BMO GAM director explains how exchange-traded funds can navigate currency and tax issues
With a sudden and likely long winter ahead in Canada, flocks of snowbirds are already migrating south down I-95. Even more prospective snowbirds are turning to their advisors, asking if they can afford to spend their winters in Miami or Palm Springs.
Lovely as the life of a snowbird sounds, it comes with a host of potential financial pitfalls. Erika Toth, director, Eastern Canada – BMO ETFs, BMO Global Asset Management, told WP about the tax risks that come with owning property and spending time south of the border in part one of our interview.
In part two, Toth also shared her picks from BMO’s roster of ETFs that offer snowbird investors a reduced currency conversion cost and limited US estate tax liability. All these ETFs trade in US dollar units but are listed on Canadian exchanges, which means that clients aren’t exposed to huge US estate tax liabilities.
These are Toth’s six picks for snowbirds, covering almost the full range of the ETF space. Every ETF trades in US dollars, but on Canadian exchanges allowing for limited US tax exposure.
1 – ZWH.U – BMO US High Dividend Covered Call ETF
They call this “THE snowbird ETF” for a reason. Designed to serve the high cash flow needs of snowbirds, it currently yields 6.04% on a diversified basket of blue-chip US stocks with a proven track record. It’s based on the largest and most liquid US stocks screened for dividend growth rate and dividend sustainability. Risks of individual security and sector concentration are mitigated.
The high yield makes for a consistent income stream to meet cash flow needs, while the cash flow also helps reduce volatility. The ZWH.U is tax efficient, with roughly half of the 6.04% (the additional yield provided by the sale of the call options) taxed as capital gains or ROC. It’s also lower cost, with a management fee of 0.71%, well below the average F-class mutual fund MER of 1.25%.
2 – ZLU.U – BMO Low Volatility US Equity ETF
Toth insists that this is the ETF for investors looking to stay in equities, but are afraid of downside risks. The ZLU has performed well during overall declines of the S&P500. In the wider decline of Q4 2018, it only dropped -0.86%. In the decline of May 209, it actually grew by 0.14%. The same story in August 2019 when it grew by 0.04% against a declining index.
3 – ZSP.U – BMO S&P 500 Index ETF
A low-cost and liquid exposure to the S&P 500, BMO charges a 0.09% MER on this ETF. It’s the single largest USD-denominated US equity ETF listed in Canada. Toth thinks it’s ideal for investors “looking for a passive, low cost core.”
4 ZUS.V BMO Ultra Short-Term US Bond ETF
BMO’s Ultra Short Term US Bond ETFs are designed to make excess USD balances work harder for clients. This strategy holds nearly 100 corporate bonds, at an average A-grade credit quality, maturing in 6 months or less. The advantages of this strategy include a stable net asset value, a yield boost over high interest savings accounts, and intraday liquidity that GICs cannot provide.
As the largest bond ETF issuer in Canada, BMO can cherry pick the best quality bonds from their 1-5 year US corporate bond ladder as they get closer to maturity. They can pass on these savings to clients, offering the ZUS.V ETF at a MER of 0.17%.
The ZUS.V uses an innovative “accumulating units” purchase option, reinvesting the interest rather than distributing it. This simplifies things for investors, as total return is what appears on their account statement (instead of having to add up interest income and price change).Toth says the “accumulating units” version is far superior for an investor that doesn’t require cash flow.
5 – ZIC.U BMO Mid-Term US IG Corporate Bond Index ETF
“Conservative investors with more fixed income in their portfolios may want to consider US corporate bonds considering they offer a yield pick-up over government bonds and cash,” Toth told WP.
She noted the ZIC.U’s current yield is 3.5%, 2.7% YTM over a duration of 6.3 years. As opposed to the Canadian corporate bond market that is concentrated heavily in financials, energy, and telecoms, the US corporate bond market is better diversified and features a range of consumer non-cyclical and tech companies not normally found in similar Canadian products.
6 – ZTM.U BMO Mid-Term US Treasury Bond Index ETF
For those investors looking to mitigate risk, Toth believes US Treasuries are an ideal flight to safety exposure, tending to do well in negative markets. She sees them as a cost-effective way to add insurance to a portfolio. BMO offers short, mid, and long-term exposures, but Toth suggests the mid-term option for investors not wanting to make a large bet on the direction of interest rates.
The portfolio is 100% government bonds and carries an AAA credit quality. Though it won’t yield as much as a long-duration ETF if equity markets and rates do drop, the mid-term option isn’t as exposed to loss if rates increase. It offers a balance between yield pickup and performance over time, with downside protection offered by US treasuries.
For all their shared love of warm weather (or hatred of the cold) Snowbirds range far and wide in their investment needs and capacity for risk. Toth and BMO’s suite of ETFs, though, offer an option for nearly every snowbird, all of them carrying the benefits of US dollar units with none of the US estate tax exposure. The choice between them falls to a chat between advisors and their clients. It might be a good idea to schedule those meetings before all the snowbirds flee south this year.
