ETF Investing Basics

Using exchange traded funds as an investing tool

ETF Tools and Resources

Use this section to easily identify the right products.

ETF Dashboard

Your leading source for ETF industry trends and insights.

ETF Investing Strategies

Strategies to help you efficiently implement your investment views and maximize portfolio performance.

An ETF is a fund that is listed and traded on a stock exchange, which can be bought or sold directly during normal trading hours, similar to a stock. ETFs differ as they consist of a basket of securities which may hold stocks, bonds, or other assets such as commodities. The asset mix of an ETF generally aims to track the performance of an index or provide exposure to an asset class.

Maximize portfolio performance by matching investment needs with the right ETF investing strategy.

Understanding ETFs ETF Basics with McKenzie Box
Efficient Exposure

Investors get access to both core ETFs that track broad indices such as the S&P 500 and more focused ETFs that track market sectors and industries.

Liquidity

ETFs provide intraday liquidity through buying and selling during the trading hours of the stock exchange.

Diversification

ETFs offer potentially lower risk than individual securities.

Portfolio Transparency

Investors have access to the price of an ETF and the portfolio composition at any time during regular market trading hours.

Cost Effective

Generally management fees for ETFs are lower than many other investment solutions. This means more of your money is working for you over the long term.

Tax Efficient

ETFs provide the potential for relatively lower capital gains tax liabilities than other investment products.

How they work?

ETFs can be bought and sold at any point throughout the trading day through your advisor or trading platform.

Market Tracking

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.
What is an ETF?
Market makers, ETF pricing and liquidity
Summary of ETF costs
How to use ETFs?
Bond ETFs, pricing and discounts
How to invest in ETFs?
Strategies on how to use ETFs (part 1)
Strategies on how to use ETFs (part 2)

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.

Instead, the liquidity of an ETF is best measured by the underlying securities which it holds. If the individual securities that compose the ETF have a high traded volume, and are therefore very liquid, then the ETF that holds them will have the same degree of liquidity. Similarly, if the underlying securities of the ETF have a low traded volume, or are illiquid, the ETF will have a low degree of liquidity as well. BMO ETFs have been constructed to have liquid portfolios by establishing traded volume requirements for each security held within the portfolios.

An ETF’s underlying liquidity can be seen by observing the difference between the buying price and the selling price, or the “bid-ask spread.” A tighter bid-ask spread on an ETF generally indicates that the underlying securities also have tight bid-ask spreads and are therefore also more liquid.

In this way, even an ETF with low traded volume is liquid if its bid-ask spread is tight. Again, if the securities that make up the ETF are liquid, so is the ETF itself.

Understanding ETFs Market Makers ETF Pricing and Liquidity with Dan Stanley

How does the ETF liquidity mechanism work?

First level of liquidity – On the exchange

The interaction between buyers and sellers creates the first level of liquidity for an ETF. This natural liquidity is established when a sell order from an existing unit holder is matched with a buy order from a purchaser on the exchange. Popular and established ETFs with high transaction volumes can develop even greater liquidity than their underlying holdings.

Second level of liquidity – Market maker activity

Market makers are responsible for posting bid and ask offers on the exchange. This enhances liquidity and allows a buyer or seller to transact with minimal trading costs. Market Makers continually post units at a price which reflects the spread of the underlying portfolio.

Third level of liquidity – Unit creation based on underlying securities

Market makers can offset an increase in demand by creating more units. On the other hand, when the demand for the units decreases, the market maker redeems units to tighten supply. When a large buy order occurs, the market maker will buy the basket of securities and initiate a creation order with the ETF provider.
When evaluating ETFs, the underlying liquidity is what matters. The true liquidity of an ETF is best measured by the liquidity of its underlying securities and allows for significant trade orders without having an impact on the price of the ETF itself.

ETF FAQs

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.

Individual investors and financial advisors can contact our client services department at 1-800-361-1392 or [email protected].

Financial advisors can also contact their BMO Mutual Funds wholesaler.

ETFs

ETFs are open-ended funds that are listed and traded on a stock exchange, and can be bought or sold directly during trading hours, much like a stock. They typically represent a basket of securities which may consist of stocks, bonds, or other assets such as commodities. ETFs offer many benefits to investors, including diversification, liquidity, low fees, flexibility, transparency and tax efficiency.

• Efficient access to core investments and focused market segments.
• Access to institutional strategies by retail clients.
• Provide intraday liquidity through buying and selling during the trading hours of the stock exchange.
• Flexibility to buy on margin or sell short.
• Diversification offers potentially lower risk than individual securities.
• Ability to have exposure to a portfolio of stocks or bonds.
• Portfolio transparency on a daily basis.
• Cost-efficient due to relatively low management fees.
• Tax efficient, with potential for relatively low capital gains distributions.

Trading ETFs

Shares of BMO ETFs can be bought and sold during normal trading hours through registered brokers and dealers in the province or territory where you reside. ETFs are not purchased directly from the ETF provider. To trade BMO ETFs, you can use any online, discount or full-service brokerage account. Your broker will charge their usual commissions or fees.

The trading price of an ETF is approximately equal to the value of the underlying holdings in the portfolio and any other asset or liabilities, such as cash and dividends receivable. The price of the ETF will move up and down during the trading day with supply and demand, but will generally reflect the price movements in the underlying holdings. Unlike a traditional mutual fund where a client receives the end of day net asset value (NAV), an ETF client trades on the intra-day price on the exchange.

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.

The bid and ask for an ETF are similar to a stock, where the bid reflects what investors are willing to pay to buy units, and the ask reflects what investors are willing to sell units for. Unlike a stock, ETFs are open ended, meaning that supply and demand is not limited, so that a large order can result in the creation or redemption of ETF units. The bid and ask will reflect the average bid and ask of the underlying portfolio, and in addition, natural liquidity between buyers and sellers of the ETF may narrow the bid-ask spread.

BMO ETFs are designed to serve the needs of all types of investors, whether they are institutional or self-directed investors, or deal with a financial advisor.

Yes, all BMO ETFs are RRSP, RRIF, RDSP, and TFSA eligible. In general, BMO ETFs that qualifies as a mutual fund trust and that are listed on an established market index are eligible for registered plans, you should consult with your own broker or tax advisor regarding your personal circumstances.

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.

BMO ETFs

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

Fixed income ETFs incorporate all of the benefits of a typical ETF – diversification, liquidity and cost effectiveness, and are effective core holdings in a portfolio. A fixed income ETF may also be appropriate for those investors who wish to take an active role in positioning their fixed income portfolios to reflect their own economic expectations. With BMO ETFs, investors can use long or short positions, as well as target specific fixed income durations or credit risks.

The interest paid on a bond is known as the coupon rate. The weighted average includes all of the underlying holdings in the portfolio.

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.

Duration measures the approximate sensitivity of a bond’s price to a change in interest rates, where bond prices are inversely related to interest rates. A duration of 3, for example, means that the price of the bond would increase by approximately 3% if the interest rate decreased by 1%. The weighted average includes all of the underlying holdings in the portfolio.

Tax Considerations

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.

BMO ETF Taxation

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.

BMO ETFs pay distributions as income or capital gains. The term “dividends” is usually used to describe distributions paid on shares of a corporation; however, some ETFs, especially in the US, use the terms dividends and distributions interchangeably to refer to distributions of income of all types, including dividends, interest and capital gains. We specifically use the term “distributions” as the appropriate term when discussing BMO ETFs.

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:

Dividends
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.

Capital Gains
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 tax parameters outline the tax composition of distributions, broken down per unit. Please see here for more information on tax parameters for 2016 taxation year.

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

A

Active Investing

An investing approach that aims to identify and invest in securities that may be mispriced by the market with the view of generating enhanced returns. It's a strategy that can involve amongst other things, in-depth analysis of companies' financial statements and significant understanding of various markets and companies from around the world.

Active Share

The sum of the differences between the percentage weight of each security in a portfolio and the percentage weighting in a benchmark or comparator index.

Active Share

The sum of the differences between the percentage weight of each security in a portfolio and the percentage weighting in a benchmark or comparator index.

ADRs

American Depository Receipts. ADRs are a type of negotiable financial security that is traded on a local stock exchange but represent a security that is issued by a foreign publicly-listed company.

Annualised return (%)

An annualised total return is the geometric average amount of money earned by an investment each year over a given time period.

Annualised return (%)

An annualised total return is the geometric average amount of money earned by an investment each year over a given time period.

Annualised volatility

Annualised volatility is a statistical measure of the dispersion of returns for a given security or market index for each year over a given time period.

Annualized Rate of Return

An annualized rate of return is a cumulative return expressed as an equivalent annual compounded rate. A compounded rate of return includes the effect of interest-on-interest.

Asset Class

A type of investment such as stocks, bonds, real estate or cash.

Assets

The amount of money invested in a fund. Also referred to as Net Asset Value (NAV).

B

Basket of Securities

in relation to a particular BMO ETF, a group of securities determined by the Manager from time to time representing the constituents of the applicable index in approximately the same weightings as such constituents are weighted in the applicable index.

Benchmark Index

A standard against which the performance of a security or mutual fund can be measured. Generally, broad market indexes are used for this purpose.

Bond

A debt instrument promising to pay its holders periodic interest (or coupon) payments on a fixed amount of principal and maturity.

Bond floor

As a form of restriction, a floor provides a limit for a particular activity or transaction to which it must adhere. The floor functions as a lower limit.

C

Cash and Cash equivalents

This asset class includes money market instruments and are short-term, highly liquid, low risk and relatively low return investment holdings.

Continuous Savings Plan (CSP) Amount

The amount you can automatically invest in your mutual funds on a weekly, bi-weekly, monthly, bi-monthly, quarterly, semi-monthly, monthly or annually basis. Once you set up a CSP, we'll automatically transfer money from your bank account to buy units of the funds you choose.

Conversion price

The conversion price is the price per share at which a convertible security, such as convertible bonds or preferred shares, can be converted into common stock. The conversion price is set when the conversion ratio is decided for a convertible security.

Current Yield

Current yield is an investment's annual income (interest or dividends) divided by the current price of the security. Current yield represents the return an investor would expect to earn, if the owner purchased the bond and held it for a year. However, current yield is not the actual return an investor receives if he holds a bond until maturity.

D

Date Started / Inception Date

The date that a fund became available for sale to investors.

Deferred Sales Charge (DSC)

If you purchase your funds under the deferred sales charge option, you may be required to pay a fee if you redeem your fund units within a specified number of years after your purchase. Some fund companies offer both a Standard Deferred Sales Charge option and a Low Load Deferred Sales Charge option (i.e. over a reduced number of years).

Delta

A delta is a ratio, sometimes referred to as a hedge ratio. It compares the change in price of an asset with the change in price of a derivative or option based on that same asset. A delta can be either positive or negative.

Derivative

Specialized investments like forward or future contracts, options contracts, and swap agreements whose value is based on the value of another investment called an underlying investment.

Designated Broker

a registered dealer, including BMO Nesbitt Burns Inc., an affiliate of the Manager, that has entered into a designated broker agreement with the Manager, on behalf of one or more BMO ETFs pursuant to which the Designated Broker agrees to perform certain duties in relation to the BMO ETFs.

Distribution Frequency

The amount of times during a year that a mutual fund pays distributions to unitholders. This is typically monthly, quarterly or annually.

Distribution Payment Date

: a day which is no later than the 10th business day following the applicable distribution record date, on which a BMO ETF pays a distribution to its Unitholders.

Distribution Record Date

a date determined by the Manager as a record date for the determination of Unitholders of a BMO ETF entitled to receive a distribution.

DPSPs

Deferred profit sharing plans as defined in the tax act

Duration

measures the approximate sensitivity of a bond's price to a change in interest rates. A duration of , for example, means that the price of the bond would decrease/increase by approximately 2% if the interest rate increased/decreased by 1%.

Duration to put

Is the duration of the bond to the next exercise date of an option – also known as the option adjusted duration.

E

Effective duration

Effective duration is a duration calculation for bonds that have embedded options. This measure of duration takes into account the fact that expected cash flows will fluctuate as interest rates change.

Effective maturity

The length of time it takes for a bond to reach maturity, taking into consideration that certain actions, such as a call or refunding, may cause some bonds to be repaid before they mature.

Eligibility

Indicates types of registered plans a mutual fund may be held in.

Equity (Stock)

Shares of ownership in a company.

Equity Growth Funds

A category of BMO Mutual Funds, these funds maximize return potential through investing in specific market sectors or emerging economies with greater growth potential. These may entail greater risk than conventional growth funds.

ETF

exchange-traded fund

ETF Summary Document

summarizes certain features of the ETF such as performance and total cost. All purchasers of an ETF will receive this publicly available document.

F

Financial Statements

Annual and semi-annual fund specific reports that provide the financial position of the mutual fund.

Front-end Load (Sales Charge Option)

Under a front-end (FE) load option, you pay a commission to your dealer when you buy units of a fund. The commission is usually negotiable between you and your dealer.

Fund Facts

The Fund Facts documents highlight key information about each available series of a fund, including the performance history, risk ranking, investor suitability and the cost of buying and owning a fund.

Fund Total Assets

The amount of money invested in a fund, also referred to as Net Asset Value (NAV). NAV is calculated by adding the total value of the Fund's assets and subtracting the liabilities.

G

Growth Funds

A category of BMO Mutual Funds, these funds provide potential for higher long-term returns, often by investing in stocks. They range from relatively conservative equity funds that specialize in high quality Canadian "blue chip" stocks to funds that invest in major global stock markets. It's important to remember that higher growth potential may entail greater risk.

I

Inception Date

The date that a fund became available for sale to investors.

Income Funds

A category of BMO Mutual Funds, these funds typically invest in bonds, mortgages and other fixed income securities. The level of income and risk depend on the characteristics of investments in the fund's portfolio.

Information ratio

The information ratio (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns. The benchmark used is typically an index that represents the market or a particular sector or industry.

Interest rate duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

Investment Objectives

Included in the prospectus and fund facts, the fund's objective outlines the goals of the fund.

L

Last Distribution

The last date that a payout was made to unitholders of the net income or realized capital gains earned by a mutual fund.

Low Load Deferred Sales Charge (Low Load)

If you purchased your funds under the low load sales charge option (LL), you may be required to pay a fee if you redeem your fund units within a specified number of years after your purchase. Some fund companies offer both a Standard Deferred Sales Charge option and a Low Load Deferred Sales Charge option (i.e. over a reduced number of years).

M

Managed Solutions

An investment solution that wraps a mix of underlying mutual funds and/or ETFs into a single portfolio.

Management Expense Ratio (MER)

The management expense ratio is the total annual fee charged by the fund to pay for the costs associated with running the fund. It includes the management fee, operating expenses and applicable taxes. It does not include the TER. It is expressed as an annualized percentage of the average net asset value of the funds.

Management Fee

Each fund pays the manager a fee for management services and this fee is included in the fund's MER. The management fee is a percentage of your total investment and varies by fund and by series. It does not include a fund's operating expenses related to the operation of the fund.

Management Report of Financial Performance (MRFP)

Annual and semi-annual fund-specific reports that includes a management discussion of fund performance; financial highlights; past performance, and a summary of portfolio holdings as at the end of the relevant period.

Manager

BMO Asset Management, a Canadian investment manager responsible for providing managerial, administrative and compliance services to the BMO ETFs.

Modified duration

Modified duration is a formula that expresses the measurable change in the value of a security in response to a change in interest rates. Modified duration follows the concept that interest rates and bond prices move in opposite directions.

N

NAV per Unit

in relation to a particular BMO ETF, the net asset value per unit, calculated by dividing the NAV of the BMO ETF by the total number of units outstanding.

No-load

A no-load mutual fund does not require you to pay a sales charge or redemptions fee when you buy, switch or redeem units of the fund.

Nominal rates duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in nominal interest rates.

O

Operating Expenses

Each fund pays operating expenses that include administration fees related to the day to day operation of the fund such as audit, legal, recordkeeping system and custodian fees. Operating expenses are included in the management expense ratio (MER) of a fund.

P

Passive Investing

An investing approach that provides access to a broad market, for example, through an index fund or exchange traded fund (ETF) that typically tracks the performance of a market index.

Portfolio Manager

Registered individual who manages the assets and expenses of a mutual fund according to the fund's objectives.

Premium

The difference between the higher price paid for a fixed-income security and the security's face amount at issue, which reflects changes in interest rates or risk profile since the issuance date.

Price (NAVPS)

The market value of one unit of a mutual fund on a given day. Net Asset Value (NAV) is calculated by adding the total value of the Fund's assets and subtracting the liabilities. To find the net asset value per security (NAVPS), the Fund's Net Asset Value is divided by the total number of securities outstanding.

Prospectus

The simplified prospectus is a legal document that contains important information about each BMO Mutual Fund to help investors make investment decisions and understand their rights as investors. The prospectus includes the fund objectives and strategies, associated fees and risks as well as distribution policy.

R

RDSP (Registered Disability Savings Plan)

A plan that provides people with disabilities an easy and effective way to save and invest for their long-term financial security.

Real rates duration

A measure of the sensitivity of the price of a bond or other debt instrument to a change in real interest rates.

Registrar and Transfer Agent

in relation to a particular BMO ETF, CIBC Mellon Trust Company.

Reinvestment Price

The price at which unitholders, who have opted to reinvest their distributions, buy additional units of a mutual fund with the distribution proceeds.

RESP (Registered Education Savings Plan)

A plan that allows investors to save for post-secondary education on a tax-sheltered basis.

RIF (Retirement Income Fund)

A plan that holds your retirement savings and provides income after you retire. There are rules about how much you may take out each year.

ROC (Return of Capital)

A mutual fund trust may distribute a ROC if it distributes more than its net income and net realized capital gains. A ROC distribution is not included in your income, but instead reduces the adjusted cost base ("ACB") of the securities on which it was paid.

S

Sales Commissions (Load)

You may be required to pay a commission when you buy the (front-end load) version of a mutual fund.

Security Funds

A category of BMO Mutual Funds that help you preserve wealth, while providing a modest level of income. They offer safety of principal, regular income payments and easy access to money should you need it. Money market funds are typical security funds.

Sharpe Ratio

The Sharpe ratio is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of total risk.

Short-term Trading Fee

A fund may charge a short-term trading penalty (e.g. up to 2% of the amount that you redeem or switch) if you buy or switch and then redeem or switch securities of a fund within a specified number of days (e.g. 30 days) of purchasing or switching them. This penalty is meant to discourage short-term trading by investors because it may adversely affect all investors in a fund.

Sortino Ratio

The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset's standard deviation of negative portfolio returns, called downside deviation, instead of the total standard deviation of portfolio returns which are used in a Sharpe ratio.

Spread duration

The sensitivity of the price of a bond to changes in credit spread.

Strategic Asset Allocation

An investing approach that maintains a predetermined mix of asset weightings within a portfolio. For example, a simple strategic allocation model might target a weighting of 60% in equities and 40% in bonds. Because the value of investments can change over time, the portfolio would be rebalanced regularly to maintain the preset asset weightings.

T

Tactical Asset Allocation

An investing approach that aims to take advantage of perceived market opportunities by increasing a portfolio's weightings in some assets and reducing other assets correspondingly. This approach may also include placing upper and lower bounds around asset class allocations. For example, for equities in a portfolio, a lower bound might be 40%, an upper bound 80% and a neutral weighting 60%.

TFSA

A plan that provides tax-free growth on savings in which investors can make tax-free withdrawals at any time. There is an annual contribution limit, with the ability to carry forward unused contribution room.

Tracking Error

A measure of how closely the performance of an investment portfolio follows that of the reference benchmark or comparator of the fund.

Trading Day

for each BMO ETF, a day on which: (i) a session of the TSX is held; (ii) the primary market or exchange for the majority of the securities held by the BMO ETF is open for trading.

Trading expense ratio (TER)

The TER represents the costs each fund spends on brokerage commissions for buying and selling the underlying investments. The TER is not part of the MER. Typically, new funds, funds with high portfolio turnover or foreign securities will have a higher TER.

Trailing Commission (Service Fees)

This is an ongoing type of service commission paid by fund companies to dealers and brokers for the continued advice and service they provide to investors. They are usually based on the value of the units of the funds that their clients hold.

TSX

The Toronto Stock Exchange.

U

Unitholder

a holder of units of a BMO ETF.

V

Valuation Agent

BMO Asset Management

Valuation Date

each Trading Day and any other day designated by the Manager on which the NAV and NAV per Unit of a BMO ETF will be calculated. If that BMO ETF elects to have a December 15 year-end for tax purposes as permitted by the Income Tax Act (Canada), the NAV per Unit will be calculated on December 15.

Valuation Time

4:00 p.m. EST on each Valuation Sat or, if the market closes earlier that day, then the time as of which the market closes.

W

Worst drawdown (%)

The worst observed loss from a peak to a trough of a portfolio, before a new peak is attained.

Y

Year to Date (YTD) Return

as at a specific date during a calendar year, the rate of return beginning January 1st of that calendar year to the specific date.

Yield to Best

The greater of the yield to maturity and yield to put for a convertible bond where the investor also has a put option back to the issuer (typically at par).

Yield to maturity (%)

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.
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