Understanding ETFs BMO EXCHANGE TRADED FUNDS
The Exchange Traded Fund (ETF) market in Canada has grown rapidly over the past 10 years. ETFs offer investors efficient and effective access by indices to a wide variety of asset classes. BMO Exchange Traded Funds (BMO ETFs) offer tremendous value to investors, giving them additional choices for their investment portfolio. This booklet provides an introduction to ETFs and explains how they can play a role in your portfolio. The Roadmap on pages 12-15 outlines the full range of BMO ETFs, categorized by equity, fixed income, commodity and yield-focused ETFs. For more information on the topics in this booklet, or for additional information on BMO ETFs, please visit our website at bmo.com/etfs. Table of contents What are Exchange Traded Funds? & What are the benefits of ETFs.......... 2 The True Liquidity of an ETF........................................ 3,4 How do ETFs work?................................................. 5 Building Portfolios with ETFs....................................... 6,7 Fixed income investing using ETFs..................................... 8 Covered Call Option Strategy......................................... 9 Gaining Commodity Exposure Through ETFs............................. 10 Corporate Bond Target Maturity ETFs.................................. 11 Roadmap..................................................... 12-15 BMO EXCHANGE TRADED FUNDS 1
What are Exchange Traded Funds? An Exchange Traded Fund is an open-ended fund that is listed and traded on a stock exchange and which can be bought or sold directly during trading hours, much like a stock. An ETF is a basket of securities which may consist of stocks, bonds, or other assets such as commodities. The asset mix of an ETF generally aims to track the performance of an index. There are different types of ETFs available in the market place and can be broadly classified into equity, bond, and commodity ETFs. ETFs offer many benefits to investors, including diversification, liquidity, low fees, flexibility, transparency and tax efficiency. What are the benefits of ETFs? Exchange Traded Funds offer attractive features and benefits for investors, including: Lower cost ETFs tend to charge lower management fees and expenses than many other diversified investment options. Lower costs mean that more of your money is working for you over the long-term. By purchasing an ETF, an investor avoids the commission costs that would normally be paid for purchasing each underlying security in a diversified portfolio, while only paying one commission fee for the purchase of an ETF. Trading costs in the portfolio that make up most ETFs are also kept to a minimum. Portfolio transparency An investor can view the current trading price of an ETF at any time during the course of a regular trading day. Investors can also verify the composition of an ETF s actual portfolio on a daily basis. This provides ongoing transparency, which can be particularly helpful during volatile investment markets. Investment flexibility Most ETFs can be bought and sold at current market prices at any time during the trading day. ETFs allow investors to access securities that are broadly linked to a particular region, market, sector, commodity or theme without the need to analyze and trade each individual security. Plus, by appropriately investing either long or short, investors are able to implement their positive or negative views on a particular market or sector. Liquidity Unlike other similar investments, ETFs enable investors to buy and sell whenever they want when the markets are open. In addition, unlike single stocks, due to the create and redeem process, the true liquidity of an ETF is represented by the liquidity of the underlying securities. Diversification By aiming to replicate a specific index or market return, an ETF aims to incorporate all, or a representative sample of, the securities that make up that index, regardless of the number of securities involved. This offers investors lower portfolio variability and can reduce the impact that volatile markets can have in terms of rising and falling prices, especially when compared to holding individual securities. Tax efficiency As an investment, ETFs tend to have low portfolio turnover, as each investor does not transact with the Fund. Instead, units are primarily bought and sold on an exchange between different investors, rather than directly with the ETF. This means that there are typically fewer realizations of capital gains and losses with ETFs than with other investment products. 2 BMO EXCHANGE TRADED FUNDS
The True Liquidity of an ETF The traded volume of an ETF has little effect on its liquidity. While the liquidity of an individual security is directly related to the traded volume of that security, the same correlation 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 spread 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. 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 offer from an existing unit holder is matched with a buy offer 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 designated broker activity Designated brokers 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. For BMO ETFs, the designated broker continuously posts units on both the bid and ask side, at a price which reflects the spread of the underlying securities. Third Level of Liquidity unit creations based on underlying securities Because ETFs are open-end structures, the underwriter can correct supply imbalances by creating or redeeming units. This is essential as the underwriter can offset an increase in demand by creating more units. On the other hand, when the demand for the units decreases, the underwriter redeems units to tighten supply. When a large buy order occurs, the underwriter will buy the basket of securities and initiate a creation order with the ETF provider. The cost to the investor would be the fair value of the units based on the midpoint of the spread, the underwriter s costs of building the basket, and the investor s single trade commission rate with their broker. The underwriter s costs are based on how much each security trade impacts its traded volume. With very liquid underlying securities, this cost is minimal. The cost increases as the liquidity of the underlying securities decreases. By comparison, if the investor instead purchased each underlying security within the ETF, they would be faced with commission costs on each individual trade, plus the trading costs incurred with each transaction. BMO EXCHANGE TRADED FUNDS 3
The graphs below show total volume traded in the BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and its underlying holdings (the six major banks) during the last week in October 2010. As you can see the volume in ZEB averaged around 20,000 shares traded per day. In contrast the major banks regularly traded millions of shares individually a day, which is where ZEB s true liquidity resides. Despite the low volume on ZEB, the bid-ask spread remained very tight, near one cent for the week, which mirrored the underlying banks. ZEB VOLUME 1,000,000 900,000 0.05 0.04 800,000 0.03 700,000 0.02 600,000 0.01 SHARES 500,000 400,000 300,000 0.00-0.01-0.02 SPREAD 200,000-0.03 100,000-0.04 0 10/25/2010 10/26/2010 10/27/2010 10/28/2010 10/29/2010-0.05 Volume Average Daily Spread BANK VOLUME 5,000,000 0.05 4,500,000 0.04 4,000,000 0.03 3,500,000 0.02 3,500,000 0.01 SHARES 2,500,000 2,000,000 0.00-0.01 SPREAD 1,500,000-0.02 1,000,000-0.03 500,000-0.04 0 10/25/2010 10/26/2010 10/27/2010 10/28/2010 10/29/2010 BMO RY BNS TD CM NA Average Bank Spread -0.05 As we have seen, 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. 4 BMO EXCHANGE TRADED FUNDS
How do Exchange Traded Funds work? Exchange Traded Funds are open-ended funds that are listed and trade like stocks on a stock exchange. ETFs are usually designed to provide, to the extent possible, the return of a broad asset class such as Canadian equities and Canadian fixed income, or of a narrower industry or sector within the asset class. The listing and trading on exchanges represents one important way that ETFs fundamentally differ from mutual funds. Units of mutual funds can be purchased only once a day, at the fund's closing Net Asset Value (NAV), whereas an ETF can be traded at any point throughout the trading day. The benefits of the ETF structure include: low management fees portfolio transparency investment flexibility high liquidity diversification tax efficiency Unit creation An ETF may be created to track an index either by holding a representative basket of securities to match or sample the index, or by using derivative products to simulate the index return. An approved underwriter, usually a large securities dealer, will generally deliver the underlying basket of securities to the Fund Provider in exchange for the units of the fund. The underwriter will then continue to create or redeem units based on the demand for units from investors in the secondary market on the exchange. If demand exceeds supply, or the spread between the bid and ask on the exchange is growing, more units will be created. If the supply exceeds demand, the underwriter will redeem units. The ability to create additional units to meet demand is an important part of the liquidity of an ETF, which is best reflected by the liquidity of the underlying securities, not by the liquidity of the ETF itself. 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. One of these is fund trading costs. Since the underwriters deliver, or take possession of, the underlying securities during subscriptions and redemptions, ETFs negate the need for the Fund Manager to trade securities on the exchange. Therefore, trading and commission costs are kept to a minimum. Another significant source of tracking can be cash drag, which is the result of an uninvested portion of a portfolio s net assets. ETFs maintain low cash levels due to the subscription and redemption mechanism. An ETF will seek to further minimize cash drag by reinvesting the proceeds or providing quarterly income distributions to investors. Uses of ETFs ETFs can be important investment tools for both institutional and individual investors. They are used to gain exposure to markets and sectors. ETFs are valuable tools for core satellite investment strategies, for asset allocation, as well as for equitizing cash positions. Furthermore, investors can use ETFs to implement positive or negative views by investing long or short in the appropriate ETF. BMO EXCHANGE TRADED FUNDS 5
Building portfolios with Exchange Traded Funds Whether you are building a portfolio on your own or with the assistance of a financial advisor, you must complete two basic but critical steps: 1. Identify your objectives, time horizon, risk tolerance, level of financial knowledge, and personal preferences; 2. Select a range of appropriate investments and decide how much to allocate to each asset class to maximize returns for a given level of risk. Ideally, you want an optimal portfolio one that provides maximum potential returns for a given level of risk. By using the efficient frontier (see illustration), investors can see the trade-offs between risk and return offered by different portfolios. From this, they can then work to pinpoint the portfolio that may best achieve their objectives. Portfolio building strategies using Exchange Traded Funds Exchange Traded Funds (ETFs) are a valuable tool that can be used to build more optimal portfolios. An ETF tracks the performance of a specific index, such as an equity or bond index, mirroring its returns. ETFs are ideally suited for use in portfolio building strategies because of their flexibility, low cost and wide range of investment options. The following are four examples of strategies that can be used on their own or in conjunction with one another and the benefits of using ETFs to implement them. Blend index and actively managed funds Indexed funds offer market performance which matches the beta, or returns of the overall market or of a specific segment of the market. Active management, meanwhile, provides the potential for alpha (outperformance relative to the market) through individual security selection, sector rotation or other active strategies. Get the benefits of each type of investment by incorporating both into your portfolio. Benefits of using ETFs: ETFs provide diversified indexed exposure at a low cost; they are traded throughout the day, which provides added flexibility. Mix core and satellite investments The core is comprised of major asset classes combined to achieve a particular risk/reward profile. For example, these could include the Canadian and U.S. equities, and domestic investment grade fixed income. Satellites have the potential to add value when combined with your core, but may be associated with additional risk. An example of a satellite position includes U.S. high yield bonds. Investors who want exposure to this less correlated asset class with its higher income potential could invest in a TSX-listed ETF that provides the performance of a diversified basket of these securities. Benefits of using ETFs: Wide variety of equity and fixed income ETF options; easy and efficient access to various markets and market segments; suitable for both core and satellite portions of portfolio, depending on investor requirements. 6 BMO EXCHANGE TRADED FUNDS
Employ a tactical short-term strategy ETFs are an efficient means to adjust portfolio exposure through specific sector or segment investments. For example, if an investor wants tactical access to growth and dividend income provided by the Canadian banking industry, they could invest in a TSX-listed ETF that holds all of the big six banks in an appropriately diversified manner. Benefits of using ETFs: Low entry and exit cost; easy and efficient access to segments and sectors that you want in your portfolio. Diversify fixed income holdings Many investors have built targeted equity portfolios to reflect their world view but have not applied that focus to their fixed income portfolio. A wide variety of fixed income choices are available, including federal, provincial and corporate bonds with different credit ratings and maturities. Depending on the market environment, their personal risk and return preferences, and time horizons, fixed income investors may want to choose specific fixed income sectors and maturities for their portfolios. For example, in the short maturity segment, they may prefer the combination of relatively higher credit quality and income that provincial bonds provide. ETFs are available that would allow investors to get that precise investment exposure in their portfolios. Benefits of using ETFs: Provide diversification by maturity, credit rating or type; enable investors to take targeted positions to best fit their macro economic expectations (for example, interest rate movements and inflation expectations). Hypothetical efficient frontier Return 100% Equities 100% Bonds Risk This is a hypothetical illustration showing the risk return trade-off as a portfolio s asset mix moves from 100% bonds to 100% equities. Portfolios that fall on the line offer the higher level of return for a given level of risk. BMO EXCHANGE TRADED FUNDS 7
Fixed income investing using ETFs Just as with equities, investors can add value to fixed income portfolios by positioning them to benefit from the advantages of different bond categories: sectors, credit ratings and maturities. However, a traditional approach of selecting individual bonds can be time-consuming, costly and inefficient. ETFs make it easy to gain exposure to a range of bonds. Specialized fixed income Exchange Traded Funds allow investors to invest in diversified portfolios of bonds quickly, cost-effectively and efficiently. An ETF tracks the performance of a specific index, such as a bond index, by aiming to mirror its returns and allowing investors to participate in its potential income and growth. By carefully selecting ETFs that track government or corporate bonds with different maturities (see flowchart), you can get the precise sector, credit rating and maturity exposure that you need for the fixed income portion of your portfolio. And, you can do so in a more diversified, efficient and cost-effective manner compared to individual bonds. Canadian investment grade bond market Total Canadian Aggregate Bond Market 100% Federal Aggregate 46.8% Provincial Aggregate Corporate Aggregate 25.8% 27.4% Short Mid Long Short Mid Long Short Mid Long Federal Federal Federal Provincial Provincial Provincial Corporate Corporate Corporate 30.3% 8.2% 8.3% 6.3% 7.6% 11.9% 13.7% 8.0% 5.2% Source: DEX Market capitalization weight as of December 31, 2010 8 BMO EXCHANGE TRADED FUNDS
Covered Call Option Strategy The covered call option strategy, also known as a buy write strategy, is implemented by writing (selling) a call option contract while owning an equivalent number of shares of the underlying stock. This is considered a conservative strategy because it decreases the risk of stock ownership while providing additional income; however, it caps upside potential on significant price increases. A call option is a contract which allows the purchaser to benefit from a rise in the stock price over a limited time period. Each contract has a stated exercise price which is the price at which the purchaser has the option to buy the underlying stock. If the stock price rises above the exercise price, the purchaser will exercise their option. If the stock price falls below the exercise price, the purchaser will let the worthless option expire. The price of the option will be determined based on the difference between the stock price and the exercise price, the volatility of the underlying stock (where greater volatility leads to a higher price) and the time to expiration of the option contract (where a longer time period leads to a higher price). The covered call option strategy allows the portfolio to generate income from the written call option premiums in addition to the dividend income from the underlying stocks. Mechanics of Covered Calls In general, the strategy used by the BMO Covered Call Canadian Banks ETF will be to own the underlying 6 Canadian banks or units of BMO S&P/TSX Equal Weight Banks Index ETF (ZEB) and then sell call options in proportion to the underlying holdings. As an example, consider a portfolio that consists of 100 shares of Bank of Montreal (BMO) at a current price of $60, for a total value of $6,000. At the money (ATM) call options (exercise at $60) that expire in one month are valued at a premium of $1.50 per contract. To implement a covered call strategy, the portfolio writes call options on 100 BMO shares and receives $150 in premium. Payoff without exercise: Premium received adjusted for any difference in stock price. If the stock price drops to $58.50, the calls are not exercised, but the portfolio value drops. The new portfolio value is $6,000 ($5,850 + $150) which is the break even point (stock purchase price - premium received). The portfolio will devalue at any price below $58.50. Payoff with exercise: Premium received adjusted for any difference between stock price and exercise price. If the stock price rises to $62, the calls are exercised at $60 eliminating the benefit of the rising stock price except for the premium received. The new portfolio value is $6,150. Impact of Market Conditions The covered call option strategy is most effective when the underlying stocks are expected to be range bound, meaning that the stock s price is not expected to be volatile. When the stock price rises significantly and exceeds the exercise price, the call option will move into the money. This caps the gain for the call writer based on the premium received. The strategy only provides limited protection when the stock price declines significantly, as the decline of the underlying stock portfolio is partially offset by the call premium received. BMO EXCHANGE TRADED FUNDS 9
Gaining Commodity Exposure Through ETFs The popularity of commodities as an investment has grown significantly over the last decade. There are three structures through which ETFs access commodities. The method by which the ETF gains exposure will result in different performance in different business conditions. Thus, with a growing number of commodity related ETFs on the market, investors must familiarize themselves with the different structures of commodity ETFs. Physical-based ETFs invest in the commodity directly. This structure has the benefit of closely matching the spot price, but is impacted by the cost of storage. Equity-based ETFs invest in a basket of equities that are associated with a commodity. They have the advantages of ease of access and operating leverage. Additionally, they are not affected by futures pricing conditions. However, as they are constructed with equities, they may move more with the stock market as a whole than with commodities in certain market conditions. Futures-based ETFs invest in futures contracts of different commodities with an underlying portfolio of money market instruments. As the futures contracts approach expiration, they are closed out and reopened as future dated ones. The rolling of futures exposes the ETF to differences between the spot price and the future price. If the future price is in backwardation (future price < spot price) the ETF benefits from the price difference. If the future price is in contango (future price > spot price), the ETF loses from the price difference. Returns of futures-based ETFs are based on: 1 Money Market Yield Investing in futures contracts does not require paying for an investment like a stock; money is exchanged on daily gains and losses (known as margin payments). Instead, the underlying assets are invested in T-Bills which earn short term interest rates. This gives the futures based fund the added benefit of the money market yield in addition to changes in the commodities price. 2 Spot Return The change in the spot price of the underlying commodity will also have an impact on the overall return of the ETF. The futures price will generally converge to the spot price at expiration. 3 Roll Yield Roll yield or roll return is generated as existing contracts expire and new ones are bought. Backwardation results in a positive roll yield, and contango results in a negative roll yield. Investment Opportunity The type of commodity ETF best used to access commodities can differ under changing business environments and an investor s investment objective. BMO ETFs offer a line up of both equity based and futures based ETFs. A Comparison of Commodity Related ETFs Physical-Based Equity-Based Futures-Based Advantages Disadvantages Example Tight tracking to underlying spot price Pure exposure to commodity No counterparty risk Not directly affected by contango or backwardation No storage costs Operating leverage No explicit storage costs Provide access to many types of commodities Storage costs Not all commodities are storable (ex. energy and perishable commodities) Can move more in line with the stock market than commodities at certain times May be affected by contango /backwardation May be subject to counterparty risk SPDR Gold Trust (GLD NYSE) BMO Junior Gold Index ETF (ZJG TSX) BMO Precious Metals Commodities ETF (ZCP TSX) 10 BMO EXCHANGE TRADED FUNDS
Corporate Bond Target Maturity ETFs Target maturity bond ETFs are designed to have characteristics similar to traditional bonds. They make regular income payments and have a fixed maturity date. The average time to maturity of the ETF s underlying portfolio will decrease to match the approaching maturity date. Like a regular bond that matures on a specific date, the target maturity bond ETF will mature or convert into a short-term bond fund. This gives the investor the flexibility to access funds when needed while reducing the risk profile of the portfolio over time due to the decreasing time to maturity and duration. Essentially, a target maturity bond ETF is a customized bond that matches specific risk characteristics and the maturity date of a traditional bond, but provides the benefit of portfolio diversification. These types of ETFs allow investors to plan for future expenses or cash flow requirements. Target maturity bond ETFs have a term to maturity, just like bonds. Generally, a target term to maturity can be achieved by : 1 Purchasing a zero coupon bond. 2 Purchasing a traditional fixed coupon paying bond. 3 By building a portfolio of bonds or ETFs. This type of portfolio is customized to achieve a desired average term to maturity for the ETF as a whole with the added benefit of issuer diversification. Unlike the first two options, Option 3 adds a very significant benefit in terms of diversification. As fixed income ETFs generally have a relatively constant average term to maturity, they can be used in the same manner as individual bonds to design a target maturity portfolio. BMO ETFs offer four corporate bond target maturity ETFs. ZXA BMO 2013 Corporate Bond Target Maturity ETF ZXB BMO 2015 Corporate Bond Target Maturity ETF ZXC BMO 2020 Corporate Bond Target Maturity ETF ZXD BMO 2025 Corporate Bond Target Maturity ETF Mechanics of BMO Target Maturity Corporate Bond ETFs Each BMO Target Maturity Corporate Bond ETF is expected to hold a combination of the three BMO Corporate Bond ETFs (listed below) and individual corporate bonds. Short-term money market securities are added over time as each ETF nears maturity. ZCS BMO Short Corporate Bond ETF: average term to maturity of approximately 3 years ZCM BMO Mid Corporate Bond ETF: average term to maturity of approximately 7 years ZLC BMO Long Corporate Bond ETF: average term to maturity of approximately 22 years Since ZCS, ZCM and ZLC each hold over 75 bonds by tracking their respective underlying index in addition to any direct bond holdings, they add a level of diversification to each BMO Target Maturity Corporate Bond ETF. The weightings of the securities held by ZXA, ZXB, ZXC and ZXD will be determined so that each portfolio matches the weighted average term to maturity of its combined holdings to end approximately on the applicable target maturity date. For example, ZXD (BMO 2025 Target Maturity Bond ETF), will have an average term to maturity of approximately 15 years as of January 2011. By combining holdings of ZCM and ZLC, we can approximately achieve the desired 15 years average term to maturity. As time passes, our strategy is to move further into the shorter dated ETFs and money market securities to keep the ETF in-line with its average target term to maturity. What happens when BMO Corporate Bond Target Maturity ETFs near maturity? Unlike regular bonds that return principal at their specific maturity date, BMO Corporate Bond Target Maturity ETFs are designed to continue operating as or merge into a short-term bond ETF (holding fixed income securities with remaining term to maturity of one year or less). This will allow investors to choose when to withdraw their capital from the ETF. BMO EXCHANGE TRADED FUNDS 11
BMO ETF Roadmap With BMO ETFs extensive offering of equity based exchange traded funds, investors can now get efficient access to diverse markets ranging from broad-based equities in different geographical regions to sector based equities. BMO ETFs benefit investors by making customized portfolio construction and completion an easy and simple process. The BMO ETF equity map groups each product according to its geographical exposure and includes relevant information such as trading tickers and portfolio yields. Equity Roadmap BMO Equal Weight REITs ZRE Portfolio Yield: 6.1% BMO Equal Weight Banks ZEB Portfolio Yield: 3.7% BMO Equal Weight Oil & Gas ZEO Portfolio Yield: 2.7% BMO Equal Weight Utilities ZUT Portfolio Yield: 5.6% Canada BMO DJ Canada Titans 60 ZCN Portfolio Yield: 2.3% Mgmt. Fee: 0.15% BMO Dow Jones Industrial Average ZDJ Portfolio Yield: 2.5% Mgmt. Fee: 0.23% BMO US Equity ZUE Portfolio Yield: 1.9% Mgmt. Fee: 0.22% US BMO Equal Weight US Banks ZUB Portfolio Yield: 1.7% Mgmt. Fee: 0.35% BMO Equal Wgt US Health Care ZUH Portfolio Yield: 0.8% Mgmt. Fee: 0.35% BMO Nasdaq 100 Equity ZQQ Portfolio Yield: 0.6% Mgmt. Fee: 0.35% BMO Junior Gold ZJG Portfolio Yield: 0.0% Mgmt Fee: 0.55% BMO Junior Gas ZJN Portfolio Yield: 0.4% Mgmt Fee: 0.55% Global BMO Junior Oil ZJO Portfolio Yield: 0.4% Mgmt Fee: 0.55% BMO International Equity ZDM Portfolio Yield: 3.2% Mgmt. Fee: 0.455% BMO Equal Wgt Global Base Metals ZMT Portfolio Yield: 0.6% BMO Global Infrastructure ZGI Portfolio Yield: 2.9% BMO Emerging Markets Equity ZEM Portfolio Yield: 3.0% Mgmt. Fee: 0.535% BMO India Equity ZID Portfolio Yield: 0.8% Mgmt. Fee: 0.65% BMO China Equity ZCH Portfolio Yield: 1.4% Mgmt. Fee: 0.65% 12 BMO EXCHANGE TRADED FUNDS
The BMO ETFs fixed income product suite is designed to allow investors to optimally build a fixed income portfolio. The bond map illustrates the segmentation of the Canadian bond market across maturity terms as well as across sectors. Further BMO fixed income ETFs are available, including Real Return Bonds for inflation protection, U.S. High Yield Corporate Bonds (Hedged to C$) for increased risk/return profile, Sovereign Emerging Market Bonds (Hedged to C$) for global diversification and four target maturity ETFs to help plan for future expenditures. Fixed Income Roadmap BMO US High Yield Bond ZHY Duration: 4.7 Portfolio Yield: 7.9% BMO Emerging Market Bond ZEF Duration: 7.0 Portfolio Yield: 6.5% Mgmt. Fee: 0.50% BMO Long Corporate Bond ZLC Duration: 11.8 Portfolio Yield: 5.6% Mgmt. Fee: 0.30% Yield BMO Short Corporate Bond ZCS Duration: 2.9 Portfolio Yield: 4.4% Mgmt. Fee: 0.30% BMO Short Provincial Bond ZPS Duration: 2.8 Portfolio Yield: 4.4% Mgmt. Fee: 0.25% BMO Short Federal Bond ZFS Duration: 2.5 Portfolio Yield: 3.0% Mgmt. Fee: 0.20% BMO Mid Corporate Bond ZCM Duration: 5.8 Portfolio Yield: 5.2% Mgmt. Fee: 0.30% BMO Mid Federal Bond ZFM Duration: 6.5 Portfolio Yield: 3.6% Mgmt. Fee: 0.20% BMO Aggregate Bond ZAG Duration: 6.2 Portfolio Yield: 4.1% Mgmt. Fee: 0.28% BMO Long Federal Bond ZFL Duration: 13.0 Portfolio Yield: 4.3% Mgmt. Fee: 0.20% BMO Real Return Bond ZRR Duration: 16.0 Portfolio Yield: 2.5% Mgmt. Fee: 0.25% Maturity BMO 2013 Corporate Bond Target Maturity ZXA Duration: 2.7 Portfolio Yield: 4.4% Mgmt. Fee: 0.30% BMO 2015 Corporate Bond Target Maturity ZXB Duration: 4.1 Portfolio Yield: 5.1% Mgmt. Fee: 0.30% BMO 2020 Corporate Bond Target Maturity ZXC Duration: 6.8 Portfolio Yield: 5.8% Mgmt. Fee: 0.30% BMO 2025 Corporate Bond Target Maturity ZXD Duration: 8.8 Portfolio Yield: 6.0% Mgmt. Fee: 0.30% BMO EXCHANGE TRADED FUNDS 13
BMO ETFs offer various ways to gain investment exposure to precise commodity sectors. The commodities map illustrates the BMO ETFs available to gain exposure to commodities through either futures based or equity based portfolios, grouped by energy, precious metals, base metals and agriculture. Commodities Roadmap Energy Precious Metals Base Metals Agriculture Futures BMO Energy Commodities ZCE Mgmt. Fee: 0.65% Crude Oil 30% Brent Crude 17% Gasoil 17% Heating Oil 16% RBOB Gas 11% Natural Gas 9% BMO Precious Metals Commodities ZCP Mgmt. Fee: 0.65% Gold 85% Silver 15% BMO Base Metals Commodities ZCB Mgmt. Fee: 0.65% Copper 31% Zinc 20% Aluminum 18% Nickel 17% Lead 14% BMO Agriculture Commodities ZCA Mgmt. Fee: 0.65% Wheat 22% Sugar 17% Corn 18% Soybeans 15% Cotton 15% Coffee 7% Kansas Wheat 4% Cocoa 2% Large Cap Equity BMO Equal Wgt Oil & Gas ZEO 14 companies BMO EW Global Base Metals ZMT 47 companies BMO Junior Oil BMO Junior Gold ZJO ZJG 68 companies 34 companies Junior Equity BMO Junior Gas ZJN 36 companies 14 BMO EXCHANGE TRADED FUNDS
BMO ETFs offer a wide range of yield generating products through fixed income, equity, and balanced ETFs. The yield map illustrates the higher yielding BMO ETFs across equity and fixed income as well as the current portfolio yield levels. Further higher yield income ETFs include Monthly Income for a balanced portfolio across asset classes and sectors, and Covered Call Canadian Banks for equity exposure enhanced with call premiums. BMO ETFs offer 20 products with monthly distributions. Yield Focused Roadmap Equity Fixed Income BMO Equal Weight REITs ZRE Portfolio Yield: 6.1% BMO US High Yield Bond ZHY Portfolio Yield: 7.9% BMO Equal Weight Utilities ZUT Portfolio Yield: 5.6% BMO Monthly Income ZMI Portfolio Yield: 6.0% BMO Emerging Market Bond ZEF Portfolio Yield: 6.5% Mgmt. Fee: 0.50% BMO Equal Weight Banks ZEB Portfolio Yield: 3.7% BMO Covered Call Cdn Banks ZWB Portfolio Yield: 8.1% Mgmt. Fee: 0.65% BMO Long Corporate ZLC Portfolio Yield: 5.6% Mgmt. Fee: 0.30% BMO Equal Weight Oil & Gas ZEO Portfolio Yield: 2.7% BMO Mid Corporate ZCM Portfolio Yield: 5.2% Mgmt. Fee: 0.30% BMO EXCHANGE TRADED FUNDS 15
For more information on BMO ETFs please contact Client Services at 1-800-361-1392 or visit bmo.com/etfs. Portfolio yield is calculated as the most recent income received by the ETF in the form of dividends, interest and other income annualized based on the payment frequency, divided by the current market value of the ETF s investments. Duration is a measure of sensitivity of bond prices to changes in interest rates. For example, a 5 year duration means the bond will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%. Generally, the higher the duration the more volatile the bond s price will be when interest rates change. The portfolio yield and duration of each ETF is as of January 31, 2011 and is reported gross of management fees, withholding taxes and other expenses. BNY Mellon ADR Index and BNY Mellon DR Index are service marks owned by the Bank of New York Mellon Corporation. Each sub-index is part of the BNY Mellon Family of DR Indices. Each sub-index and the BNY Mellon Family of DR Indices are service marks owned by The Bank of New York Mellon Corporation. The Dow Jones Industrial Average SM is a product of Dow Jones Indexes, a licensed trade-mark of CME Group Index Services LLC ( CME ), and has been licensed for use. Dow Jones, Dow Jones Industrial Average SM, Dow Jones Canada Titan 60 Diamond and Titans are service marks of Dow Jones Trademark Holdings, LLC ( Dow Jones )and have been licensed for use for certain purposes. BMO ETFs based on Dow Jones indexes are not sponsored, endorsed, sold or promoted by Dow Jones, CME or their respective affiliates and none of them makes any representation regarding the advisability of investing in such product(s). Nasdaq, OMX, NASDAQ OMX, Nasdaq-100, and Nasdaq-100 Index, are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the Corporations ) and are licensed for use by BMO Asset Management Inc. The BMO Nasdaq 100 Equity Hedged to CAD Index ETF has not been passed on by the Corporations as to its legality or suitability and is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORATIONS MAKE NO WARRANTIES AND BEAR NO LIABILITY WITH RESPECT TO The BMO Nasdaq 100 Equity Hedged to CAD Index ETF. Standard & Poor s, S&P and S&P GSCI is a registered trademark of Standard & Poor s Financial Services LLC ( S&P ) and have been licensed for use by BMO Asset Management Inc. BMO Energy Commodities Index ETF, BMO Agriculture Commodities Index ETF, BMO Precious Metals Commodities Index ETF and BMO Base Metals Commodities Index ETF (BMO ETFs) are not sponsored, endorsed, sold or promoted by S&P or its affiliates and S&P and its affiliates makes no representation, warranty or condition regarding the advisability of buying, selling or holding units in BMO Energy Commodities Index ETF, BMO Agriculture Commodities Index ETF, BMO Precious Metals Commodities Index ETF and BMO Base Metals Commodities Index ETF (BMO ETFs). Standard & Poor s and S&P are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ) and TSX is a trademark of Toronto Stock Exchange. These trademarks have been licensed for use by BMO Asset Management Inc. BMO S&P/TSX Equal Weight Banks Index ETF, BMO S&P/TSX Equal Weight Oil & Gas Index ETF, and BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF is not sponsored, endorsed, sold or promoted by S&P or Toronto Stock Exchange, and S&P and Toronto Stock Exchange make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the BMO S&P/TSX Equal Weight Banks Index ETF, BMO S&P/TSX Equal Weight Oil & Gas Index ETF, and BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. The funds are not guaranteed, their values change frequently and past performance may not be repeated. This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual s circumstances.individuals should seek the advice of professionals, as appropriate, regarding any particular investment. BMO ETFs are administered and managed by BMO Asset Management Inc., a portfolio manager and a separate legal entity from the Bank of Montreal. Registered trade-mark of Bank of Montreal, used under licence.
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