Looking for low-volatility investments

This BMO ETF aims to dampen price swings

We’re starting to see a new spike in market volatility. After hitting a one-year peak in early March, the CBOE Volatility Index (VIX) fell by almost half over the following four weeks. But now it’s gradually climbing again as investors contemplate the long-term effects of the Ukraine war, soaring inflation, rising interest rates, and the impact of the pandemic on supply chains and global growth.

Volatility is a measure of the swings in price of an index or a specific stock. Assets that have high volatility are deemed to be riskier. They are known as “high-beta” stocks. Those that display lower up-down price movements are described as “low beta” and are generally seen as lower risk.

High volatility doesn’t necessarily mean a stock should be avoided. It simply warns investors to expect large price swings one way or the other. Investors with heart conditions who watch stock prices closely should probably choose lower-beta alternatives.

Low-beta stocks are a completely different story. Most Canadian ETF and mutual companies offer at least one and sometimes several low volatility funds (sometimes called minimum volatility). Here’s one example from my Income Investor recommended list.

BMO Low Volatility Canadian Equity ETF (TSX: ZLB)

Background: This ETF invests in a portfolio of large-cap Canadian stocks that have a low-beta history, meaning they are less sensitive to broad market movements and, therefore, theoretically less risky. The portfolio is rebalanced in June and reconstituted in December.

Performance: The fund has been moving higher since the start of the year, reaching a high of $42.68 back in April. Over the past decade (to May 31), the average annual total return is 12.6%.

Portfolio: There are 47 positions in the portfolio, all Canadian companies. The portfolio is fairly evenly balanced, with Hydro One (4.69%), Franco-Nevada (3.85%), Metro Inc. (3.38%), Fortis Inc. (3.37%), and Emera Inc. (3.37%) being the largest holdings.

In terms of sector breakdown, 21.8% is in financials (a significant underweight from the TSX Composite), 16% in utilities (an overweight), and 20% in consumer services. There are no energy stocks, despite the fact it’s the second-largest sector in the S&P/TSX Composite.

Key metrics: The fund was launched in October 2011 and has almost $3 billion in asset under management. That’s up $2.4 billion at the time of September 2020. The MER is 0.39%.

Distributions: The fund makes quarterly payments, which are currently running at $0.26 per unit ($1.04 per year). At that rate, the yield at the current price is 2.5%.

Tax implications: In 2021, about 98% of the distributions were treated as capital gains or eligible dividends, making this is a very tax-efficient fund.

Risk: BMO classifies it as low-medium. Although this is a low-volatility fund, it is not immune from stock market risk. However, this fund should hold up better than the broad market in a steep decline.

Conclusion: This ETF is well positioned for current market conditions and offers some downside protection in the event the selloff continues.

Gordon Pape is one of Canada’s best-known personal finance commentators and investment experts. He is the publisher of The Internet Wealth Builder and The Income Investor newsletters, which are available through the Building Wealth website.

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Notes and Disclaimer

Content © 2022 by Gordon Pape Enterprises. All rights reserved. Reprinted with permission. The foregoing is for general information purposes only and is the opinion of the writer. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting, or tax advice. Always seek advice from your own financial advisor before making investment decisions.