Second Quarter 2025

Portfolio Strategy Report (Q2 2025)

All prices, returns and portfolio weights are as of market close on March 31, 2025, unless otherwise indicated.

Caution Over Exuberance

As we update our quarterly portfolio strategy, we’re reminded of an important lesson that often must be re-learned. Namely, that markets are terrible at forecasting non-linear events.

To wit, we are preparing this edition just ahead of the America First Trade Policy” memorandum is scheduled to be released. That release is expected to recommend additional country-specific tariffs to be implemented based on the principle of reciprocity and other non-tariff barriers. Additionally, tariff exemptions on USMCA-compliant imports from Canada and Mexico are set to expire on April 2nd while the threat of sector-specific damage on autos, semiconductors and pharmaceuticals still looms large.

It’s difficult to extract just how much of the impact from tariffs is in the price.” That’s not least as there is always the chance that the White House could change its mind on the scale of these measures along with which countries are targeted. At the very least, we can credibly argue that the unpredictability of trade policy means that we probably haven’t reached peak uncertainty. In a more practical sense, that implies that sticking with a defensive posture is still prudent. The flip side to that is, we’ve yet to see U.S. economic fundamentals deteriorate in a meaningful manner to justify an extension to the correction we’ve seen in Q1. That points to maintaining a bit of flexibility and/​or nimbleness when it comes to risk allocation in your portfolios.

Nevertheless, our inclination for the coming quarter is to proceed with a healthy degree of caution on broad risk while also prioritizing regional diversification. Additionally, we are far more constructive on infrastructure over the long-term.

For U.S. equities, while we understand some of the optimism expressed by our colleagues who tend to follow a bottom-up” approach, we must pay tribute to the fact that the U.S. economy is still operating with a restrictive monetary policy backdrop. True, the passthrough from that backdrop to markets can take some time, but we’re now getting to a point where the expansion phase of the economic cycle is starting to feel mature. At the same time, U.S. equity valuations remain elevated relative to other regions. As such, we are shifting our approach within the equity sleeve of our portfolio and prioritizing regional diversification. In particular, we’ll be allocating more to the Eurozone and China.

Zooming in on the Eurozone, the threat of a trade conflict with the U.S. alongside a geopolitical realignment that doesn’t favour Europe has led to two important outcomes: First, it has accentuated long-term concerns with U.S. valuations – especially compared to the relatively lower valuations in the Eurozone; Second, it has forced European governments to reconsider long-standing aversion to increased deficit spending to boost the domestic economy.

The former has been a reason why European investment has migrated back to domestic markets. But the latter is integral for why European markets should continue to outperform. As European governments spend more on infrastructure, the multiplier effect on the real economy should lead to a higher rate of return over time. The implication here is that we should see a greater proportion of European savings remain invested in the Eurozone and not in the U.S.

As geopolitical realignments move forward, we expect developed countries to reassess their economic models. As part of that, we anticipate that countries that have fiscal space will likely spend more on defense and upgrading or expanding infrastructure. That means more opportunities for project financing as well as P3-style private-public investments. Even countries that lack the fiscal space are now more likely to entertain the idea of spinning off extant infrastructure holdings to private sector firms that can operate far more efficiently.

The upshot of that additional spending is that it is likely to be funded by additional issuance. That is particularly true in a place like Canada, where we expect to see healthy dose of fiscal stimulus in the coming quarters to deal with the fallout of the trade war. At the same time, it’s not as clear that the Bank of Canada will be quick to ease interest rates – not least as inflationary pressures remain sticky in the near-term. To us, that suggests that the Canadian dollar (CAD) yield curve should bear steepen1 – an environment that isn’t as conducive for strategic plays for CAD duration.2 We can make a similar case for the U.S., as well.

To conclude, investors should remember that the best way to enter a dark cave is not by rushing in. Instead, it’s by slowly feeling your way through and letting your eyes adjust. In this backdrop of policy uncertainty, cautiousness is rewarded – not exuberance. 


Balanced Portfolio for Q2 2025

Investment Objective and Strategy:

The strategy involves tactically allocating to multiple asset-classes and geographies to achieve long-term capital appreciation and total return by investing primarily in ETFs

Ticker ETF Name Sector Positioning Price Management Fee Weight (%) 90-Day Volatility Volatility Contribution Annualized Distribution Yield (%)* Yield/Volatility**
Fixed Income
ZDB BMO Discount Bond Index ETF Fixed Income Core $15.21 0.09% 8.0% 6.27% 4.76% 2.36% 0.38
ZBI BMO Canadian Bank Income Index ETF Fixed Income Core 30.60 0.25% 15.0% 2.53% 3.60% 3.53% 1.39
ZTIP.F BMO Short-Term US TIPS Index ETF Fixed Income Tactical $29.07 0.15% 5.0% 2.75% 1,30% 3.58% 1.30
Total Fixed Income 28.0% 9.65%
Equities
ZUQ BMO MSCI USA High Quality Index ETF Equity Core $86.79 0.30% 10.0% 13.13% 12.45% 0.55% 0.04
ZLB BMO Low Volatility Canadian Equity ETF Equity Core $49.33 0.35% 12.0% 7.98% 9.08% 2.28% 0.29
ZDI BMO International Dividend ETF Equity Core $26.13 0.44% 10.0% 11.28% 10.69% 3.67% 0.33
ZXLV BMO SPDR Health Care Select Sector ETF Equity Tactical $29.35 0.19% 5.0% 13.11% 6.21% - -
ZWEN BMO Covered Call Energy ETF Equity Tactical $30.45 0.65% 5.0% 15.84% 7.50% 8.74% 0.55
ZCH BMO MSCI China Selection Equity Index ETF Equity Tactical $19.03 0.60% 5.0% 32.22% 15.27% 1.78% 0.06
Total Equity 47.0% 61.20%
Non-Traditional Hybrids
ZLSU BMO Long Short US Equity ETF Hybrid Tactical $41.33 0.65% 5.00% 10.42% 4.94% 1.25% 0.12
ZGLD BMO Gold Bullion ETF Hybrid Tactical $46.25 0.20% 8.00% 14.03% 10.63 - -
ZGI BMO Global Infrastructure Index ETF Hybrid Tactical $53.71 0.55% 7.00% 15.49% 10.28% 2.74% 0.18
Total Alternatives 20.00% 25.85%
Total Cash
ZUCM BMO USD Cash Management ETF Cash Tactical $31.74 0.12% 5.00% 10.42% 4.94% 1.25% 0.12
Portfolio 0.33% 100.0% 10.55% 100.00% 2.58% 0.24

As of March 31, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

* This yield is calculated by taking the most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. The yield calculation does not include reinvested distributions.

** Yield calculations for bonds are based on yield to maturity, including coupon payments and any capital gain or loss that the investor will realize by holding the bonds to maturity and. For equities, it is based on the most recent annualized income received divided by the market value of the investments. Please note yields of equities will change from month to month based on market conditions. The portfolio holdings are subject to change without notice and only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.


Changes to Portfolio Strategy*

Sell/​Trim

Ticker

Old weight

(%)

New
weight

BMO Discount Bond Index ETF

ZDB

10%

-2%

8%

BMO Mid Corporate Bond Index ETF

ZCM

5%

-5%

0%

BMO Long-Term US treasury Bond Index ETF

ZTL

5%

-5%

0%

BMO MSCI USA High Quality Index ETF - Hedged Units

ZUQ/F

7%

-7%

0%

BMO US High Dividend Covered Call - Hedged to CAD ETF

ZWS

5%

-5%

0%

BMO Covered Call US Banks ETF

ZWK

10%

-10%

0%

BMO Long Short US Equity ETF

ZLSU

10

-5%

5%

BMO US Equity Buffer Hedged to CAD ETF - January

ZJAN

5%

-5%

0%

BMO Gold Bullion ETF

ZGLD

10%

-2%

8%

Buy/​Add

Ticker

Old weight

%

New
weight

BMO Short-Term US TIPS Index ETF

ZTIP/F

0%

5%

5%

BMO MSCI USA High Quality Index ETF

ZUQ

8%

2%

10%

BMO Low Volatility Canadian Equity ETF

ZLB

5%

7%

12%

BMO International Dividend ETF

ZDI

0%

10%

10%

BMO SPDR Health Care Select Sector ETF

ZXLV

0%

5%

5%

BMO MSCI China Selection Equity Index ETF

ZCH

0%

5%

5%

BMO Global Infrastructure Index ETF

ZGI

0%

7%

7%

BMO USD Cash Management ETF

ZUCM

0%

5%

5%

As of March 31, 2025. Model portfolio for illustrative purposes only. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. These are not recommendations to buy or sell any particular security. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.


Asset Allocation:
  • Relative to our stance in Q1, we’re allocating a bit more to the equity sleeve in our portfolio. That should be interpreted as a nod towards the fact that we see a more constructive backdrop developing outside of North America – where the mix of monetary and fiscal policy easing should be more beneficial for broad risk.
  • Nevertheless, we’re still underweight equities relative to our benchmark (which tends to be in the 50-60% range). That reflects our cautiousness with the backdrop in North America, as tariffs are likely to quicken the transition from expansion to slowdown in the U.S. economy and tip the Canadian economy towards a recession.
  • For the fixed income sleeve, we’ve slightly curbed some of our exposure. The reason for this is that we see more two-way risk for U.S. and Canadian sovereign yields from here. At the same time, we’re a bit leery about the risk backdrop and what that portends for credit spreads, as well.3
  • We continue to see value in maintaining a healthy degree of exposure to alternative assets. Given the current backdrop, the lack of correlation to other traditional assets is a virtue – on top of our constructive view for gold and infrastructure over the medium-term.
  • Finally, the nature of the uncertain backdrop in the U.S. means that we continue to prioritize income and liquidity there. That means keeping some cash (in the form of ZUCM) on hand to deploy once the smoke clears a bit more with respect to tariffs.

Fund Performance (%)

Ticker

Year-to-Date

1-Month

3-Months

6-Month

1-Year

3-Year

5-Year

10-Year

Since Inception

ZDB

2.01

-0.26

2.01

1.87

7.56

2.42

0.83

1.65

2.41

ZBI

1.14

-0.20

1.14

3.12

9.05

4.80

-

-

3.79

ZTIP.F

2.69

0.78

2.69

2.17

5.68

2.42

-

-

2.77

ZUQ

3.66

-1.14

3.02

10.75

22.91

19.92

18.97

15.89

17.11

ZLB

5.69

1.14

5.69

3.80

17.23

8.77

14.63

9.03

12.12

ZDI

9.76

0.69

9.76

5.74

13.42

13.79

14.60

6.64

7.26

ZXLV

Returns are not available as there is less than one year’s performance data

ZWEN

8.48

2.97

8.48

13.20

6.93

-

-

-

9.60

ZCH

21.39

1.63

21.39

20.01

56.45

7.95

-2.71

0.83

2.87

ZLSU

0.11

-4.58

0.11

10.37

20.04

-

-

-

25.18

ZGLD

19.46

9.29

19.46

25.90

49.07

-

-

-

52.17

ZGI

6.85

3.31

6.85

12.35

30.65

9.56

12.95

7.93

11.98

ZUCM

1.14

-0.20

1.14

8.74

11.44

-

-

-

9.59

Bloomberg, as of March 31, 2025. Inception date for ZDB = 2/14/2014, ZBI = 2/10/2022, ZTIP/F = 1/26/2021, ZUQ = 11/12/2014, ZLB = 10/27/2011, ZDI = 11/12/2014, ZXLV = 2/6/2025, ZWEN = 1/26/2023, ZCH = 1/21/2010, ZLSU = 9/26/2023, ZGLD = 2/15/2024, ZGI = 1/21/2010, ZUCM = 9/26/2023.



Portfolio Characteristics
Regional Breakdown (Overall Portfolio)
A pie chart shows the portfolio characteristics as follows: 36.9% Canada, 53.12% United States, and 10.79% other.
Bloomberg, BMO Asset Management Inc., As of March 27, 2024. For illustrative purpose only.
Equity Sector Breakdown
A pie chart shows the Equity Sector Breakdown as follows: 25.64% Financials, 11.37% Information Technology, 12.50% Consumer Staples, 4.11% Real Estate, 9.02% Industrials, 7.90% Health Care, 7.74% Utilities, 7.62% Energy, 6.61% Communication Services, 4.20% Consumer Discretionary, 3.18% Materials.
Bloomberg, BMO Asset Management Inc., As of March 27, 2024. Sector breakdown of model portfolio for illustrative purpose only.
Asset Breakdown
A pie chart shows the asset breakdown as follows: 35% Fixed Income, 40% Equities, and 25% non-traditional.
Bloomberg, BMO Asset Management Inc., As of March 27, 2024. For illustrative purpose only.

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1 A bear steepener” refers to a situation where the yield curve, which plots the difference between short-term and long-term interest rates, widens, meaning long-term rates rise faster than short-term rates, typically signaling rising inflation expectations and a potential bearish outlook for the economy.

2 Duration: A measure of the sensitivity of the price of a fixed income investment to a change in interest rates. Duration is expressed as number of years. The price of a bond with a longer duration would be expected to rise (fall) more than the price of a bond with lower duration when interest rates fall (rise).

3 Credit spread: The difference in yield between two debt instruments with different credit ratings but similar maturities.

Disclaimers

For Advisor use only. 

The portfolio holdings are subject to change without notice. They are not recommendations to buy or sell any particular security.

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 prospectus.

The viewpoints expressed by the author represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.

This communication is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/​or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.

Index returns do not reflect transactions costs or the deduction of other fees and expenses and it is not possible to invest directly in an Index. Past performance is not indicative of future results.

The Index is a product of S&P Dow Jones Indices LLC or its affiliates (“SPDJI”), and has been licensed for use by the Manager. S&P®, S&P 500®, US 500, The 500, iBoxx®, iTraxx® and CDX® are trademarks of S&P Global, Inc. or its affiliates (“S&P”) and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”), and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by the Manager. The ETF is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the Index.

The ETFs referred to herein are not sponsored, endorsed, or promoted by MSCI and MSCI bear no liability with respect to an ETF or any index on which such ETF is based. The ETF’s prospectus contains a more detailed description of the limited relationship that MSCI has with the Manager and any related ETF.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus of the BMO ETFs before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends or distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any unitholder that would have reduced returns. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated. 

For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the BMO ETF’s prospectus. BMO ETFs trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/​or elimination.

BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.

BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.

BMO Buffer ETFs seeks to provide income and appreciation that match the return of a Reference Index up to a cap (before fees, expenses and taxes), while providing a buffer against the first 15% (before fees, expenses and taxes) of a decrease in the Reference Index over a period of approximately one year, starting from the first business day of the stated outcome period. 

An investor that purchases Units of a Structured Outcome ETF other than on the first day of a Target Outcome Period and/​or sells Units of a Structured Outcome ETF prior to the end of a Target Outcome Period may experience results that are very different from the target outcomes sought by the Structured Outcome ETF for that Target Outcome Period. Both the cap and, where applicable, the buffer are fixed levels that are calculated in relation to the market price of the applicable Reference ETF and a Structured Outcome ETF’s NAV (as Structured herein) at the start of each Target Outcome Period. As the market price of the applicable Reference ETF and the Structured Outcome ETF’s NAV will change over the Target Outcome Period, an investor acquiring Units of a Structured Outcome ETF after the start of a Target Outcome Period will likely have a different return potential than an investor who purchased Units of a Structured Outcome ETF at the start of the Target Outcome Period. This is because while the cap and, as applicable, the buffer for the Target Outcome Period are fixed levels that remain constant throughout the Target Outcome Period, an investor purchasing Units of a Structured Outcome ETF at market value during the Target Outcome Period likely purchase Units of a Structured Outcome ETF at a market price that is different from the Structured Outcome ETF’s NAV at the start of the Target Outcome Period (i.e., the NAV that the cap and, as applicable, the buffer reference). In addition, the market price of the applicable Reference ETF is likely to be different from the price of that Reference ETF at the start of the Target Outcome Period. To achieve the intended target outcomes sought by a Structured Outcome ETF for a Target Outcome Period, an investor must hold Units of the Structured Outcome ETF for that entire Target Outcome Period.

Distribution yields are calculated by using the most recent regular distribution, or expected distribution, (which may be based on income, dividends, return of capital, and option premiums, as applicable) and excluding additional year end distributions, and special reinvested distributions annualized for frequency, divided by month end net asset value (NAV). The yield calculation does not include reinvested distributions. Distributions are not guaranteed, may fluctuate and are subject to change and/​or elimination. Distribution rates may change without notice (up or down) depending on market conditions and NAV fluctuations. The payment of distributions should not be confused with the BMO ETF’s performance, rate of return or yield. If distributions paid by a BMO ETF are greater than the performance of the investment fund, your original investment will shrink. Distributions paid as a result of capital gains realized by a BMO ETF, and income and dividends earned by a BMO ETF, are taxable in your hands in the year they are paid. Your adjusted cost base will be reduced by the amount of any returns of capital. If your adjusted cost base goes below zero, you will have to pay capital gains tax on the amount below zero. 

Cash distributions, if any, on units of a BMO ETF (other than accumulating units or units subject to a distribution reinvestment plan) are expected to be paid primarily out of dividends or distributions, and other income or gains, received by the BMO ETF less the expenses of the BMO ETF, but may also consist of non-taxable amounts including returns of capital, which may be paid in the manager’s sole discretion. To the extent that the expenses of a BMO ETF exceed the income generated by such BMO ETF in any given month, quarter, or year, as the case may be, it is not expected that a monthly, quarterly, or annual distribution will be paid. Distributions, if any, in respect of the accumulating units of BMO Short Corporate Bond Index ETF, BMO Short Federal Bond Index ETF, BMO Short Provincial Bond Index ETF, BMO Ultra Short-Term Bond ETF and BMO Ultra Short-Term US Bond ETF will be automatically reinvested in additional accumulating units of the applicable BMO ETF. Following each distribution, the number of accumulating units of the applicable BMO ETF will be immediately consolidated so that the number of outstanding accumulating units of the applicable BMO ETF will be the same as the number of outstanding accumulating units before the distribution. Non-resident unitholders may have the number of securities reduced due to withholding tax. Certain BMO ETFs have adopted a distribution reinvestment plan, which provides that a unitholder may elect to automatically reinvest all cash distributions paid on units held by that unitholder in additional units of the applicable BMO ETF in accordance with the terms of the distribution reinvestment plan. For further information, see the distribution policy in the BMO ETFs’ prospectus. 

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