada Inc. to recognize the “best of the best” among Canadian investment funds. The FundGrade A+® calculation is supplemental to the monthly FundGrade ratings and is calculated at the end of each calendar year. The FundGrade rating system evaluates funds based on their risk-adjusted performance, measured by Sharpe Ratio, Sortino Ratio, and Information Ratio. The score for each ratio is calculated individually, covering all time periods from 2 to 10 years. The scores are then weighted equally in calculating a monthly FundGrade. The top 10% of funds earn an A Grade; the next 20% of funds earn a B Grade; the next 40% of funds earn a C Grade; the next 20% of funds receive a D Grade; and the lowest 10% of funds receive an E Grade. To be eligible, a fund must have received a FundGrade rating every month in the previous year. The FundGrade A+® uses a GPA-style calculation, where each monthly FundGrade from “A” to “E” receives a score from 4 to 0, respectively. A fund’s average score for the year determines its GPA. Any fund with a GPA of 3.5 or greater is awarded a FundGrade A+® Award. For more information, see Although Fundata makes every effort to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Fundata.

BMO Global Asset Management Disclosures:

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.

This article is for information purposes. The information contained herein is not, and should not be construed as, investment advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Commissions, management fees and expenses all may be associated with investments in BMO ETFs and ETF Series of the BMO Mutual Funds. Please read the ETF facts or prospectus of the relevant BMO ETF or ETF Series before investing. The indicated rates of return are the historical compounded total returns including changes in share or unit value and the reinvestment of all dividends or distributions and do not take into account the sales, redemption, distribution, optional charges or income tax payable by the unitholder that would have reduced returns BMO ETFs and ETF Series 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 or ETF Series of the BMO Mutual Funds, please see the specific risks set out in the prospectus. BMO ETFs and ETF Series 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.

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. ETF Series of the BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

®/™ Registered trade-marks/trade-mark of Bank of Montreal, used under licence.

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