Fall 2023

Park Cash, Drive Return with Money Market and Ultra Short-Term Bonds

Laura Tase
Director, Institutional & Advisory ETF Distribution, BMO ETFs
Oct. 18, 2023

With high interest rates and market uncertainty persisting, how can Investment Counsellors and Family Offices satisfy clients’ ongoing desire for yield? Laura Tase, Director, Institutional & Advisory, BMO ETFs, presents several ETF strategies that offer attractive monthly payouts, while preserving the client’s hard-earned capital.


The hunt for yield

It’s no secret that the past several years for markets have been characterized by an unusual degree of macroeconomic uncertainty. From the COVID-19 pandemic and geopolitical instability to high interest rates and persistent inflation, many investors are understandably nervous. This has translated into high client interest in cash and cash-like instrument; in August 2023, for instance, the BMO Money Market Fund ETF Series (ZMMK) ranked fourth among all BMO ETFs in inflows with $76.6 million, and year-to-date, it ranks sixth with $616.1 million.1

For many years, historically low interest rates meant that investors had to look to the long end of the curve to find attractive yields. Now, however, central banks’ aggressive rate hikes mean that investors are finally able to find yield at the short end. As The Wall Street Journal recently reported, money market funds and cash-like instruments have upended the paradigm, as yields of around 5% combine with relatively little risk to create an appealing alternative to stocks. In turbulent markets, this trade-off makes sense for many investors, enabling them to earn a robust return while waiting to jump back into equities.

BMO’s suite of money market and ultra short-term bond ETFs

There are many solutions available for clients seeking a place to park their cash. With high-interest savings account (HISA) ETFs currently under review by the Office of the Superintendent of Financial Institutions (OSFI), money market and short-term bond solutions may be investors’ best bet for attractive yields with minimal downside. BMO offers several such strategies depending on the client’s particular yield goals, risk tolerance, and tax situation.

ZMMK – BMO Money Market Fund ETF Series

The BMO Money Market Fund ETF Series (ZMMK) offers exposure to a diversified portfolio of high-quality money market instruments issued by Canadian governments and corporations, including treasury bills, bankers’ acceptances, and commercial paper. These securities mature in less than 365 days and have an average term-to-maturity of less than 90 days. It is an ideal solution for investors seeking an attractive yield in addition to liquidity and capital preservation.

BMO Money Market Fund ETF Series (Ticker: ZMMK)2

  • Distribution Yield: 4.92%
  • Distribution Frequency: Monthly
  • Yield to Maturity: 5.20%
  • Management Fee: 0.12%
  • Risk Rating: Low

Source: BMO Asset Management. Annualized Distribution Yield: The most recent regular distribution, or expected distribution, (excluding additional year end distributions) annualized for frequency, divided by current NAV. Yield to Maturity: The total expected return from a bond when it is held until maturity – including all interest, coupon payments, and premium or discount adjustments. Risk is defined as the uncertainty of return and the potential for capital loss in your investments.

ZUCM – BMO USD Cash Management ETF
ZUCM.U – BMO USD Cash Management ETF(Hedged to USD)

The new BMO USD Cash Management ETF (ZUCM) is ideal for clients with cash on the sidelines and a preference for a U.S. dollar (USD) solution. It seeks to preserve capital and maximize monthly income by providing exposure to high-quality, short-term fixed income securities denominated in USD. With a weighted average term to maturity of less than six months, ZUCM — and its USD-hedged version, ZUCM.U — is an easy, agile way to park money.

BMO USD Cash Management ETF (Ticker: ZUCM)3

  • Distribution Yield: N/A
  • Distribution Frequency: Monthly
  • Yield to Maturity: N/A
  • Management Fee: 0.12%
  • Risk Rating: Low

BMO USD Cash Management ETF (Hedged to USD) (Ticker: ZUCM.U)3

  • Distribution Yield: N/A
  • Distribution Frequency: Monthly
  • Yield to Maturity: N/A
  • Management Fee: 0.12%*
  • Risk Rating: Low

Source: BMO Asset Management.

ZST – BMO Ultra Short-Term Bond ETF

For clients seeking higher yield and who are willing to slightly increase credit risk, consider the BMO Ultra Short-Term Bond ETF (ZST). ZST invests in a diversified portfolio of federal, provincial, and corporate bonds, all with a term to maturity of less than one year or reset dates within one year. With these types of bonds currently trading at a discount, ZST also offers a tax advantage in comparison to GICs, as illustrated below:

BMO Ultra Short-Term Bond ETF (ZST) vs. 1-Year Non-Redeemable (GIC)

Before Tax Return

After Tax Return

Coupon

YTM

Interest Income ($)

Capital Gains ($)

Interest Income ($)

Capital Gains ($)

After Tax Return ($)

After Tax Return (%)

Difference

ZST

2.864

5.455

$2.86

$2.59

$1.33

$1.90

$3.23

3.23%

0.67%

GIC

5.50

5.50

$5.50

$0.00

$2.56

$0.00

$2.56

2.56%

-0.67%
Tax Calculation

ZST

ZST After-Tax Difference: 0.67%

Interest Income

  • 2.86% Coupon x $100 Initial Investment = $2.86 Pre-Tax Interest Income
  • $2.86 Income Before Tax x (1- Marginal Tax Rate6) = $1.33 After-Tax Interest Income

Capital Gain

  • (5.45% x YTM – 2.86% Coupon) x $100 Initial Investment
    = $2.59 Pre-Tax Capital Gains realized at maturity
  • Capital Gains before Tax x (1 – Capital Gains Inclusion Rate)
    + [Capital Gains Before Tax x (1 – Capital Gains Inclusion Rate) x (1 – Marginal Tax Rate)]
    = $1.90 After-Tax Capital Gains

Total Return

  • $2.86 Interest Income + $2.59 Capital Gains = $5.45 Pre-Tax Return
  • $1.33 Interest Income + $1.90 Capital Gains = $3.23 After-Tax Return


GIC

Interest Income

  • 5.5% Coupon x $100 Initial Investment = $5.50 Pre-Tax Interest Income Earned
  • $5.50 Coupon x (1 – Marginal Tax Rate) = $2.56 After-Tax Return

Given current market dynamics, an investor can generate a higher after-tax expected return (approximately +26%) by investing in an ETF such as ZST vs a GIC.

ZST is also available in an Accumulating Units option (ZST.L), where the coupon compounds daily in NAV.

BMO Ultra Short-Term Bond ETF (Ticker: ZST)2

  • Distribution Yield: 4.68%
  • Distribution Frequency: Monthly
  • Yield to Maturity: 5.63%
  • Management Fee: 0.15%
  • Risk Rating: Low

Source: BMO Asset Management.

ZUS.V – BMO Ultra Short-Term US Bond ETF (US Dollar Accumulating Units)

The BMO Ultra Short-Term US Bond ETF offers similar benefits to ZST, but in USD accumulating units. As U.S. bonds are trading at a discount, ZUS also offers a similar tax advantage to ZST.

BMO Ultra Short-Term US Bond ETF (US Dollar Accumulating Units) (Ticker: ZUS.V)2

  • Distribution Yield: 0.0%
  • Yield to Maturity: 5.96%
  • Management Fee: 0.15%
  • Risk Rating: Low

Source: BMO Asset Management.


For more information on BMO’s ETF solutions, reach out to your regional Institutional BMO ETF Specialist.

1 Hannah Miao and Charley Grant, ​“Where Investors Are Finding Returns in a World of Yield,” The Wall Street Journal, Aug. 19, 2023.

2 BMO Asset Management Analytics, as of August 31, 2023.

3 As of September 15, 2023. Changes in rates of exchange may also reduce the value of your investment.

4 As of July 20, 2023.

5 YTM is calculated gross of fees.

6 Assuming the tax rate is 53.53. Top marginal tax bracket will differ depending on province of residence.

Disclosures:

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 simplified prospectus.

The viewpoints expressed by the authors represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. 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. The statistics in this update are based on information believed to be reliable but not guaranteed.

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

Distributions are not guaranteed and may fluctuate. Distribution rates may change without notice (up or down) depending on market conditions. The payment of distributions should not be confused with an investment fund’s performance, rate of return or yield. If distributions paid by an investment fund are greater than the performance of the fund, your original investment will shrink. Distributions paid as a result of capital gains realized by an investment fund, and income and dividends earned by an investment fund, 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. Please refer to the distribution policy for BMO ETF set out in the prospectus.

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 Distribution Policy in the BMO ETFs’ prospectus.

Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus 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 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.

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