The new BMO Enhanced Equity Income ETFs range is a first for passive investors says Christine Cantrell (pictured), sales director, ETFs, at BMO Global Asset Management. The strategy brings an institutional approach to investing, available in an ETF format, with broad equity benchmarks at its core and an option overlay for additional yield.
“I am excited because these are so unique,” Cantrell says. “They haven’t been done before in the UCITS ETF structure but it is a tried and tested approach because we are already leaders in a similar strategy in Canada.”
Canadian headquartered BMO has GBP23.5 billion assets under management across its Systematic and ETF strategies as at 31 May 2017. BMO Global Asset Management has GBP183 billion assets under management as at 30 April 2017.
BMO has been running eight options-based ETFs in Canada for six years and has accumulated USD3.4 billion under management in those ETFs as at 30 June 2017.
“We are replicating the equity indices that a lot of our clients benchmark against while also trying to enhance the income,” Cantrell explains. “We are increasing the distribution yield from this product to be above the typical dividend yield.
“For a portion of the portfolio we are writing call options which allows us to take advantage of the volatility risk premium. We get paid for writing the options through a premium estimated at between 2-4 per cent which goes on top of the typical dividend yield. This results in an attractive yield on an estimated net basis of 4.6 per cent in the US, 6 per cent on European equities and 6.8 per cent in the UK.”
Cantrell reports that a lot of the firm’s asset and wealth manager clients are trying to find income. “Private wealth managers are constantly trying to think of ways to construct a higher income portfolio for clients who are retired and need an income stream but don’t want to sell down parts of their portfolios,” she says.
“Wealth managers construct risk profiled portfolios for different clients but may have to create another portfolio just dedicated to an increased amount of income. We have a lot of demand from those types of clients for something paying at least 5 per cent. Typically these clients would have to increase their risk to achieve that level of yield but we are allowing them to reduce their equity risk while increasing their income.”
BMO Global Asset Management’s experience in Canada has shown that the Enhanced Income Equity ETFs achieve 90 per cent of the volatility of their respective equity benchmarks.
Costs on the new funds have an ongoing charge of 30 basis points. “In the past, you would have had to use a 75 basis points to 1 per cent active fund and exposed yourself to idiosyncratic stock picking risk,” Cantrell says.
Source: BMO Global Asset Management.
For professional investors only. The value of investments and income derived from them can go down as well as up as a result of market or currency movements and investors may not get back the original amount invested. Investing in ETFs involves risk, including risks associated with market volatility, currency rate fluctuations, replication strategies, and changes in composition of the underlying index and assets. © 2017 BMO Global Asset Management. All rights reserved. BMO Global Asset Management is a trading name of F&C Management Limited, which is authorised and regulated by the Financial Conduct Authority. CM13674 UK