BMO Exchange Traded Funds June 2012 Alfred Lee, CFA, CMT, DMS Vice President & Investment Strategist BMO BMO Global Asset Management
Agenda The Growing ETF Landscape Institutional Usage of ETFs Mechanics Behind ETFs Trends in the Industry 1
ETF Assets Continue to Grow ETF assets continue to grow globally Industry insiders expect assets to grow to US$2 Trillion in next several years # of Listings 3500 3000 2500 2000 1500 1000 AUM # of Listings 1800 1600 1400 1200 1000 800 600 400 Assets (US$B) 500 200 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 (YTD) Source: Blackrock ETP Landscape Report, Bloomberg (As of April 2012) 0 2
ETFs Are Dynamic Investment Tools ETFs provide access to almost every asset classes and sector Equities Fixed income Commodities Currencies Strategies Volatility And more Can be combined with stocks and/or pooled funds to increase portfolio efficiency Developed Market Equity Emerging Market Equity Fixed Income Commodities Others Develop more dynamic strategies from basic to advanced Source: Blackrock ETF Landscape Report Portfolio completion, risk mitigation, cost control 3
Expected Increase in ETF Usage Longer holding periods of ETFs with both asset managers and institutional funds show usage is more than just interim beta or cash management Investors also expect to increase their usage of ETFs in 2012 4
How Are Institutional Investors Using ETFs? Transition management and cash equitization tend to be gateway for ETF usage amongst institutional investors Greenwich associates reports that after using ETFs for these applications, users quickly see additional applications for these products There are countless ways in which investors can implement ETFs in their process 5
How Important is Volume? Volume is not a good measure of liquidity for an ETF An ETF that has no volume can be very liquid The underlying constituents determine liquidity of ETF A Closer Look at ZEB Security Weight Average Volume (100D) Shares/Basket % of Daily Volume RY 16.67% 5,624,628 5270.98 0.09% TD 16.67% 2,860,428 3643.09 0.13% BMO 16.67% 2,792,501 4961.02 0.18% BNS 16.67% 3,782,153 5397.18 0.14% CM 16.67% 1,783,295 3772.66 0.22% NA 16.67% 830,211 3764.00 0.45% Source: Bloomberg 6
So How Do you Measure Liquidity? Bid-ask spread A tighter bid-ask spread implies greater liquidity Underlying basket An ETF is as liquid as its least liquid underlying Market depth Level 2 quoting allows investors to see market depth Tips: Avoid trading near market open or close Use limit-orders Look for well constructed ETFs # Size Bid Ask Size # The Levels of Liquidity 1) On exchange liquidity 2) Market depth 3) Unit Creation 1 30,000 $15.00 $15.01 30,000 1 1 10,000 $14.99 $15.02 10,000 1 1 10,000 $14.98 $15.03 10,000 1 1 10,000 $14.97 $15.04 10,000 1 1 10,000 $14.96 $15.05 10,000 1 1 10,000 $14.95 $15.06 10,000 1 7
The Mechanism Behind ETFs 8
A Live Example Average volume prior to large trade was 5000 units/day A large trade of close to 12 million units was executed with no impact to premium/discount to NAV Trade had zero-impact to underlying as constituent stocks were 60 large-cap stocks (very liquid) BMO ETFs PM desk can help further facilitate liquidity 1.00 Volume 14,000,000 Premium/Discount 0.80 0.60 0.40 0.20 0.00-0.20-0.40-0.60-0.80 Price-NAV 12,000,000 10,000,000 8,000,000 6,000,000 4,000,000 2,000,000 Volume -1.00 0 24-Feb-10 25-Feb-10 26-Feb-10 27-Feb-10 28-Feb-10 1-Mar-10 2-Mar-10 3-Mar-10 4-Mar-10 5-Mar-10 6-Mar-10 7-Mar-10 8-Mar-10 9-Mar-10 10-Mar-10 11-Mar-10 12-Mar-10 13-Mar-10 14-Mar-10 15-Mar-10 16-Mar-10 17-Mar-10 9
Trends in the ETF Space 1) Move towards alternative beta and factor weighted indices 2) More strategy/solution based ETFs 3) Products in between passive and active 10
BMO BMO ETFs $6 Billion AUM in three years 44 different ETFs Fastest growing ETF provider in Canada A leader in innovation: U.S. High Yield Corporate Bond ETF Emerging Market Debt ETF Covered Call ETF Low Volatility ETF Small-Cap Commodity ETFs Target Maturity Bond ETFs 11
Capital Market Activity By Month BMO continues to add net new assets despite sluggish equity market growth The capital market activity growth rate for BMO ETFs has increased in 2012 BMO ETFs - Capital Activity by Month $6,000 $5,418 $5,799 $6,021 $5,000 $4,405 $4,979 $ millions $4,000 $3,000 $2,000 $1,000 $0 $163 $1,349 $1,187 $2,067 $1,870 $1,629 $1,489 $140 $242 $197 $139 $2,783 $2,582 $2,342 $274 $240 $201 $3,894 $2,960 $3,086 $3,215 $3,484 $177 $126 $269 $410 $129 $511 $574 $439 $381 $222 (MTD) 2009 2010 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Source: BMO ETFs 12
A Diverse Equity ETF Line-Up BMO has a diverse equity ETF line-up providing exposure to various: 1.Broad markets 2.Sectors 3.Weighting methodologies 4.Countries 5.Capitalization 13
Canada s Most Robust Fixed Income ETF Line-Up BMO s fixed income ETF line-up allow investors to target their exposure by duration and credit Investors can also gain exposure to U.S. high yield bonds, emerging market debt BMO also launched the first target maturity date ETFs in Canada 14
A Differentiated Commodity Based Line-Up Through BMO ETFs, investors can gain differentiated exposure to areas in commodities Investors can get access to energy, precious metals, base metals and agriculture Exposure through futures or energy 15
Yield Focused Line-up Investors continue to have an appetite for yield or income based investments Given the aging demographic and lower interest rates, yield will likely continue to be in high demand Through yield based ETFs, investors can build a diversified income based portfolio 16
Disclaimers / Registered 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 managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal.. 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 values change 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 Global Base Metals Hedged to CAD Index ETF is 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 Oil & Gas 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. Nasdaq, OMX, NASDAQ OMX, Nasdaq-100, and Nasdaq-100 Index, are registered trademarks of The NASDAQ OMX Group, Inc. (which with its affiliates is referred to as the Corporations ) and are licensed for use by BMO Asset Management Inc. The BMO Nasdaq 100 Equity Hedged to CAD Index ETF has not been passed on by the Corporations as to its legality or suitability and is not issued, endorsed, sold, or promoted by the Corporations. THE CORPORTAIONS MAKE NO WARRANTIES AND BEAR NO LIABILTY WITH RESPECT TO THE BMO Nasdaq Equity Hedged to CAD Index ETF. 17