It’s not an easy time for investors. Stock markets have wavered between relative calm and near panic in recent months, with the worst coming in April after U.S. President Donald Trump unveiled his bizarre tariff program in the White House Rose Garden.
After a steep fall in share prices, Mr. Trump postponed the new tariffs for three months to try to negotiate one-on-one deals with key trading partners. Stocks quickly recovered. But now the deadline for reaching agreements is only days away and nothing much has happened.
That has people starting to worry again, especially older Canadians who are concerned about their retirement savings. In normal times, we’d probably be seeing many of them moving some of their assets from stocks to bonds. But the bond market has been unusually turbulent, and returns are low. What to do?
For some, the compromise is low volatility ETFs. These funds have a low beta history, meaning they are less sensitive to broad market movements and, theoretically, less likely to be hit with big losses in a falling market.
We have several of these ETFs on our Internet Wealth Builder newsletter recommended list. Here is a look at how they are doing.
BMO Low Volatility Canadian Equity ETF
Originally recommended Feb. 18/19 at $31.53. Closed July 4 at $53.24.
Ticker: ZLB-T
Background: This ETF invests in an actively managed portfolio of large-cap Canadian stocks. It is rebalanced in June and reconstituted in December.
Performance: Along with the rest of the stock market, this ETF took a hit in early April in response to Mr. Trump’s tariff wars. However, it has rallied strongly since and is up 69 per cent from its original recommended price.
Key metrics: The fund was launched in October 2011 and has almost $5-billion in assets under management. The MER is 0.39 per cent.
Portfolio: There are 52 positions in this equal weight portfolio, all Canadian companies. Grocery giants Empire Co. Ltd, Loblaw Co Ltd., and Metro Inc. occupy the top three positions. Utilities Fortis Inc. and Hydro One Ltd. round out the top five.
In terms of sector breakdown, 21.4 per cent is in financials, 18 per cent in consumer staples, 14.9 per cent in utilities, and 12.9 per cent in industrials. Energy, which is the second-largest sector in the Composite, has negligible representation and information technology accounts for only 4.3 per cent of the assets.
Distributions: The fund makes quarterly cash distributions, which are steady at 28 cents per unit ($1.12 per year). At that rate, the yield at the current price is 2.1 per cent.
Tax implications: This is a very tax-efficient fund. In 2024, about 48 per cent of the distributions were treated as eligible dividends, meaning they qualified for the dividend tax credit if held in a non-registered account. About 45 per cent was classed as capital gains. The remaining 7 per cent was treated as return of capital.
Risk: Over the past 11 calendar years, this fund has been down only twice, and both times the declines were minimal. The worst was a drop of 2.8 per cent in 2018. In 2022, which was a terrible year for stocks, this fund lost only a fractional 0.4 per cent.
Conclusion: This ETF continues to offer strong downside protection during stock market selloffs. It’s a good choice for conservative investors.
BMO Low Volatility International Equity Hedged to Canadian Dollar ETF
Originally recommended on Feb. 18/19 at $24.04. Closed July 4 at $30.01.
Ticker: ZLD-T
Background: This is the international equivalent of the Canadian Low-Volatility EFT described above. It focuses on stocks from developed countries outside North America. The fund invests in units of ZLI, a companion low-volatility fund that is unhedged. In ZLD, foreign currency exposure is hedged back into Canadian dollars, thereby eliminating one level of risk.
Performance: We see the same pattern in all these ETFs – a tariff-related slump in April, followed by a recovery. This fund hit a 52-week high of $30.75 in late May but has retreated a little since.
Key metrics: The fund was launched in February 2014 and has $31 million in assets under management. The MER is 0.45 per cent.
Portfolio: ZLI, which is the underlying fund, holds 102 stocks, more or less equally weighted. Japan is the number one favorite country, with 17.5 per cent of the portfolio, followed by Britain (12.6 per cent), Germany (11 per cent), and France (10.2 per cent).
The portfolio is well-balanced, with consumer staples the largest sector at 17.1 per cent followed by financials (13.8 per cent), communication services (13.5 per cent), healthcare (13.4 per cent), industrials (11.9 per cent), and utilities (11.3 per cent).
Distributions: The fund makes quarterly payments, which are currently running at 16 cents per unit ($0.64 per year), for a yield of 2.1 per cent.
Tax implications: Most of the distributions are treated as foreign income. That means they are fully taxable in a non-registered account although it’s partially offset by a foreign tax credit. So, there are some tax advantages here, but not to the same degree as in the Canadian entry.
Risk: This ETF is somewhat higher risk than the Canadian fund, as international stocks tend to be somewhat more volatile. That said, European stocks have been strong recently.
Conclusion: This ETF is a useful addition if you want some lower-risk overseas exposure in your account.
iShares Edge MSCI Minimum Volatility USA Index ETF (CAD-Hedged)
Originally recommended on Aug. 17/20 at $27.80. Closed July 4 at $38.65.
Ticker: XMS-T
Background: This ETF tracks an index which measures the performance of low volatility U.S. stocks in the MSCI USA Index. The fund is hedged back to the Canadian dollar.
Performance: This is supposed to be a minimum volatility fund, but it has showed more ups and downs than might be expected. It gained 13.7 per cent in 2024 but so far this year it has added only 5.6 per cent.
Key metrics: The ETF was launched in April 2016 and has $51.8 million in assets under management. The MER is 0.33 per cent.
Portfolio: Most of the assets are held in its sister fund, the iShares MSCI MV USA Index ETF (XMU-T), which is unhedged. Holdings are equal weighted, with none comprising more than 1.7 per cent of total assets. Top stocks include IBM, Cisco Systems Inc., Microsoft Corp. and Exxon Mobil Corp.
What makes this fund different from the BMO Canadian ETF is its sector breakdown. Over a quarter of the assets (27.2 per cent) are invested in technology stocks. Financials account for 15.2 per cent and healthcare makes up 14.7 per cent.
Distributions: Payments are made quarterly. They are not consistent but usually in the range of 24 cents per unit. Trailing 12-month distributions were $1 per unit, for a yield of 2.6 per cent at the current price.
Risk: The fund has lost money in only one year since 2019. That was a drop of 10.9 per cent in 2022, which was a down year across the board for both stocks and bonds as interest rates soared.
Conclusion: This is a defensive security. It will limit losses if the stock market retreats but gains will be below average when the market rises.
BMO Low Volatility US Equity Hedged to CAD ETF
Originally recommended on Aug. 8/22 at $32.41. Closed July 4 at $35.42.
Ticker: ZLH-T
Background: This ETF has a similar mandate to XMS, reviewed above. However, it takes a different approach to portfolio construction – it’s actively managed by BMO Global Asset Management whereas XMS is a passive, index-based fund.
Performance: This ETF has recovered from a couple of deep slumps earlier this year and is now ahead about 5 per cent year to date.
Key metrics: The fund was launched in February 2016 and has assets under management of $70-million. The MER is 0.33 per cent.
Portfolio: This is also an equal-weighted fund but the stocks at the top of the list are quite different from XMS. They include IBM, CBOE Global Markets Inc., Johnson & Johnson, Gen Digital Inc. and Northrup Grumman Corp.
Utilities, at 19.8 per cent, is the largest sector position in the fund. It’s followed by healthcare (17.2 per cent), consumer staples (15.3 per cent), and financials (13.4 per cent). Information technology, which accounted for only 8.9 per cent of the portfolio at the time of our last review, had been bumped up to 13.4 per cent. But that’s still well below XMS, which has over 27 per cent of its assets in the tech sector. This explains why XMS has outperformed in recent years.
Distributions: Payments are made quarterly and are currently at 17 cents per unit ($0.68 per year). The yield is 1.9 per cent, although that is not guaranteed.
Tax implications: In 2024, about two-thirds of the distribution was treated as return of capital, meaning it was not taxable in the year received. The rest was fully taxable foreign income, for which unitholders received a foreign tax credit.
Comments: This fund and XMS track the same broad market, but the style of management and the resulting portfolio is different. The results over the past two years have been markedly divergent, but longer term the difference is small. This fund has a five-year average annual compound rate of return of 8.8 per cent compared to 9.1 per cent for XMS.
Risk: This ETF has done an excellent job of limiting risk. It has lost money in only two calendar years since 2017 and both were small: a 1.3 per cent drop in 2018 and a decline of about 2 per cent in 2023.
Conclusion: XMS and ZLH use different strategies, but the longer-term result is similar. On balance, I would give this one a slight edge.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
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