Looking South of the Border

Seeking U.S. Equity Exposure through ETFs

Alfred Lee, CFA, CMT, DMS
Vice President, BMO ETFs
Portfolio Manager & Investment Strategist
BMO Asset Management Inc.

June 4, 2013
Recent Developments:

  • Since the beginning of 2011, when we made the recommendation to overweight U.S. equities, the 44.0% total return of the S&P 500® Composite Index (SPX) (in Canadian dollars) has easily outperformed the 1.4% total return of the S&P/TSX Composite Index (S&P/TSX)(Chart A). From a fundamental perspective, we continue to favour U.S. equities given that the 16.1x current price-to-earnings (P/E) ratio of the SPX is still at a 34.2% discount to its 2009 high. In comparison, the 16.3x forward P/E ratio of the S&P/TSX is at a 23.4% discount to its 2009 high.
  • As investors are aware, the S&P/TSX is heavily concentrated in sectors that are highly sensitive to global economic growth. For instance, the energy and material sectors together currently make up close to 40% of the S&P/TSX. With many emerging markets focusing on internalizing their economic growth, and relying less on infrastructure related projects to stimulate their economies, commodity related areas will likely continue to face headwinds. The material sector has had a total return of -23.9% year-to-date, by far the worst performing sector of the S&P/TSX. While the 6.0% total return of the energy sector is more than the 3.7% total return of the S&P/TSX year-to-date, it is the third worst performing sector of the S&P/TSX over the period.
  • For Canadian equity exposure, we continue to recommend low volatility ETFs such as the BMO Low Volatility Canadian ETF (ZLB) and/or dividend related ETFs such as the BMO Canadian Dividend ETF (ZDV), given their lower weights to cyclical oriented areas – (Chart B). Over the long-term, we remain favourable on U.S. equities, but indicators such as the Relative Strength Indicator (RSI), a technical measure we use for shorter-term price momentum, suggest U.S. equities to be short-term overbought. Given we remain favourable on U.S. equities over the long-term, should the market experience a short-term pull-back, exchange traded funds (ETFs) can be used to efficiently gain exposure to U.S. equities. For alternatives in which BMO ETFs investors can use to get U.S. equity exposure, please see below.

Investment Idea:

  • Investors can easily access U.S. equities through traditional indices such as the S&P 500 Composite Index (SPX), the Dow Jones Industrial Average (Dow) and the NASDAQ-100 Index (NDX) which a number of BMO ETFs track. For the broad based SPX, investors have several alternatives including the S&P 500 Index ETF (ZSP), which is also available in U.S. dollar units (ZSP.u) and in a currency hedged format through the BMO S&P 500 Hedged to CAD Index ETF (ZUE). Investors looking for U.S. blue chip companies can utilize the BMO Dow Jones Industrial Average Hedged to CAD Index ETF (ZDJ), which tracks the multinational oriented Dow. Those investors preferring a heavier exposure to technology may prefer the BMO NASDAQ 100 Equity Hedged to CAD Index ETF (ZQQ), which tracks the NDX.
  • Investors that seek a dividend oriented approach to U.S. equity investing, may want to consider the BMO U.S. Dividend ETF (ZDY), which is also available in U.S. dollar units (ZDY.u) and a currency hedged version through the BMO U.S. Dividend Hedged to CAD ETF (ZUD). This ETF screens for stocks that have a flat or growing dividend payout over the last three years and also companies that have a sustainable payout ratio.

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