This past week BMO announced the startup of a bunch of new ETFs. The one that intrigues me the most is the BMO Low Volatility US Equity ETF (Symbol: ZLU). It is described as being constructed with the same method as the BMO Low Volatility Canadian Equity ETF (ZLB) that uses beta (stock price movement relative to the market average) to pick stocks that are less volatile i.e. low beta stocks.
As I blogged about just recently, passive rules-based alternative selection & weighting schemes (so-called smart beta) are coming to be accepted as being superior to traditional market-cap passive indices as an investment strategy. ZLU fills a gap in the smart beta space for US equities for an ETF using beta instead of simple price volatility e.g. funds like SPLV. Russell had some low beta US equity ETFs on the market for a while but closed them down due to lack of uptake. A mix of funds with different non-market cap weighting schemes in a portfolio is the way to go (e.g. this relatively simple smart beta portfolio), so ZLU is a useful additional component.
It is interesting to see how different market conditions in Canada vs the US are affecting low beta/volatility funds in comparison to the market-cap benchmarks. US equities have been on a tear recently as we read about all-time market highs. High beta ETFs like SPHB have been outstripping the market in the short term, such as the past 6 months, but low volatility funds like SPLV are handily ahead of both SPHB and SPY over a year or longer. The reason - SPLV doesn't spurt ahead in big leaps but its dips are much less pronounced. see the Yahoo Finance chart below. Slow and steady wins the race, huh?
Though BMO's Canadian equity low beta fund ZLB has been growing slowly since its launch in October 2011, I would have thought those return-chasing investors would have leaped on board this performance vs its market cap rival XIU.
Another interesting feature of ZLU, traded in Canadian dollars despite holdings of US traded and US-dollar denominated equities, is that it also comes in a US-dollar version traded in USD on the TSX under symbol ZLU.U. Given that ZLU and ZLU.U are in effect the same fund, just with two different prices, one in CAD the other in USD, it might even be possible to do low cost currency exchange using Norbert's Gambit as described on Financial Webring, which is often done with DLR and DLR.U.
NB I have voted with my money some time ago and own a fair chunk of ZLB and no XIU.