Insights From ETFs: BMO: An industry leader in ETFs

The Exchange-Traded Funds (ETF) industry has grown tremendously since the first ETF (XIC) was introduced by Blackrock in 1999 (Fun fact: It was actually the first ETF in the world). Vanguard came into the Canadian space with ETFs over a decade later, in 2011, taking a good share of the market. However, the big Canadian banks were about two decades late, introducing ETFs as late as 2018 and 2019. The exception to this group, however, is Bank of Montreal (BMO) which launched its first ETF in 2009 and now has about 134 ETFs, 60 of which have Assets Under Management (AUM) over $100 million.

ETF Industry Leader

BMO has built a reputation for providing a wide selection of ETFs for DIY investors, tax-efficient funds, a good selection of ìstrategy ETFsî with competitive fees and even offering retail branch clients the option to invest in certain ETF portfolios, something none of the big banks have accomplished as of yet. All of this has built BMO one of the largest asset bases in the industry and has certainly become a leader in the ETF industry with about one third of the total market share.

BMO also has an impressive array of options that allow investors to get access to every major asset class, geography, sector and what we like most, investment strategies. Here is a list of BMO ETFs we like with a strong asset base and reasonable fees for different strategies:

• US quality>
  • BMO MSCI USA High Quality ETF (ZUQ)

• Low Volatility >
  • BMO Low Volatility US Equity ETF (ZLU)
  • BMO Low Volatility International ETF (ZLI)
  • BMO Low Volatility Canadian Equity ETF (ZLB)

• Equal-weighted >
  • BMO Equal Weight US Banks ETF (ZBK)
  • BMO Equal Weight Banks ETF (ZEB)
  • BMO Equal Weight Utilities ETF (ZUT)
  • BMO Equal Weight REITs ETF (ZRE)

• Covered Call >
  • BMO Covered Call Canadian Banks ETF (ZWB)
  • BMO Europe High Dividend Cov Call ETF (ZWP) 
  • BMO Covered Call Utilities ETF (ZWU)
  • BMO US High Dividend Covered Call ETF (ZWH)

The BMO Advantage: Tax Efficiency

One of the main advantages BMO ETFs have is tax efficiency, particularly when it has to do with foreign dividend exposure. Creating their own ETFs allows BMO to hold foreign securities directly rather than relying on U.S.-listed ETFs to get exposure. Dividends earned from international equities are subject to withholding tax, but Canadians can claim a foreign tax credit to offset some of these taxes if the securities are held directly in the fund. If not directly held, and instead, the ETF holds another U.S.- listed ETF to get exposure, investors cannot claim this tax credit and may even be double taxed if exposure is through a U.S.-listed ETF getting international (non-U.S.) exposure.

While some Canadian-listed Blackrock and Vanguard ETFs hold foreign exposure directly, it is more common that they use their own U.S.-listed ETFs to cut costs and maximize efficiencies. However, we think this will work against them in the long run as more investors begin to realize the effects it has on returns. BMO also has one of the two ìDiscount Bond ETFsî in Canada, which provide tax efficiency for fixed income investors through lower interest income and more capital gains (favourable taxation). The capital gains happen as the bond value moves up to par value at maturity as it was initial purchased at a ìdiscountî. This is in contrast to conventional premium bonds which offer higher coupons (interest) and, in turn, a higher tax rate on the return, followed by a capital loss as they mature. Finally, BMOís famous covered-call ETF pays out call premiums as distributions recognized as capital gains for tax purposes.

As a final note we will leave with some our favourite ETFs in the BMO line up for tax-efficient exposure.

Disclosure: Authors, directors, partners and/or officers of 5i Research have a financial or other interest in XIT and ZRE.