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Frequently Asked Questions

BMO Financial Group

The ETF market in Canada has grown rapidly over the past 10 years because ETFs offer investors efficient and effective access to a wide variety of asset classes. We launched BMO ETFs because these investments offer tremendous value for investors, giving them additional choices for their investment portfolio.

BMO is committed to bringing Canadians a broad range of investment products and solutions that will stand the test of time. We have dedicated significant resources to ensure that ETFs are a core part of BMO Financial Group's investment product offerings now and in the future. An example of this dedication is in the BMO ETF management team, one of the most experienced in Canada. Rajiv Silgardo, CEO of BMO Asset Management Inc., and his ETF team collectively have over 100 years of experience managing institutional indexing and retail ETF strategies and are highly regarded in Canada and abroad as ETF experts.

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 are traded on the Toronto Stock Exchange and can be purchased through most discount and full service brokerages.

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.

  • Individual investors and financial advisors can contact our client services department at 1-800-361-1392 or bmo.etfs@bmo.com.
  • Financial advisors can also contact their BMO Mutual Funds wholesaler.
  • There are a number of advantages to using BMO ETFs:

    1. Management Team: BMO ETFs are managed by one of the most experienced ETF teams in Canada. Based out of Toronto, Rajiv Silgardo leads a team of 8 individuals who collectively have over 100 years of experience in managing institutional and retail ETF strategies.
    2. BMO Financial Group: Recent market volatility and uncertainty has highlighted the strength and stability of Canadian financial institutions.
    3. Innovation: BMO is committed to providing innovative products to Canadian investors and BMO ETFs highlight this commitment. In addition to providing access to Canadian, U.S. and International equity indices, BMO ETFs offer a range of fixed income investments as well as targeted exposure to specific sectors and industries such as banks, utilities, health care, REITs, infrastructure, technology, and commodities.

     

    BMO ETFs

    Each of these industry groups are amongst the largest groups in the Canadian market and both global and domestic investors look to the Canadian market for optimal exposure to cyclical resource-based companies. The banks, REITs, and utilities were chosen because they offer a very competitive dividend yield for income oriented investors. In addition, U.S. healthcare and technology ETFs are available, as a complement to the Canadian market which has limited exposure to these sectors.

    There are four health care stocks and five technology stocks within the TSX Composite Index. By looking to the U.S. market, we are able to offer broadly diversified sector ETFs, including 49 large cap health care stocks, and 100 non-financial NASDAQ listed stocks. We choose to deliver a diversified exposure to U.S. diversified banks with 17 stocks.

    The Canadian Dividend ETF (ZDV) offers exposure to higher yielding equities. The Monthly Income ETF (ZMI) offers a balanced exposure to both the higher yielding equity and fixed income ETFs. The three covered call ETFs (ZWB, ZWU, ZWA) offer significant yields through writing call options on equity portfolios.

    Additionally, all BMO Canadian sector ETFs have a dividend yield greater than the broad market (S&P/TSX Composite Index), Canadian banks (ZEB), Canadian Utilities (ZUT), Canadian Oil & Gas (ZEO) and Canadian REITs (ZRE).

    There are three junior, or small cap, ETFs. These include gold, oil, and natural gas. These ETFs offer the potential benefit of a small cap bias, while allowing an investor to make a sector investment.

    BMO ETFs track market capitalized indexes, equal weighted indexes, price weighted indexes, and factor weighted indexes. Sectors and industries can be skewed by high concentrations in one or two larger companies.

    For example, in the BMO Diversified Banks ETF, market capitalization weighting would have led to the top bank having a weight of over 28% of the portfolio, with the top two banks together being more than 50% of the portfolio. Therefore we have used equal weighting because it is optimal from a mean variance or risk adjusted perspective. Generally, ETFs with a high number of names that are of a similar size are left as market weighted.

    We have launched factor weighted ETFs that allow investors to gain exposure to GDP weights with the Emerging Markets Bond ETF (ZEF), yield weights with the Canadian Dividend ETF (ZDV), and low beta weights with the Low Volatility Canadian Equity ETF (ZLB).

    BMO ETFs use regular rebalancing for our equal weighted indexes and control and reduce turnover wherever possible. In addition, the BMO ETF team has many years of experience in successfully managing and trading various institutional and ETF index funds to ensure the lowest possible level of transaction costs for any rebalancing of the portfolios. It is important to realize that market capitalization weighted ETFs may have comparable turnover due to index additions and deletions, share float increases or mergers and acquisitions.

    Equal weighting is used when it is the best solution for the investor. Equal weighting does have a small capitalization bias and is typically used only in instances where market capitalization weighting will introduce concentration issues in the portfolio. For example, in the BMO global base metals ETF (ZMT), the top five companies would have accounted for over 55% of the portfolio. This concentrated holdings exposure can increase risk and detract from the desired exposure to the overall sector. Therefore the benefits of using equal weighting offset the impact of the small capitalization bias.

    Whenever an Index Provider rebalances or adjusts an Index by adding securities to or subtracting securities from that Index, the applicable BMO ETF will generally acquire and/or dispose of the appropriate number of securities through one or more Designated Brokers.

    The BMO ETFs will rebalance based on the underlying index changes and semi-annually for most non-indexed ETFs.

    Currency risk is removed from most BMO ETFs giving investors exposure to the local market returns. There is currency risk on the emerging markets ETF (ZEM) due to the high cost of hedging emerging markets currencies and also on the global infrastructure ETF (ZGI) due to the low correlation of the unhedged returns to Canadian equities.

    When BMO ETFs provide exposure to markets in a currency hedged manner, investors receive local market returns. This allows investors to focus their investing decision on only one factor, the local asset class return, without needing to make a secondary decision based on currency movement expectations.

    The Covered Call Banks ETF (ZWB), Utilities ETF (ZWU), and Dow Jones Industrial Average ETF (ZWA), provide call premium income in addition to the dividend income on the portfolio. 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.

    We offer a broad range of ETFs, covering a full suite of core products, sectors, and fixed income.

    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.

    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.

     

    Fixed Income ETFs

    BMO ETFs offer four target date corporate bond ETFs, 2013, 2015, 2020, 2025. These funds allow investors to match the timeline of an expected expense, where the ETF's term to maturity will decrease over time to match the fund's maturity date.

    The majority of ETF assets are within a wide range of equity based products but investors haven't had the same level of choice within the fixed income universe. While offering a Canadian aggregate bond ETF (ZAG), BMO ETFs also segment the Canadian fixed income market by term (short, mid, and long) and by credit risk (federal, provincial, and corporate). We also offer a real return bond ETF (ZRR) for inflation protection.. We have also offered two firsts in Canada, currency hedged U.S. high yield bonds (ZHY) and currency hedged emerging markets bonds (ZEF).

    Fixed income ETFs incorporate all of the benefits of a typical ETF - diversification, liquidity and cost effectiveness. A fixed income ETF may be more appropriate than a fixed income mutual fund 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.

    Bond ladders are a great way to manage interest rate or maturity risk. However, the key issue is the availability of the right bond at the right time. For example, at times, the right credits aren't available, at other times they can be very expensive. BMO ETFs also offer 4 target date corporate bond ETFs, 2013, 2015, 2020, 2025 which offer the ladder benefit of fixed maturity dates with the added bonus of diversification.

     

    Balanced ETFs

    BMO ETFS offer a monthly income ETF which holds a balanced portfolio of the higher yielding BMO equity and fixed income ETFs. This ETF offers asset class diversification with a significant income focus.

     

    ETFs - General

    ETFs are open ended investment funds with shares that trade throughout the day on stock exchanges that allow investors to participate in the performance of various asset classes during normal investment trading hours. ETFs combine the advantages of investing in index funds, including diversification and low costs, coupled with the liquidity, efficiency and flexibility of investing in individual stocks.

    Investors can buy and sell shares on a stock exchange through a financial advisor or discount brokerage account during normal operating hours.

    ETF assets grow through the increase of their price and through the offering of additional new units. Market trades by individual investors occur at market prices rather than NAV. Underwriters alleviate supply and demand imbalances by engaging in transactions with the fund itself, trading baskets of securities for very large blocks of shares. These transactions, which result in the creation or redemption of ETF shares, occur at net asset value (NAV).

    The NAV is calculated at the end of the daily trading session (in the same manner as mutual funds), while the market price is the value at which ETFs are traded throughout the day (NAV should be close to the market price).

    • 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 tax liabilities.

    As the prices of the underlying securities increase (decrease), the ETF's price increases (decreases)

    Tracking error is the performance difference between an ETF and its benchmark index.

    Security licensed advisors (IIROC), institutional funds and individual investors through discount brokers.

    No, commission-based advisors can use ETFs too; they generate their revenue from the commission fees on the trades.

    A designated broker and other market makers keep the spread narrow by carefully balancing buy and sell orders.

    No, since ETFs are regularly traded on the stock market, the manager does not have to sell securities to meet redemption requests. If a supply imbalance develops where there are more sellers than buyers, a redemption order will be placed against the fund by an underwriter. The ETF will generally deliver a basket of securities against this order, removing the need to sell securities and the redemption risk.

    Yes, less trading in the fund due to indexing and since most of the buying and selling of units occurs between different investors on the exchange rather than with the fund, making ETFs more tax-efficient than open-end mutual funds.

    Similar to an open-end mutual fund, investors can benefit from a credit for taxes paid by the fund in foreign countries.

    Yes, since ETFs do not face any redemption risk, the manager does not have to sell securities at depressed prices to raise cash which avoids locking in short term losses for the rest of the unit holders.

    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.

     

    Tax Implications of ETFs

    Tax considerations will generally reflect the dividends, income, and capital gains from the underlying portfolio. Please see here for a more in-depth look at the tax considerations for the BMO ETF family of products.

    A Canadian resident investor in an ETF may be taxed on distributions paid by the ETF and on gains realized on the sale of the investor's investment in the ETF. The taxation of distributions is described below under "What is the tax treatment of ETF distributions?" On a sale of an investment in an ETF, an investor who sells ETF units that were held by the investor as a long term investment, and not as part of a business, 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.

    Investors in an ETF can buy and sell their ETF units on the stock exchange, rather than buying and redeeming units from the ETF, as is the case with mutual funds that are not listed on a stock exchange. Although ETF units are also redeemable like mutual fund units, most investors who want to sell their ETF investment choose to sell their ETF units on the stock exchange. This means that the ETF does not need to sell its own investments in order to fund redemptions for these investors. The ETF will therefore have a lower portfolio turnover and can continue to hold its investments rather than having to frequently sell its investments and possibly trigger capital gains tax for its investors.

    In addition, indexed funds generally have a lower portfolio turnover compared with actively managed funds. This means that indexed ETFs will generally have lower portfolio turnover and lower expected capital gains compared with actively managed funds.

    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 more generic 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 may be classified in the following categories:

    Distributions (dividends and interest)
    The individual stocks or shares held within the ETF pay dividends that are received by the ETF. Similarly, fixed income ETFs receive interest on their investments in bonds and other debt obligations. Distributions by the ETFs to investors out of the ETF's dividend and interest 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, investors 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.

    Capital Gains Distributions
    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.

    In most cases, it is more efficient for an ETF to distribute its realized capital gains as of year end by issuing more units of the ETF to investors rather than by paying a cash distribution. The ETF issues new units having a value equal to the amount of the capital gains distribution; however, the ETF then immediately consolidates its units, so that Canadian resident investors hold the same number of units as they did before this year end distribution. Although this type of capital gains distribution is still taxable to investors in the same way as a cash distribution, the investors' adjusted cost base ("ACB") of their units is increased by the amount of this "in-kind" distribution. If and when the investor sells the ETF units, the higher ACB will reduce the amount of any capital gain that would otherwise be realized on the sale.

    Foreign Income Distributions
    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 on its tax return for some of the foreign withholding tax paid by the ETF, depending on the investor's particular situation.

    Non-Taxable Distributions
    In some cases, an ETF may distribute an amount to investors, such as a return of invested capital that is not taxable to investors. However, such a distribution received by an investor will decrease the ACB of the investor's units. If and when the investor sells the ETF units, the lower ACB will cause an increase in the amount of any capital gain that would otherwise be realized on the sale.

    BMO ETFs pay distributions out of their income (such as dividends from Canadian companies, interest and foreign income) in cash on either a monthly, quarterly, or annual basis. Generally, the greater the income in the fund, the higher the distribution frequency. The frequency can be found on the Enhanced ETF Profile. Capital gains resulting from a sale of the ETF's investments are usually distributed at the end of the year, and usually by the issuance of new units followed by a consolidation of units as described above under "Capital Gains Distributions". The following is a tentative schedule for distributions by BMO ETFs:

    BMO ETFs Distribution Calendar

    2014 Declaration Date Ex Date Record Date Payable Date
    January 21-Jan-14 28-Jan-14 30-Jan-14 6-Feb-14
    February 18-Feb-14 25-Feb-14 27-Feb-14 6-Mar-14
    March 19-Mar-14 26-Mar-14 28-Mar-14 4-Apr-14
    April 17-Apr-14 25-Apr-14 29-Apr-14 6-May-14
    May 20-May-14 27-May-14 29-May-14 5-Jun-14
    June 18-Jun-14 25-Jun-14 27-Jun-14 7-Jul-14
    July 21-Jul-14 28-Jul-14 30-Jul-14 7-Aug-14
    August 19-Aug-14 26-Aug-14 28-Aug-14 5-Sep-14
    September 18-Sep-14 25-Sep-14 29-Sep-14 6-Oct-14
    October 21-Oct-14 28-Oct-14 30-Oct-14 6-Nov-14
    November 17-Nov-14 24-Nov-14 26-Nov-14 3-Dec-14
    December 17-Dec-14 24-Dec-14 30-Dec-14 7-Jan-15

    The foregoing is very general information. BMO Asset Management Inc. does not provide tax advice, and investors should consult a tax professional for any further information and for advice on the investor's own tax

    BMO tax parameters outline the tax factor distribution break down per unit. Please see here for more information on tax parameters for 2013 taxation year.

    BMO Asset Management Inc. does not determine tax implications for non-resident investors in BMO ETFs. Non-resident investors should contact their brokers, financial advisors and lawyers to obtain more information on securities regulation, as well as currency and taxation issues in regards to investing in BMO ETFs.

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    BMO - A part of BMO Financial Group
    BMO ETFs are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.