How they work?
ETFs can be bought and sold at any point throughout the trading day through your advisor or trading platform.
The purpose of an indexed ETF is to track as closely as possible the return of a specific market benchmark or index. Deviation from the benchmark return, known as a tracking error, can occur for several reasons:
- Trading Costs. However, since the underwriters deliver, or take possession of, the underlying securities during subscriptions and redemptions, ETFs lessen the need for the Fund Manager to trade securities on the exchange. Therefore, trading and commission costs are kept to a minimum.
- Cash drag is the result of an un-invested portion of a portfolio’s net assets. ETFs will seek to minimize cash drag by reinvesting the proceeds or providing income distributions to investors
Understanding Liquidity and Building Equity
The liquidity of an individual security is directly related to the traded volume of that security, the same correlation however does not apply to ETFs.
Included below are the answers to most of the commonly asked questions on BMO ETFs. If you have an additional question or comment, please contact us.
BMO ETFs are offered through a prospectus filed in accordance with Canadian securities laws and regulations. Neither the securities of the ETFs nor the ETFs are registered with the United States Securities and Exchange Commission, or in any other jurisdiction. Generally persons that are non-residents may invest through a broker by placing purchase orders on the Toronto Stock Exchange.
ETFs and mutual funds are both designed to provide easy access to a variety of investment options and both can be used to build an optimal portfolio that is right for each client. By expanding its range of investment products to include ETFs, BMO is giving investors additional choices so that they can make appropriate investment decisions tailored to meet their specific needs, whether it is on their own or with the assistance of a financial advisor.
BMO ETFs look at each portfolio separately and selects the most appropriate weighting methodology for that ETF. Market capitalization weighting for broad markets and diversified exposures provide the expected return of well followed indexes. Smart beta or strategic weighting increases an ETF’s exposure to the desired factor, such as low volatility, higher income, or quality. Equal weighting removes concentration risks where sectors and industries can be skewed by high concentrations in one or two larger companies.
In general, it may be advisable to consider using limit orders when trading any security, including ETFs, especially with large amounts. This allows investors to control the price, at which they are willing to buy or sell, something which can be very important in volatile markets.
Tracking error is the performance difference between an ETF and its benchmark index.
Whenever holdings are traded in a currency other than the Canadian Dollar, currency movements are a key factor in total returns. BMO ETFs may have exposure to the local currencies where the underlying holdings are traded, or they may be currency hedged to remove most of the currency returns from the underlying holdings. BMO ETFs that are currency hedged generally have “Hedged to CAD” included in the ETF name.
The BMO Covered Call ETFs provide call premium income in addition to the dividend income on the portfolio. This strategy involves selling call options against the underlying holdings, where a premium is received in exchange for the excess upside return of the holding. This strategy is most effective when the underlying portfolio is expected to be range bound (limited expectations of large price movements). The covered call strategy is considered to be defensive as the additional income partially offsets potential portfolio decreases while removing the participation in large market upswings.
Our goal is to deliver a comprehensive line-up of BMO ETFs that meet the current and future needs of ETF investors. To do this we will be evaluating our ETF line-up on a regular basis and making additions as we identify opportunities.
Fixed Income ETFs
Unlike equities that have no maturity, bonds have a fixed maturity; the return to that date can be measured using current prices. Yield to Maturity (YTM) is the discount rate that equates the present value of a bond’s cash flows with its market price (including accrued interest). The weighted average includes all of the underlying holdings in the portfolio.
Generally, the tax considerations of investing in a BMO ETF include the treatment of distributions paid by the BMO ETF and the treatment of the gain or loss realized on selling the investment in the BMO ETF.
A Canadian resident investor who sells ETF units that were held by the investor as capital property will generally be considered to realize a capital gain (or capital loss) in the amount by which the sale proceeds, net of reasonable expenses of the sale, exceeds (or is less than) the investor’s adjusted cost base (“ACB”) of the units.
While your primary focus as an investor should be on the yield from your investment as well as the capital appreciation, the tax treatment of distributions on the investment is also important. From a tax perspective, distributions from ETFs are composed of the following types of income:
The individual stocks or shares held by an ETF pay dividends that are received by the ETF. Distributions by an ETF to investors out of the ETF’s dividend income are generally treated as ordinary income to the investors. However, where the ETF pays a distribution out of dividends received by the ETF from Canadian companies, an investor can treat that distribution as if it were a dividend from a Canadian company. For investors who are Canadian resident individuals, this means that such a distribution qualifies for the lower effective tax rate applicable to dividends from Canadian companies.
Interest and Other Income
Fixed income ETFs receive interest on their investments in bonds and other debt obligations. Distributions by an ETF to investors out of the ETF’s interest and other income are generally treated as ordinary income to the investors.
An ETF may also realize capital gains on the sale of investments in the ETF’s portfolio. If the ETF pays a distribution to investors out of its net realized capital gains, an investor can usually treat this distribution as if it were a capital gain realized by the investor. As is the case for realized capital gains, only one-half of such a capital gains distribution has to be included in the investors’ income.
Foreign Income and Foreign Tax Paid
An ETF may earn dividends or interest on foreign investments and therefore be required to pay foreign withholding tax. When the ETF pays distributions out of this foreign income, an investor that pays Canadian tax may be able to claim a foreign tax credit for some of the foreign tax paid by the ETF, depending on the investor’s particular situation.
Return of Capital
In some cases, an ETF may distribute an amount to investors as a return of capital that is generally not taxable to investors. However, such a distribution will decrease the ACB of the investor’s units. When the investor sells the ETF units, the lower ACB will increase the capital gain (or decrease the capital loss) that would otherwise be realized on the sale.
BMO Asset Management Inc. does not provide information about the tax implications for non-resident investors in BMO ETFs. Non-resident investors should contact their brokers, financial advisors, lawyers, and tax advisors to obtain more information on securities regulation, as well as currency and taxation issues in regards to investing in BMO ETFs.
BMO ETFs pay distributions out of their income in cash on either a monthly, quarterly, or annual basis. Generally, the greater the income in the fund, the higher the distribution frequency. Download the BMO ETFs Distribution Calendar