BMO Exchange Traded Funds (ETFs)

Transcription

1 The ETF evolution Simon Cordery Bank of Montreal For professional investors only BMO Exchange Traded Funds (ETFs) The ETF Evolution June

2 Agenda History Innovation Market growth Factor based investing Case study The origins of ETFs Born from the index tracking world which saw the first public mutual fund launch in 1976 S&P 500 tracker Called First Investment Trust (launched with $11m, now over $100bn) Participation Shares Toronto 35 Participation Units (TIPs 35) S&P 500 Depository Receipt (SPDR) Europe's first ETF launched Alternatively Weighted First actively managed ETF Debut episode of The Simpsons Prince Charles and Princess Diana Separate Harry Styles is born Titanic premiers in London Nokia launches 3310 Roman Abramovich buys Chelsea F.C. 1st Generation iphone launched 2

3 Assets under management Current AUM globally exceeded US$3 billion as at the end of April ,297 ETFs/ETPs 283 providers Listed on 65 stock exchanges in 51 different countries Source: ETFGI data sourced from ETF/ETP sponsors, exchanges, regulatory filings, Thomson Reuters/Lipper, Bloomberg, publicly available sources and data generated in-house. Data as at May Note: ETFs are typically open-ended index funds that provide daily portfolio transparency, are listed and traded on exchanges like stocks on a secondary basis as well as utilising a unique creation and redemption process for primary transactions. ETPs (Exchange Traded Products ) refers to other products that have similarities to ETFs in the way they trade and settle but they do not use a mutual fund structure. The use of other structures including grantor trusts, partnerships, notes and depositary receipts by ETPs can create different tax and regulatory implications for investors when compared to ETFs which are funds. Exchange Traded Products. Who uses ETFs? Originally an institutional product However, adopted by other investors Private wealth managers/financial advisers Multi Managers Direct private investors 3

4 Evolution in understanding of portfolio returns 1960s and 1970s Investors don t distinguish between the sources of portfolio return Active investing was predominant way of managing long-term portfolios 1960s 1980s 2000s Alpha Active investing 1980s and 1990s Alpha Finance research underpins the adoption of passive investing as an alternative basis for implementation Investors can capture market beta efficiently through passive mandates Portfolio return Factor return Factor investing 2000s and 2010s Investors increasingly recognize factors as key drivers of long-term performance Market return Market return Passive investing Factor investing implemented through rulesbased transparent indexes offers an alternative for implementation Factor investing and the asset allocation process Factor investing sits between capweighted passive and active Seek to capture higher risk adjusted returns via systematic exposure to stock characteristics Not new: factors such as Value can be traced back to the 1930s Can explain part of the long-term portfolio performance of fundamental active investors* Factor indexes provide a transparent, rules-based and costeffective basis to seek systematic exposure to Factors Passive investing Active management *For example, Buffett s Alpha Andrea Frazzini, David Kabiller and Lasse Pedersen, December

5 What factors? Factor strategies continue to gain momentum These strategies are not being used in isolation, most users are now focusing on the combination of strategies According to FTSE Russell Global Smart Beta Survey On average users are evaluating 4 different strategies Among institutional equity ETFs users about 1 in 5 are employing factor based strategies and about one-third among asset managers What strategies have you evaluated or are you currently evaluating? Source: Smart Beta: 2015 Global Survey Findings from Asset Owners FTSE Russell. Case study BMO MSCI Income Leaders ETFs How do we construct the index? Which sectors does the methodology take us into / out of? What has performance looked like in up and down markets? Why are dividends important when looking for returns? How do these factors perform in different economic environments? 5

6 methodology Parent Quality screen Dividend screen Investment universe Stocks ranked in their order of their quality score top 50% selected Stocks then ranked in descending order of their dividend yield top 50% selected MSCI USA Profitability 85% of US Market Cap Large and mid caps 538 stocks Earnings quality Five key dimensions of quality Corporate governance Financial leverage Asset growth Stocks weighting based on their free float adjusted market cap. rebalanced in June and December annually Where does the methodology take us? MSCI USA Select Quality Yield sector allocation MSCI USA MSCI USA Select Quality Yield Utilities 3% Materials 3% Telecommuni cation Services 3% Industrials 10% Information Technology 21% Health Care 14% Financials 16% Staples 10% Energy 6% Discretionary 14% Information Technology 25% Utilities 1% Materials 4% Telecommuni cation Services 0% Industrials 14% Financials 4% Health Care 13% Staples 16% Energy 11% Discretionary 12% Source: MSCI as at

7 Percentage over / under weight 11/07/2016 How does this differ from the parent index? MSCI USA Select Quality Yield vs MSCI USA active exposure 5.00% 3.00% 1.00% -1.00% -3.00% -5.00% -7.00% -9.00% % Financials Staples Notable underweight to financials Source: MSCI as at as at Energy Discretionary Health Care Industrials Telecommuni cation Services Materials Utilities Information Technology Active Exposure % 5.30% 4.65% -1.66% -0.80% 4.23% -2.79% 1.08% -2.91% 4.14% What has this looked like over time? MSCI USA Select Quality Yield historical sector over / underweights ( ) Historical overweight to Staples and Healthcare sectors Historical underweight to Information Technology and Financials sectors Source: MSCI 46 7

8 Upside participation with lower downside capture MSCI US Select Quality Yield vs MSCI USA s 12 best and worst months 11.00% 9.00% 7.00% 5.00% 3.00% 1.00% -1.00% MSCI USA NETR (USD) MSCI USA SELECT QUALITY YIELD NETR USD -2.00% -7.00% % % MSCI USA NETR (USD) MSCI USA SELECT QUALITY YIELD NETR USD Source: MSCI, MSCI USA Net USD monthly returns vs MSCI Select Quality Yield Net USD Months are discrete, not necessarily consecutive. 47 Performance of factors under different economic environments Univariate analysis Economic growth Inflation - MSCI World Decreasing Increasing Decreasing Increasing Equal weighted 0.0% 0.3% 0.2% 0.0% High dividend yield 0.2% 0.1% 0.2% 0.2% Minimum volatility* 0.3% -0.3% 0.0% 0.1% Momentum 0.2% 0.3% 0.2% 0.3% Quality 0.3% -0.1% 0.0% 0.2% Risk weighted 0.2% 0.2% 0.2% 0.1% Value weighted 0.0% 0.2% 0.1% 0.0% Quality factor Most positively performing factor when growth is decreasing Performs positively when inflation is increasing High dividend yield factor Performs positively when economic growth is both increasing and decreasing Performs positively when inflation is both increasing and decreasing Source: MSCI. Average monthly gross active returns relative to MSCI World from December 1975 to December *Based on official index levels from May 1988; Low Volatility Tilt prior to that includes simulated dates. es where the return differential is less than 10 basis points are boxed. For illustrative purposes only. 48 8

9 Performance metrics Key metrics MSCI Europe ex UK Select Quality Yield MSCI United Kingdom Select Quality Yield MSCI USA MSCI USA Select Quality Yield MSCI Europe ex UK MSCI United Kingdom Currency USD USD EUR EUR GBP GBP Total Return* (%) Total Risk* (%) Return/Risk Sharpe Ratio Active Return* (%) Tracking Error* (%) Information Ratio NaN 0.22 NaN 0.59 NaN 0.81 Historical Beta Turnover** (%) Price to Book*** Price to Earnings*** Div. Yield*** (%) * Net returns annualised in USD for the USD EUR GBP Net returns annualised in EUR for the Net returns annualised in GBP for the Source: MSCI as at ** Annualised one-way index turnover for the ** Monthly averages for the to period Annualised one-way index turnover for the Monthly averages for the to period Annualised one-way index turnover for the Monthly averages for the to period 49 Summary ETFs have been around for 25 years There has been significant growth in assets and innovation From standard index funds to more focussed solutions A democratic investment for all investors 50 9

10 Disclaimer Past performance should not be seen as an indication of future performance. 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. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Contact us BMO Global Asset Management (EMEA) Head Office Exchange House Primrose Street London EC2A 2NY Tel: +44 (0) bmogam.com Extensive worldwide investment capabilities Total focus on clients Comprehensive range of products and solutions Defined expertise including a suite of specialist investment boutiques 2016 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. CM UK 10