Mark Webster, Vice President, Exchange Traded Funds BMO ...€¦ · • Smart beta or “factor...
Transcript of Mark Webster, Vice President, Exchange Traded Funds BMO ...€¦ · • Smart beta or “factor...
Mark Webster, Vice President, Exchange Traded FundsBMO Global Asset Management
Smart Beta: The Future of Your Portfolio
Superior Smart Beta
Innovative Speciality Solutions
Effective Core
Solutions
Comprehensive Fixed Income
*Calculations based on Bloomberg data†CREDO Research February 2013 Loyalty Ranking Survey of 33 financial services firms
BMO ETFs
BMO ETFs – Our Strategy
“ Global assets in strategic beta ETFs have increased by 87% in two years and now account
for US$380 billion” Morningstar data
Source: Morningstar Canada – “Are strategic-beta ETFs a threat to active fund managers? “ Feb 2015
• Smart beta or “factor investing” is a strategy that institutional investors have been using since the 1970’s
• Rules based investing built around factors that have exhibited enhanced risk adjusted returns over the long term
• Can be market or trading factors, fundamental balance sheet factors, or multi-factor strategies
• Also known as strategic beta and enhanced beta
Smart Beta Defined
Smart Beta
Active Management
Complex & Costly
PassiveInvesting
MarketReturn
Rule Based & Low Cost
Active Return
• Smart beta brings together the best of both worlds by blending the benefits of traditional market capitalization indexing with active management
• Smart beta is based on finding outcome oriented solutions
• Smart beta can be used as either complimentary or replacement strategies
Smart Beta Strategies
PortfolioPortfolioPortfolioPortfolioReturnReturnReturnReturn
SectorBeta
BetaBetaBetaBeta
AlphaAlphaAlphaAlphaFactorFactorFactorFactorBetaBetaBetaBeta
AlphaAlphaAlphaAlpha
Country Beta
1970s1970s1970s1970s 1980s1980s1980s1980s 2000s2000s2000s2000s
RegionalBeta
• 1970s: Total return approach
• 1980s: Deconstructing manager value add (alpha) from market returns (beta)
• Today:Deconstructing alpha into multiple factor components plus security selection
Beta Deconstruction
• Market capitalization investing still makes up the majority of passive assets, smart beta strategies are gaining momentum
• Low-volatility and dividend weighted strategies have been the most popular
• Smart Beta equity global assets have quadrupled since 20081
Current Assets (US$B) Current Assets (US$B) Current Assets (US$B) Current Assets (US$B) 2013 Flows (US$B) 2013 Flows (US$B) 2013 Flows (US$B) 2013 Flows (US$B)
1 Data as of November 2014 - Global ETF Assets (US) , Data – CETFASource: Investor Economics Insight January 2015 Annual ReviewEmergence of Smart Beta ETFs in Canada
2012 2014
# of Smart Beta ETFs 43 64
Assets in Smart Beta ETFs (millions) 4,914 8,676
Smart Beta Growth
• More recent strategies either combine single factor portfolios, or use multi-factor holistic portfolios
Passive Index Fund
Equally Weighted
Market Factor Based
Fundamentally Weighted
Multi-Factor
Smart beta strategies can be customized to meet investor demand
Smart Beta Evolution
• Deconstruct portfolio performance to geographic, sector, and factor biases to isolate security selection skills
• Create a modular portfolio based on views of market efficiency
• Complete a core-satellite approach
• Correct biases of a managed portfolio
1. Portfolio risk profile
2. Portfolio factor profile
3. Portfolio pricing
ModifyModifyModifyModify
Smart Beta & Active Management
• Research has shown that six key factors have historically earned a persistent premium over longer time periods relative to traditional market cap-weighted portfolios
• These factors play an important role in portfolio construction and security selection
SizeSizeSizeSize
YieldYieldYieldYield
MomentumMomentumMomentumMomentum
ValueValueValueValue
Low VolatilityLow VolatilityLow VolatilityLow Volatility
QualityQualityQualityQuality
It is possible to capture Value & Momentum by screening for other desirable attributes:� Dividend & Low Volatility
reflect Value:� Quality picks up the
Momentum benefits
Smart Beta Factors
Superior Smart Beta:BMO ETFs
• Selected factors that deliver long term outperformance
• Effective portfolio construction – can be used a core portfolio holding
• Targeted exposures across various regions and countries
• Reduced portfolio risk
BMO ETFs is one of the global leaders in smart-beta solutions, with about 25% of our global ETF AUM in various factor-based and smart-beta
products1
1 BMO Global Asset Management – Feb 2015
BMO ETFs Smart Beta Focus
• Effective exposure across market cycles
Why Quality?
Fundamental Screening Variable
1. High Return on Equity – Screens for companies that have solid fundamentals
2. Stable year-over-year Earnings Growth – Identifies growing companies are positioned to consistently outperform over the long term
3. Low Financial Leverage – Identified companies with low volatility
ZEQMSCI Europe High
Quality Index Hedged to CAD ETF
ZUQMSCI US High Quality
Index ETF
ZGQMSCI ACWI High Quality Index ETF
Quality
Factors 1. Large Cap Equity Universe - dividends
2. Dividend Growth – upside potential
• Based on 3 year dividend growth rate
• Illustrated company’s willingness to pay and grow dividends
3. Dividend Payout Sustainability – avoid yield traps
• 5 year analysis and weighted to the most recent year
• Forward looking consideration
4. Yield Weighted – enhanced yield
• Sector and security cap applied to ensure diversified portfolio
Focused on higher yields with sustainable growth
ZUDUS Dividend Hedged
to CAD ETF
ZDY/ZDY.UUS Dividend ETF
ZDVCanadian Dividend
ETF
ZDIInternational Dividend
ETF
Dividend
Dividend Strategies – What to Look For?
Avoid yield trapsAvoid yield traps
• Dividend strategies can be viewed as a core holding for income oriented investors
• Is the dividend sustainable?
• Look for a measure of growing payments
• Look for a measure of financial health and payout ratios
• Where are the risks?
• Dividend cuts
• Sector biases
• Capitalization biases
Avoid the surprise of unintended biases
Dividend Strategies – BMO’s Approach
• Yield weighted to emphasize high dividend payers
• Constituents screened for sustainability of dividend payment
• Overall portfolio constraints and controls to ensure no undue concentration or biases
ZUDUS Dividend Hedged
to CAD ETF
ZDY/ZDY.UUS Dividend ETF
ZDVCanadian Dividend
ETF
ZDIInternational Dividend
ETF
• Ability to target a specific portfolio risk that is lower than the board market
• Lower volatility stocks have historical outperformed the broad market over the long-term
600
800
1,000
1,200
1,400
1,600
1,800
2,000
2,200
ZLB S&P/TSX Capped Composite
ZLU/ZLU.ULow Volatility US
Equity ETF
ZLBLow Volatility
Canadian Equity ETF
Source: Morningstar as of Feb 2015 – Data based on monthly returns from Nov 2011 – Feb 2015
Why Low Volatility?
• Beta weighted – smarter portfolio construction tool than standard deviation or other risk reduction approaches
• Balances short term trends with long term risks as beta is measured over five years with an emphasis on the most recent year
Low Volatility
• Selective strategy for more developed sectors to reduce security concentration typically found in other sector based ETFs
• Helps to reduce single security risk
ZREEqual Weight REITs
Index ETF
ZBKEqual Weight US Banks Index ETF
ZINS&P/TSX Equal
Weight Industrials Index ETF
ZUHEqual Weight US
Health Care Hedged to CAD Index ETF
0%0%0%0%20%20%20%20%40%40%40%40%60%60%60%60%80%80%80%80%100%100%100%100%CNRCNRCNRCNR CPCPCPCP OtherOtherOtherOtherBMO S&P/TSX Equal Weight Industrials Index ETF (ZIN)
Bloomberg - Data as of Feb 2015
Equal Weight
ComparisonsBMO Low Volatility
Canadian Equity ETFiShares MSCI Canada Min.
Volatility Index ETFPowerShares S&P/TSX Composite
Low Volatility Index ETF First Asset MSCI Canada Low Risk Weighted ETF
Ticker ZLB XMV TLV RWC
Index ProprietyMSCI Canada Minimum
Volatility (CAD)S&P/TSX Composite Low Volatility
Index MSCI Canada Low Risk
Weighted ETF
Weighting
Methodology
Beta Weighted • Ranks securities using
5 year beta
Variance• Optimized for lowest
absolute risk
Standard Deviation • Securities are ranked by 1 year
standard deviation
Variance • Ranks securities using a
3 year historical return
Additional Screens
Liquidity & Market Cap Market Cap - Market Cap
# of Holdings 40 75 50 95
Top 3 SectorsFinancials – 21.7%
Cons. Staples – 18.9%Energy – 14.2%
Financials – 41.1%Energy – 18.0%
Cons. Staples – 9.5%
Financials – 66.6%Utilities – 8.5%
Cons. Disc. – 7.2%
Financials – 38.6%Energy – 18.1%
Cons. Disc. – 8.3%
Sectors Limits 35% None None None
AUM 485 million 23 million 48 million 6 million
MER 40 bps 33 bps 33bps 60 bps
TER 1bps 1 bps 4bps 1bps
Holdings Physical Physical Physical Physical
Source: BMO ETFs, iShares, Poweshares & First Asset – Feb 2015
Comparisons
BMO Canadian Dividend ETF iShares Canadian Select
Dividend Index ETFiShares S&P/TSX Canadian
Dividend Aristocrats Index ETF
Ticker ZDV XDV CDZ
Index Proprietary Dow Jones Canada Select
DividendS&P/TSX Canadian Dividend
Aristocrats
WeightingMethodology
Yield Yield Yield
Additional Screen
3 year dividend growth rate5 year analysis of payout ratio
with forward looking consideration
3 year dividend growth rate 5 year dividend coverage ratio
Non- negative EPS
5 consecutive years of increased dividend
Min. C$ 300 million market cap.
AUM 567 million 1.4 billion 1 billion
MER 40 bps 55 bps 66 bps
TER 4 bps 0 bps 3 bps
# of Holdings 51 31 74
Sector Cap 35% - -
Top 3 Sectors Financials – 31.9%
Energy – 26.5%Cons. Disc. – 11.9%
Financials – 55.5%Comm. – 13.4%Energy – 11.8%
Financials – 25.0%Energy – 22.1%
Industrials – 14.5%
Source: BMO ETFs & iShares – Feb 2015
Alternative Strategies – Covered Calls
• Generates additional income while reducing portfolio volatility, making covered calls income substitutes for lower yielding products
• Benefits: additional yield provides limited downside protection, outperforms in a down or flat market
• Costs: will underperform in strong short term runs, or potentially in longer choppy markets, as the portfolio return is capped by the strike prices of the options
• Return profile: similar long term returns to traditional portfolios, with lowered risk levels
Covered Calls – Where Does the Yield Come From?
Portfolio Dividend Yield – look for a good yield base, a portfolio with dividend yield
Portfolio Volatility – avoid high volatility, while these securities will have higher premiums, they are
subject to large downside moves. Leave these securities to aggressive growth investors
Option Selection – Pick shorter dated, OTM options. Look for options with 1 to 2 months to expiry to
take advantage of time decay and to reset the portfolio in rising markets. OTM options allow for some growth.
Percentage Written – be aware of how much of the portfolio is overwritten. By not writing on the entire
portfolio, more upside is available.
Covered Calls – Where Are the Risks?
• Large market movements and volatility – a covered call strategy outperforms in flat, down, or moderately rising markets. It underperforms in quickly rising or choppy markets.
• Overly Aggressive Call Writing – an over emphasis on yield based on writing too close to the money in combination with writing on a high percentage of the portfolio, may deplete the invested capital.
• Promised or Expected Yields – the calls are selected based on premium levels and volatility. The writing strategy should be dynamic by responding to market conditions, to avoid capital depletion.
Covered Calls – BMO’s Implementation
• We target a sustainable yield as we pay only the income received
• As volatility rises we write further out of the money, as volatility falls, we write closer to the money
• Calls are written 1 to 2 months to expiry to maximize time decay
• We write on 50% of the portfolio to allow for upside participation
� ZWH/ZWH.U BMO US High Dividend � ZWB BMO Canadian Banks � ZWU BMO Utilities� ZWA BMO Dow 30 Hgd to CAD
� BMO team developed several ‘ETF world firsts’Recent Highlights:
• Launched and manage over 62 ETF Disclaimer s different beta strategies across equities, fixed income and derivative strategies
• Offer the most comprehensive line-up of fixed income beta strategies
• Smart beta solutions that provide effective long term exposures based on in-depth security selection and risk mitigating portfolio construction
• A global leader in innovation, developing solutions such as Covered Call Strategies, Preferred Share Ladder, Low Volatility and alternative beta ETFs
• Efficient broad market ETFs with industry leading benchmarks at market leading pricing
BMO ETF Advantage