This week BMO announced more additions to its line of ETFs. What’s most interesting about these new funds is not so much the asset classes they track, but the fact that each comes in two or three flavours.

  • The first group focuses on US dividends. Like the BMO Canadian Dividend ETF (ZDV), the new funds do not track an index: instead they use a rules-based methodology to select 100 companies based on dividend growth rate and payout ratio as well as yield. But here’s the fresh angle: the fund comes in three versions: one uses currency hedging (ZUD), while the others are non-hedged and trade in your choice of Canadian (ZDY) or US dollars (ZDY.U).
  • A second trio of ETFs is devoted to mid-term US investment-grade corporate bonds, which have maturities ranging from five to 10 years: that contrasts with the iShares U.S. IG Corporate Bond (XIG), which has an average maturity of about 12 years. Again, the fund is available with currency hedging (ZMU) and in non-hedged Canadian (ZIC) and US-dollar (ZIC.U) versions.
  • Next up is a pair of low-volatility US equity ETFs, based on a strategy similar to that of the BMO Low Volatility Canadian Equity (ZLB). As I explained in an earlier post, several strategies can be used to build low-volatility ETFs: this one zeros in on the stocks with the lowest beta in the S&P 500. The fund is available in Canadian and US-dollar versions, and both are unhedged. (Currency hedging would interfere with a low-volatility strategy.)

I’m pleased to see an ETF provider offering these kinds of options. For many years, almost every foreign equity ETF in Canada used currency hedging, apparently in response to demand from advisors. Indeed, ZDY is the first Canadian ETF of US dividend stocks that does not use hedging.

Hedging worked well in the mid-2000s and other periods when the Canadian dollar rose dramatically, but over the long term it causes a drag on equity returns and may even increase a portfolio’s volatility. Ideally, investors should have the option to buy hedged and unhedged versions of US and international equity ETFs, and that’s starting to become reality: in addition to these new products, both BMO and Vanguard now offer two versions of their S&P 500 ETFs. We’re still waiting for similar options with international ETFs, but I suspect we’ll see them soon.