Inside the Numbers: BMO Low Volatility Canadian Equity ETF (ZLB.TO)

byBob Simpson, Synchronicity Performance Consultants

September 21, 2016

4 minute read

Inside the Numbers: BMO Low Volatility Canadian Equity ETF (ZLB.TO)

by Bob Simpson, Synchronicity Performance Consultants

Sep 21, 2016

"BMO Low Volatility Canadian Equity ETF has been designed to provide exposure to a low beta weighted portfolio of Canadian stocks. Beta measures the security's sensitivity to market movements. The ETF utilizes a rules based methodology to build a portfolio of less market sensitive stocks from a universe of Canadian large cap stocks. The underlying portfolio is rebalanced in June and reconstituted in December.”

The 40 lowest beta stocks from the 100 largest and most liquid securities in Canada are selected.

Source: http://www.bmo.com/gam/ca/advisor/products/etfs#fundUrl=%2FfundProfile%2FZLB

Let’s look “Inside The Numbers”

ZLB data by YCharts

ZLB has been in an uptrend since inception, other than for a brief setback in late 2015/early 2016.

Is ZLB an index beater? Since inception, ZLB has provided investors with better than double the return of the TSX 60.

ZLB Total Return Price data by YCharts

The next chart is a ratio chart of ZLB divided by XIU. If the trend is higher, ZLB is outperforming the TSX 60. If it is trending lower, the TSX 60 is stronger. ZLB has consistently outperformed the TSX 60, other than through 2013 and much of 2014. During this period, ZLB provided investors with market returns.

Fundamental Chart data by YCharts

How about against its peers? ZLB is at the top of the table over the past one year. For comparison, I have chosen a variety of different styles (value, dividend growers and momentum).

ZLB Total Return Price data by YCharts

If we take a longer-term view, ZLB has been much stronger than its peers.

ZLB Total Return Price data by YCharts

How about ZLB's holdings? Most are in an uptrend (based on trading above the 200-day MA).

The Bottom Line

ZLB has been a great ETF since inception. Its selection methodology is simple and very transparent.

One major concern is the ETF's label - Low Volatility. Low Volatility does not mean low risk. The chart below shows the drawdowns for ZLB and XIU and you can see that ZLB's price held up well when the market dropped over 20% in 2015/early 2016.

ZLB data by YCharts

The portfolio's sector breakdown is listed below. Many are interest sensitive sectors and may be hurt during periods of rising interest rates. For the time being, the fund's holdings have been pushed higher by investors hunting for yield in a low interest rate environment.

Home Depot - Time to Bail or Just a PE Correction?

September 19, 2016

Home Depot has been a great stock to own since the 2008 market correction:

But recently, the stock has experienced some weakness and is now trading below its 200-day moving average.

HD data by YCharts

Technicians are watching the previous low for a break and if that occurs, there will likely be a further sell-off. The question is why is HD selling off? Is it experiencing poor earnings performance? The chart below shows that TTM (Trailing Twelve Months) EPS growth remains strong.

HD data by YCharts

Maybe analysts are bearish?

Current EPS TTM is $5.93 and 2017 - 2019 estimates are 6.328, 7.16 and 8.09. Unless the analysts re wrong, HD should perform well through 2019. The current payout ratio is 43% so if HD earns 8.093 they should pay a dividend of $3.48 up from the current $2.56.

At this stage, the only change is the price earnings multiple. HD's PE hit a brick wall at 25 times earnings and has corrected to 21.3 times earnings.

HD PE Ratio (TTM) data by YCharts

In his book One Up on Wall Street, Peter Lynch (2000) wrote, “The p/e ratio of any company that’s fairly priced will equal its growth rate.” Based on this theory, HD should trade at a PE of 15.92 (one-year growth) or approximately 22 times earnings (3 or 5 year EPS growth rate). At 19 times current earnings, HD might drop to $113, or somewhere around the February low. If it traded at 19 times the 2019 estimate, it could trade at close to $154. With dividends, that would produce a healthy profit for shareholders.

HD data by YCharts

Is this the beginning of a long-term decline in the price of HD? Until we have further information about earnings, which are expected to be announced in mid-November, price movements will be driven by speculation and volatility in the PE multiple.

This is another example of how you can do a quick "deep-dive" on a stock using YCharts. If you would like a free 7-day trial and 60 minute demo, please give me a call at 905-502-0100.

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Inside The Numbers is a three times a week equity/ETF feature for portfolio managers or those aspiring to be. Live sessions are held Fridays at Noon Eastern time. During these insightful sessions, a broad range of topics are discussed, ranging from financial markets, investment strategies, business development and how to use stock screening tools, like YCharts.

Synchroncity has been conducting these sessions each week since 2015 and recorded and posted them on their site. To date, they have conducted over 100 sessions with participation from a broad range of advisors across North America.

If you would like to attend live sessions, contact Bob Simpson at 905-502-0100, or via email at info@synchroncity.ca

Author

Bob Simpson, Synchronicity Performance Consultants

Bob Simpson, president and founder of Synchronicity has been involved, directly or indirectly in the industry since 1981. He has been a very successful financial advisor with Nesbitt Thomson Inc., a major Canadian financial institution. Between 1981 and 1989, he built a business with more than $120 million in assets under management and was one of the first Canadian advisors to transition from a solo to an ensemble model. From 1989 to 1993, he was Vice President Development and portfolio manager for a publicly traded insurance company and president of an investment counseling firm. From 1993 to 1998, he held several positions including fixed income strategist, manager of training and development, branch manager and Senior Vice President National Sales for Midland Walwyn Capital Inc., Canada’s largest independent financial services firm, which was sold to Merrill Lynch in 1998. In 1998, he founded Synchronicity Business Coaching Inc. In 1999, he was trained and certified by Michael Gerber, author of the best-selling business book, The E-Myth Revisited and his firm E-Myth Worldwide. He has subsequently adapted many of Gerber’s concepts in the development of Sustainable Growth, a program for financial services entrepreneurs.