E322 – BMO Market+ ETFs: Enhancing Core Equity Exposure

If you could get the broad exposure of an index ETF, but with a little extra alpha potential built in, would you capture it? Today we're talking about the new suite of Demo Market Plus ETFs and what the plus actually means for investors. Welcome back to views from the desk. I'm Hilly Cutler. Just a quick heads up for our listeners, my co-host, Zayla, is a little under the weather today, so she'll be sitting this one out. We wish her a speedy recovery and look forward to having her back on the desk next week. So this is the point in the podcast where Zayla typically asks me what's on my desk, so I'm just going to jump right into it. Gip political risk returned last week with the closing of the straight-of-hormous and increased tensions between US and Iran. Energy prices rose three and a half to four percent on the week, but equity markets really they generally shrugged off the added risk. US markets were up between one to two percent on the week led by the energy sector, technology and semi-conductors though they also continued to perform well. Large caps led the way this week as made in small cap indices were in the red. Canada was up just about 0.2 percent. Developed international equities were flat on the week. Emerging markets on the other hand were up nearly 2 percent led by China and South Korea. Bonds did not perform as well. Yields rose across the curve bringing you know most bond indices negative for the week. I really tried to stay away from AI this week. I know we've been talking about a lot on the podcast lately, but SK high-nix ADRs were listed on the Nasdaq index on Friday felt that we needed to give a nod to that. It was the largest ever US share sales by a foreign company. Shares were up 13 percent on Friday. However, they did plunge a record 15 percent overnight in South Korea. Today we're joined by Roxanne LaPena, managing director and head of retail investment specialists to discuss our new BMO market plus ETF suite. Roxanne is part of the team behind these strategies and works closely with advisors and investors to help them understand portfolio construction and ETF solutions. Roxanne, thanks for joining us today. Thank you so much for having me. Excited to be here. To get started Roxanne for investors hearing about market plus for the first time. What is it and what problem are we trying to solve? Yeah, let's dive right into it. So we launched a suite of products and really what they do is they give you exposure that's in line with the broad market in different geographies, but it also gives it the ability to generate some additional alpha or incremental returns in a very disciplined manner. So think about it like your core market exposure but with that added bonus of still having the potential to outperform a little bit. So we've built these really to give clients more flexibility when they're thinking about the core exposures and portfolios. Where does that kind of fit in then between index investing and active management sounds like you're leveraging elements from both sides. Yeah, exactly. So when you're thinking about these, I think we should really think about them as something that's systematically designed to deliver that market like exposure. So that's where you see similarities with passive. But then we're giving you that high conviction stock selection and that's what's more similar to active. In essence, it sounds like we've built a hybrid and that's because we essentially have. So we're able to do this because these funds are managed by our incredibly experienced quant team and that team, they leverage a model that they've actually been running for over 15 years now. And in this case, it's leveraged to ensure that our deviation from the benchmark or deviation from the indexing question is minimal yet impactful. But passive, you get no deviation whatsoever. You simply get the index. And then with active traditionally depending on the manager, you can get incredibly meaningful deviations. And that can obviously either work for you or it can work against you. So what we're doing here is we're giving you a more streamlined and controlled experience that sits kind of right in the middle. Excellent. So 15 plus years of track record running the strategy, even though the ETFs themselves are new, it's not like this is brand new for the team running this type of strategy. Let's talk a little bit about the naming convention. We went with market plus. What does the plus intended to mean? Great question. When we talk about the plus, we really say that it's market plus and edge. So the edge in question, really being the ability to outperform the market by just mention the model. And that's really what's key at the end of the day to being able to deliver this. So we call it an alpha model. And it essentially uses fundamental metrics, fundamental data to review every single stock in a given universe and it ranks them by their expected alpha, which really means the expected ability to generate excess returns. So we actually use this model across all of our want strategies throughout the business. But we then leverage that output from the model, the alpha model. And we go through a process that applies constraints in line with what we're trying to deliver. So in this case, what we're doing is we're targeting beta one with the index. And we want to keep sector exposures neutral, for example. And really at that point in time, we take the output of all of that and all the constraints and we optimize for risk adjusted returns. We're really trying to increase that expected alpha while only taking a small incremental amount of added risk within the portfolio. Which kind of leads me to my next question. If we're being sector constrained and we're constraining the model, as you said, so that beta is equal to one. So keeping risk in line with the benchmark. How does the rules based process actually help to generate better risk adjusted returns? That's the beauty of a discipline model at the end of the day. It allows for rules like we just discussed to be set and those constraints to be applied so that you can continuously control the level of risk at all times within the portfolio. You can kind of think about it like having levers that you can pull on. But for this, since we're systematically designed to only marginally increase the risk budget versus an index and doing so while investing in high conviction stocks, this means that we have the ability to outperform with risk almost in line with the index. The output should be higher returns per unit of risk. And that really kind of comes back to that at the beginning of the question and thing that we always talk about in investing is in other words, we're always trying to deliver higher risk adjusted returns. But we can do that in a controlled way because of the model that we've built. It's the small things that make us Canadian. At Bimo ETFs, all of our tickers start with Z. That's right, Z, not Z. From ZSP to ZEB, we know how to build solutions for the Canadian investor. So the next time you invest in ETFs, consider AZ instead. Visit bmoetfs.com for more. So Roxanne, it sounds like we're not looking for home run hits here, right? We're looking for just small little singles and little elements to help outperform the benchmark while still maintaining benchmark like risk. Exactly. That's exactly it. So why launch the suite now? You mentioned that the team's been running the strategy for over 15 years in some cases. What's changed in today's market that makes this approach relevant today? The short answer when it comes to the retail space really has a lot to do with Z.R.M.3. As you are very aware, we've had other podcasts about this already. You know, there's additional scrutiny being placed on fees within the industry. So this really means that clients should only be paid more for funds that are actually delivering more at the end of the day. Active management across the board is generally more costly. So when the cost itself aligns with the value that you're receiving, that's perfect. We want to deliver more options for clients so that they can determine how much active exposure they want to have in their portfolios. And we can then make these options available at an attractive price point for them. So that's really what we're trying to accomplish here, keeping price points top of mind, and really thinking about what the role a product is within a portfolio. So right now, trying to deliver that core exposure with a little bit more, but at a very attractive price point for Z.R.M.3 world. Finally, for what's going on with the regulatory environment today. Beyond that, are there any particular environments where we can expect Market Plus to outperform the market more effectively? Are there particular regions where Market Plus investment strategy will work better than in others? I love this question because I think it really does help clear up what we're doing here when we're having these conversations about passive versus active. Because generally, when you think about traditional active management, you would often see sector bets, style bets within portfolios. And these would generally align with whatever the strategy might be itself, but also just the PM use. And you know, that would often allow you to get a sense of which environments would obviously be beneficial for a fund in question or not so beneficial for a fund. Here, we have constructed this a bit differently because we're aren't taking sector bets. We're not taking style bets within the portfolio. We're really giving you a market-like experience with a bit more juice, meaning you should never actually expect it to deviate meaningfully from the indexer from the benchmark. We're really designed, like we just talked about with those single hits, is we're designed in a way to have that slow and steady wins the race type of mentality. So consistent with small incremental returns. That's what you're trying to think about in terms of how we're winning over the long run. With those small incremental returns, they really do compound over the long run. And you know, we're talking about slow and steady wins the race. This whole narrative that we've kind of constructed here. So, Hilly, I have a question for you. Is your investment preference more like a tortoise or a hair? I'm definitely more like a tortoise. Absolutely. I don't take big bets. I don't do much in the way of trading. I'm very, very simple. maybe disappointing to our listeners, but yeah, very, very simple approach and investing. What about you? Same, you know, that's why Market Plus, we're the target audience, it seems, at the end of the day. We're going to get to that in terms of the target market, but to reiterate there, it sounds like this is a great strategy for investors who really like the concept of index investing, but are also looking for the ability to, while not being too different from the benchmark, still generates some alpha, right, so they don't feel like they're maybe missing the boat somewhere. Would that in mind, who would you say is the ideal investor for Market Plus, and how does that kind of fit in within a portfolio content? So I think one thing we want to make sure that we're always getting across with the messaging with our Market Plus offering is that they are core exposures at the end of the day. So in terms of where do they fit in a portfolio, they're core, and they really have a home in every portfolio. So the most obvious client type, other than Million I, of course, are those that are already invested in the passive space, but they're just willing to take on a little bit more incremental risk to get that higher potential in the financial return. We'll link to color a little bit outside of the lines to improve the risk of just the returns of their portfolio. Excellent, I like that. Let's talk a little bit more about the lineup, how investors should think about choosing between the different strategies, and I'm sure you're as excited as I am. We had the recent launch of ZMPI, the new international Market Plus ETF. So let's talk a little bit about all the whole suite of offering. Yeah, again, because we want to really make sure that people view these as core exposures within portfolios. So they're all managed exactly the same way, and the lineup is broken down by geography. So we want to make sure that we're providing broad core equity exposure across the board. So we've created them for Canadian Market, US Market, International Market, and Global Equity exposure as well. I say the one that we just launched, the most recent launch was the International Exposure. I would say that one is probably the one that currently we're most excited about just because sometimes it can be challenging, of course, to get that International Equity Market Exposure. So we're happy to have a plethora of options and be milked to provide that declines. That International Mandate has existed as a mutual fund for many years, but the team has been managing it. I believe since January 2024, and the track record has been very strong there as well. Yeah, definitely. So we're going to do a new team on that. If investors can only take away one thing. Remember one thing about Market Plus. What would you want that to be? I think I would want it to be that it's designed to move with the market. So when you're buying Market Plus, you're not giving up Market Exposure in order to generate something from natural returns. You're keeping that market like experience and giving yourself the opportunity to have a bit more output. We'll leave it at that with respect to Market Plus. I think that's a great way to wrap the bow around it. If you'll allow me now, this is usually Zayla's section. She does a great job, but we like to call it this the Rapid Fire segment of our podcast. Are you open to that, Roxanne? I'm ready for it. Roxanne. All right. First one. Active or passive? Hybrid. You know, it's a spectrum. There's a space for all of it. And I know that that's cheating. I accept that, but that wasn't a fair question, really. I was going to say that felt like a bit of a cheat, but a nice safe answer on your part. We'll accept it for today. Most overlooked region. My pleasure. Most overlooked region today. International. So we were talking about the range of offerings that we just launched. That's probably the one I'm most excited about because Bimo really does have many ways to kind of efficiently gain exposure to international equities and were pumped to launch a new one with Market Plus. Would that include developed or emerging markets as well or. Correct. It's broad international exposure. Diversification or concentration? It's the only free lunch as they say. Love that expression harder to find sometimes in some markets than others, but definitely a good place to go. One word to describe Market Plus. I guess we're looking for synonyms of plus at this point. I'd say enhanced. I like that one enhanced. One thing investors tend to overcomplicate. I think one we hear about all the time is investors seeking that they need to time the market as the old saying goes time in the market always beats timing the market. So you know state diversified and stay invested and that's it. You mentioned throughout the podcast that it's about compounding, particularly with Market Plus. It was like small. Alpha wins like very tight targeting to the benchmarks. So compounding time in the market. Not too surprised to hear you stress that one. Okay, if that wraps up the rapid fire questions, so what do you fear to say that Market Plus is designed to give investors broad market exposure while adding a disciplined rules based approach aimed at potentially improving outcomes over time? 100%. We're giving you that market like exposure with the ability to generate additional risk adjusted returns. Excellent. Well, thanks very much for joining us today on the podcast. Really a pleasure to have you. Thanks so much for having me. All right, that's it for today's episode. Thanks for listening. If you enjoyed the conversation, be sure to like and subscribe and share the podcast with someone passionate about markets and investing. 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