BMO Tactical ETF Funds, Managed by Larry Berman

First Quarter Commentary to March 29, 2018

 

Helping clients sleep at night is top priority for the BMO Tactical ETF Funds. This means actively positioning for growth when the time is right and automatically moving to defense when it’s time to protect. With three different risk profiles to choose from, the sleep-at-night funds are a perfect complement to any portfolio.

 

The BMO Tactical Dividend ETF Fund (the “Fund”) is ideal for “growth and income” investors with medium risk tolerance. The Fund has been rated 5 stars by Morningstar during the quarter*, a measure of superior risk-adjusted performance. This means optimizing return for any given level of risk – which is key for meeting client expectations.

Defense: We entered 2018 in defense mode with beta at 30.5% as markets marched higher, reaching their peak on January 26. (Beta is a measure of expected volatility relative to the equity market, which has a beta of 100%.) February and March brought gut-wrenching volatility, the perfect environment for our tactical strategy. Early February we used our short-term fixed income and cash to buy US large cap equities on the dip, raising beta to 64.7%, then taking profits and reducing beta to 35.5% by month-end. We added US large cap equities again on the market dip of March 23, using our high cash levels to capitalize on volatility and raising portfolio beta to 48.1% by quarter-end.

Active currency management was also a key source of value-add this quarter, as we tactically managed our US dollar exposure amidst considerable volatility on trade and economic news. We partially hedged (reduced) our USD exposure at $1.29 (0.7751) early in March on trade anxiety and NAFTA risk, then restored the position, expecting further weakness in the Canadian dollar. We see CAD hitting 1.3333 (0.75) in the coming months, at which point we expect to be fully hedged.

Elsewhere in the portfolio, we maintain our defensive holdings including gold, utilities and high dividend payers. The Fund maintained a yield just below 5% for the quarter by emphasizing high quality, diversified income sources. These include dividends from global, high dividend paying companies, interest income from short-term bonds, and ETFs which employ option-writing strategies, generating premium for yield enhancement.
 

The BMO Tactical Global Growth ETF Fund has a slightly higher risk profile ideal for investors with medium risk tolerance and a longer time-horizon of at least 5 years.

Defense: As markets continued their advance in January, the Fund maintained its defensive stance, with beta at 25%. Opportunity knocked the second week of February and we raised beta to 67.1% by adding large cap US equities, then taking profits over the subsequent two weeks and lowering beta again to 32%. March presented more volatility and another opportunity to raise beta to 46.6% by quarter-end, again by adding US equities using the ample cash we had on hand. Currency strategy was active this quarter, with the US dollar position we established last December first lowered then restored in March to end the month at 39.2%.

We expect more volatility and the Fund has significant liquidity to take advantage of this going forward. We like Europe on the next dip. Canadian banks are attractive 5% lower and Canadian energy will likely remain cheap, which we will accumulate as a value-play. Trump trade policies suggest a slower global economy. The overhand of NAFTA and the US anti-trade rhetoric should push the C$ towards 75 cents. With US rates rising like they have, gold is holding in very well. We se a late cycle inflation hedge breaking gold out of its multiyear range. We will add exposure on weakness. We really like US long bonds above 3.25% yield. They will be gold in the next recession, which increasingly appears to be the most likely economic scenario in 2019/2020.
 

The BMO Tactical Balanced ETF Fund, our most conservative fund, is ideal for investors with low to medium risk tolerance, who want a balanced asset mix and want their asset allocation to be actively managed based on the manager’s market outlook and assessment of where we are in the market cycle. In defense mode, this fund will be significantly underweight equities (minimum 20%) but will shift to a maximum of 80% equity exposure when markets present better value and opportunity.

Defense: The fund entered the year decidedly risk-off, with beta of -5.3% and the fund positioned in short-term bonds, defensive, high yielding equity securities and gold. Our tactical asset mix shift from fixed income to US large cap equities early in February raised beta to market benchmark levels of 56.4%. We then took profits and re-established our defensive posture by February month-end. With cash reserves we bought US equities again on March 23, raising beta to 23% and restoring our US dollar exposure to 44.8%. With the Fed likely to raise rates 3-4 times, while other central banks lag significantly behind the Fed’s tightening pace, we see a stronger US dollar. We see CAD hitting 1.3333 (0.75) in the coming months, at which point we plan to be fully hedged.

We expect a challenging period ahead for both bonds and equities during which our unique tactical style should perform very well. We see late cycle inflation pressures building and we look to increase commodity sector exposure slightly along with floating rate notes and reset preferreds. We will add overall equity beta on weakness and are cautious on fixed-income until yields rise. US 10-year bonds above 3% yield get attractive relative to equities.
 
 

For information related to price, performance, and holdings, please use direct links above to learn about each fund

 

Disclaimer

Risk is defined as the uncertainty of a return and the potential for capital loss in your investment. The opinions expressed here reflect the views of ETF Capital Management at the above date and are subject to change without notice as markets change over time. This commentary is prepared for general information related to investment alternatives and strategies. The information contained herein is not, and should not be construed as, investment, legal or tax advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance. Past performance is not necessarily a guide to future performance. For more complete information about these separately managed portfolios, please contact your financial advisor.

Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.

BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp. and BMO’s specialized investment management firms. BMO Mutual Funds are offered by BMO Investments Inc., a financial services firm and separate legal entity from the Bank of Montreal.

Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments. Please read the fund facts or prospectus before investing. The indicated rates of return are the historical annual compounded total returns for the period indicated including changes in unit value and reinvestment of all distributions and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

The Morningstar Rating™ for funds, or “star rating”, is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Ratings are subject to change monthly. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product’s monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three- year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. For more details on the calculation of Morningstar star ratings or quartile rankings, please see www.morningstar.ca.

The star rating and number of funds in the peer group for Series F of the BMO Tactical Dividend Fund in the Tactical Balanced category is five stars over three years (227 funds in the category) as of Dec 29, 2017. Ratings change monthly.

® “BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under license.