The BMO Covered Call Dow Jones Industrial Average Hedged to CAD ETF intends to commence investing in reliance on exemptive relief recently granted by the Ontario Securities Commission.
This will provide the BMO ETF with the flexibility to manage its portfolio in a manner that is more consistent with the make-up of the Dow Jones Industrial Average, while still pursuing its covered call option writing strategy in seeking to earn option premiums and mitigate downside risk.
The relief has been granted from the concentration restriction in subsection 2.1(1) of National Instrument 81-102 Mutual Funds, subject to certain conditions and as described in the BMO ETF’s prospectus, such that its investment in a constituent issuer of the Dow Jones Industrial Average may exceed 10 per cent of the BMO ETF’s net asset value, limited only by that issuer’s weight in the Dow Jones Industrial Average.
A prospectus amendment has been filed to reflect the grant of this relief and to clarify the BMO ETF’s objective, highlighting that it will primarily invest in and hold securities of the issuers included in the Dow Jones Industrial Average in the proportions in which they are reflected in the Dow Jones Industrial Average. In addition, the BMO ETF will continue, depending on market volatility and other factors, to write covered call options on some, none or all of these securities.
Because the BMO ETF, in basing its investment decisions on the Dow Jones Industrial Average, may have more of its net asset value invested in one or more issuers than is usually permitted for mutual funds, the BMO ETF’s portfolio may be less diversified when compared to a less concentrated investment portfolio. Also, the net asset value of the BMO ETF may be more volatile than that of a more broadly-diversified portfolio and may fluctuate substantially over short periods of time. Although a more concentrated portfolio can sometimes result in increased liquidity risk, which may, in turn, have an effect on the ability of a mutual fund to satisfy redemptions, BMO Asset Management (the manager of the BMO ETF) does not believe these risks are material for the BMO ETF.
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