Utilizing ETFs To Build Your Business

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1 Utilizing ETFs To Build Your Business Capitalizing on the Popularity and Efficiencies of ETFs Chris McHaney, CFA Vice President & Portfolio Manager BMO ETFs & Global Structured Investments BMO Asset Management Exchange Traded Forum April 25, 2012

2 Agenda Exchange-Traded Funds (ETFs): The Basics ETF Landscape Continues to Grow How to Incorporate ETFs into Your Business Leverage Your Resources 2

3 What is an ETF? WHY IS EVERYONE TALKING ABOUT THEM AND WHAT DO I NEED TO KNOW? 3

4 What is an ETF? Like a stock Like a mutual fund Specific to ETFs 1. Intraday trading through an exchange listing Ability to tailor the holdings to suit a specific mandate Transparency 2. Can be bought on margin Instant portfolio diversification Lower expense ratios 3. Can be sold short Priced at end of the day at Net Asset Value (NAV) Market makers ensure liquidity at fair market value on intraday basis 4. No minimum number of units required at purchase Educational resource Tax efficient if portfolio transactions occur infrequently 4

5 How Traditional Mutual Funds Work 5

6 The ETF Create/Redeem Process 6

7 Global ETF Continues to Grow Global ETP AUM expected to reach U.S. $2.0T somewhere in 2012 Deborah Fuhr 7

8 Canadian Growth Has Been Equally Impressive AUM $B # of ETFs ETF Assets expected to reach C$105B by 2016 Investor Economics Canadian ETF Market AUM $B # of ETFs

9 Industry Insight Why are ETFs Popular Investment Tools? For Clients: Low Cost Tax Efficient Diversification Transparent For Advisors: Simplify investment decisions Targeted exposure Transparent Control fees Low Tracking Error & No Drift Differentiate your services with ETFs 9

10 Industry Insight ETF Investors Demographics Households that hold ETFs are on average wealthier - Investible assets are on average above $180k vs $102k ETF holders have a higher income (90k vs 67k) Average age is 53 74% of all investors will switch or consolidate to an advisor within 10 years of retirement Source: Investor Economics March 2010 & BMO Retirement Institute 10

11 ETFs Are Dynamic Investment Tools ETFs provide access to almost every asset classes and area Can be combined with stocks and/or mutual funds to increase portfolio efficiency Develop more dynamic strategies for your clients from basic to advanced Institutional style investing Portfolio completion, risk mitigation, cost control 11

12 How Do I Used Them In A Portfolio? HOW DO I INCORPORATE ETFS IN MY BUSINESS? 12

13 Pros and Cons of Active & Passive Investing There are advantages and disadvantages of both passive and active investing 13

14 Core-Satellite Strategy A properly constructed portfolio combines passive and active investments Combine ETFs, Mutual Funds and individual stocks and bonds to construct an efficient portfolio A Core-Satellite strategy has been used successfully by institutions for decades 14

15 BMO ETF Model Portfolios Provide Strategic Asset Allocation Models based on varying investor profiles Back-tested models that are risk differentiated Significant positive press for BMO ETFs Use it to your advantage 15

16 BMO ETF Portfolios Optimized portfolios to a specific risk profile. The portfolios use 7 to 11 ETFs. A Financial Planning approach given the Corporate Class Structure, PACs and T6 (ROC) features 16

17 Example #1: Based on Market Efficiency In theory, it is more difficult to beat an index in markets that are efficient. Therefore, passive investments can be used for efficient markets whereas active management can be used for inefficient markets. 17

18 Example #2: Based on Manager Talent An individual constructing a portfolio may be able to better source talented managers in certain areas. Therefore, passive investments can be used in areas in which talent is not available, while active management can be used where talent is available. 18

19 Example #3: Based on Correlation Although a portfolio can be diversified both globally and across sectors, correlations tend to rise in times of extreme market sell-offs. Alternative investments such as hedge funds and non-traditional asset classes which can be combined with passive investments. 19

20 Looks Like an ETF. Acts Like a Bond. BMO Target Date Maturity ETFs combine the benefits of individual bonds and bond ETFs Duration Fixed Income ETF Individual Bond Target Maturity ETFs Relatively Constant Gradually Declines Maturity Does not mature Matures Fee Fixed None Distribution Monthly Mostly Semi- Annual Gradually Declines Remain as money market ETFs, allow investors to time withdrawals Declining fee as ETFs move to money market instruments Monthly Diversification Yes No Yes 20

21 Indexed to 100 Diversification Matters ZXA closely matches the performance of bond with similar characteristics However, the diversification of a bond ETF helps mitigate company specific risk Royal Bank 5.45% 11/04/13 (Corporate Bond) BMO 2013 Corporate Bond Target Maturity ETF (ZXA) Source: Bloomberg 21

22 Leverage The Media Investors are reading more and more on ETFs ETFs get a significant amount positive press Leverage the Media s focus on ETFs Significant positive press for BMO ETFs Use it to your advantage 22

23 Leverage The Advertising BMO ETFs is quickly building a brand on being the leading innovator in the ETF space Investor are asking for BMO ETFs Leverage our advertising as it should lead back to you 23

24 Client Friendly Resources Global investment and portfolio strategies from a Canadian perspective Only Canadian ETF provider to provide product implementation and investment strategies A market leader and increased resources coming Sign up for distribution by ing Alfred Lee at alfred.lee@bmo.com 24

25 Disclaimer / Registered trade-marks/trade-marks of Bank of Montreal. This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual s circumstances. Individuals should seek the advice of professionals, as appropriate, regarding any particular investment. BMO ETFs are offered by prospectus through BMO Asset Management Inc. The prospectus contains important detailed information about the securities being offered. Copies of the prospectus may be obtained from BMO Asset Management Inc. Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the prospectus before investing. The funds are not guaranteed, their value changes frequently and past performance may not be repeated. Standard & Poor s and S&P are registered trademarks of Standard & Poor s Financial Services LLC ( S&P ) and TSX is a trademark of Toronto Stock Exchange. These trademarks have been licensed for use by BMO Asset Management Inc. BMO S&P/TSX Equal Weight Banks Index ETF, BMO S&P/TSX Equal Weight Oil & Gas Index ETF, and BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF are not sponsored, endorsed, sold or promoted by S&P or Toronto Stock Exchange, and S&P and Toronto Stock Exchange make no representation, warranty or condition regarding the advisability of buying, selling or holding units/shares in the BMO S&P/TSX Equal Weight Banks Index ETF, BMO S&P/TSX Equal Weight Oil & Gas Index ETF, and BMO S&P/TSX Equal Weight Global Base Metals Hedged to CAD Index ETF. Dow Jones, Dow Jones Industrial Average, Dow Jones Canada Titans 60, and Titans are service marks of Dow Jones & Company, Inc. and have been licensed for use for certain purposes. BMO ETFs based on Dow Jones indices are not sponsored, endorsed, sold or promoted by Dow Jones, and Dow Jones makes no representation regarding the advisability of trading in such ETFs. Citigroup Canadian Government Bond Index data copyright 2009, Citigroup Index LLC. All rights reserved. CITIGROUP is a registered trademark and service mark of Citigroup Inc. or its affiliates, is used and registered throughout the world, and is used under license for certain purposes by BMO Asset Management Inc. Reproduction of the Citigroup data and information in any form is prohibited except with the prior written permission of Citigroup Index LLC ( Citigroup ). BMO Canadian Government Bond Index ETF is not sponsored, endorsed, sold or promoted by Citigroup, and Citigroup makes no representation regarding the advisability of investing in such fund. Because of the possibility of human or mechanical error, Citigroup does not guarantee the accuracy, adequacy, completeness or availability of any data and information and is not responsible for any errors or omissions or for the results obtained from the use of such data and information. CITIGROUP GIVES NO EXPRESS OR IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE. In no event shall Citigroup be liable for any direct, indirect, special or consequential damages in connection with any use of the Citigroup data and information. BNY Mellon ADR Index and BNY Mellon DR Index are service marks owned by the Bank of New York Mellon Corporation. Each sub-index is part of the BNY Mellon Family of DR Indices. Each sub-index and the BNY Mellon Family of DR Indices are service marks owned by the Bank of New York Mellon Corporation. 25