ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE BMO MSCI EAFE Hedged to CAD Index ETF (ZDM) (the ETF ) For the 12-month period ended December 31, 2017 (the Period ) Manager: BMO Asset Management Inc. (the Manager and portfolio manager ) Management Discussion of Fund Performance Investment Objective and Strategies The ETF seeks to replicate, to the extent possible, the performance of the MSCI EAFE 100% Hedged to CAD Index (the Index ), net of expenses. The investment strategy of the ETF is to invest in and hold the Constituent Securities (as defined in the prospectus) of the Index in the same proportion as they are reflected in the Index or securities intended to replicate the performance of the Index. The Manager may also use a sampling methodology in selecting investments for the ETF. As an alternative to or in conjunction with investing in and holding the Constituent Securities, the ETF may invest in or use certain Other Securities (as defined in the prospectus) to obtain exposure to the performance of the Index. Risk The risks associated with an investment in the ETF remain as disclosed in the ETF s most recent prospectus or any amendments and ETF facts. During the Period there were no changes to the ETF that materially affected the overall risk level associated with an investment in the ETF. However, beginning in February 2018 the ETF s investment risk level is being determined by calculating the ETF s ten-year standard deviation in accordance with the investment risk classification methodology under National Instrument 81-102 Investment Funds, which came into force effective September 1, 2017. If the ETF does not have at least ten years of performance history, a reference index that is expected to reasonably approximate the ETF s standard deviation is used as a proxy for the remainder of the ten year period. In February 2018, the Manager reviewed the ETF using the new standardized investment risk classification methodology and determined that the risk rating of the ETF had not changed. The Manager reviews the ETF s investment risk level and reference index(es), if any, at least annually. Results of Operations The listed CAD units of the ETF returned 16.12% versus the MSCI EAFE 100% Hedged to CAD Index (the Index ) return of 16.46%. The change in total net asset value during the Period from approximately $720 million to approximately $628 million had no impact to the performance of the ETF. The difference in the performance of the listed CAD units of the ETF relative to the Index during the Period (-0.34%) resulted from the management expense ratio (-0.23%), and the impact of sampling and certain other factors (-0.11%), which may have included timing and holding differences versus the Index, and market volatility. Market Conditions During the Period, international equities delivered solid returns, posting double-digit gains in both local currencies and Canadian dollars. The market-friendly outcome of the French elections in early 2017 coupled with improving economic data lifted European equities. Meanwhile, equities in Japan benefited from meaningful earnings revisions. In addition, manufacturing Purchasing Managers Index remained well in expansionary territory and improved in the second half of 2017. Overall, global investors continued to expect momentum in economic activity and capital markets. This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the ETF. If the annual financial statements of the ETF do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling 1-800-361-1392, by writing to us at BMO Asset Management Inc., 250 Yonge Street, 7th Floor, Toronto, Ontario, M5B 2M8 or by visiting our website at www.bmo.com/etflegal or SEDAR at www.sedar.com. You may also contact us using one of these methods to request a copy of the ETF s proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure. 18
All sectors contributed positively to the ETF s performance. Financials, Industrials and Consumer Discretionary sectors were the highest contributing sectors. Significant individual contributors to performance were HSBC Holdings, Nestle SA, AIA Group Ltd, and Novo Nordisk A/S. Individual detractors to performance included Teva Pharmaceutical, GlaxoSmithKline Plc, BT Group Plc and Shire Plc. Recent Developments The European and Asian equity markets are expected to have a favourable backdrop for continued price appreciation in 2018. After pulling back in December 2017 due to political uncertainty in Germany and Italy, European equities should reflect the continued improvement in macro-economic conditions, where continued reforms may boost growth in France. In Asia, the market consensus calls for a continued economic recovery in Japan and expansion in China. Some negative factors that may affect international equities include a stronger euro that might hinder the region s exports, failure to implement further reforms in France, as well as slower consumers spending. In Asia, risks may stem from credit tightening in China as the government tightens loan conditions amidst rising global trade tensions. Management Fees The Manager is responsible for the day-to-day management of the business and operations of the ETF. The Manager monitors and evaluates the ETF s performance, manages the portfolio and provides certain administrative services required by the ETF. As compensation for its services, the Manager is entitled to receive a management fee payable quarterly and calculated based on the daily net asset value of the ETF at the maximum annual rate set out in the table below. Ticker Maximum Annual Management Fee Rate % ZDM 0.20 Brokerage Commissions The ETF pays standard brokerage commissions at market rates to BMO Nesbitt Burns Inc., an affiliate of the Manager, for executing a portion of its trades. The brokerage commissions charged to the ETF (excluding exchange and other fees) during the periods were as follows: 2017 2016 Total brokerage commissions paid $ 51,835 185,972 Total brokerage amounts paid to related parties $ 24,211 8,399 Related Party Transactions The Manager, an indirect, wholly-owned subsidiary of Bank of Montreal ( BMO ), is the portfolio manager, trustee and promoter of the ETF. From time to time, the Manager may, on behalf of the ETF, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a Related Party ). The purpose of this section is to provide a brief description of any transactions involving the ETF and a Related Party. Designated Broker The Manager has entered into an agreement with BMO Nesbitt Burns Inc., an affiliate of the Manager, to act as designated broker and dealer for distribution of BMO exchange traded funds, on terms and conditions that are comparable to arm s length agreements in the exchange traded funds industry. The material terms and conditions of the agreement have been disclosed in the ETF s prospectus. The Manager has also entered into agreements with certain other registered dealers in Canada to act as dealers for the creation and redemption of units of BMO exchange traded funds. 19
Financial Highlights The following tables show selected key financial information about the ETF and are intended to help you understand the ETF s financial performance for the periods indicated. The ETF s Net Assets per Unit Listed CAD Units 2017 2016 2015 2014 2013 Net assets, beginning of period $ 19.22 18.56 18.18 17.81 14.52 Increase (decrease) from operations Total revenue $ 0.63 0.69 0.85 0.61 0.44 Total expenses $ (0.00) (0.03) (0.08) (0.12) (0.11) Realized gains (losses) for the period $ 0.22 1.34 0.57 0.85 (0.75) Unrealized gains (losses) for the period $ 2.24 (1.32) (0.69) (0.33) 3.84 Total increase (decrease) from operations (3) $ 3.09 (0.68) 0.65 1.01 3.42 Distributions From income (excluding dividends) $ 0.00 0.01 0.00 From dividends $ 0.51 0.56 0.52 0.57 0.32 From capital gains $ 1.15 0.30 0.09 Return of capital $ 0.02 0.04 0.17 0.01 0.10 Total Annual Distributions (4) $ 0.53 1.75 0.99 0.68 0.42 Net assets, end of period $ 21.76 19.22 18.56 18.18 17.81 Unlisted Institutional Units 2017 2016 2015 2014 (5) Net assets, beginning of period $ 20.63 19.50 18.66 17.62* Increase (decrease) from operations Total revenue $ 0.65 0.57 0.78 0.49 Total expenses $ (0.01) Realized gains (losses) for the period $ 0.04 1.65 0.59 0.96 Unrealized gains (losses) for the period $ 2.55 (1.09) (0.53) (0.40) Total increase (decrease) from operations (3) $ 3.24 1.13 0.84 1.04 Distributions From income (excluding dividends) $ From dividends $ From capital gains $ Return of capital $ Total Annual Distributions (4) $ Net assets, end of period $ 23.87 20.63 19.50 18.66 * Initial net assets. This information is derived from the ETF s audited financial statements. Includes commissions and other portfolio transaction costs and withholding taxes. (3) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit. (4) Distributions were either paid in cash or reinvested in additional units of the ETF, or both. (5) The information shown in this column is for the period beginning February 10, 2014 (the ETF s establishment date) and ending December 31, 2014. Ratios and Supplemental Data Listed CAD Units 2017 2016 2015 2014 2013 Total net asset value (000 s) $ 627,705 719,521 860,872 701,914 741,867 Number of units outstanding (000 s) 28,841 37,441 46,380 38,613 41,655 Management expense ratio % 0.23 0.23 0.23 0.29 0.41 Management expense ratio before waivers or absorptions % 0.23 0.23 0.23 0.29 0.41 Trading expense ratio (3) % 0.10 0.07 0.10 0.02 0.28 Portfolio turnover rate (4) % 65.03 98.70 39.24 31.35 143.31 Net asset value per unit $ 21.76 19.22 18.56 18.18 17.81 Closing market price $ 21.80 19.24 18.60 18.19 17.88 Unlisted Institutional Units 2017 2016 2015 2014 (5) Total net asset value (000 s) $ 0 0 0 0 Number of units outstanding (000 s) 0 0 0 0 Management expense ratio* % * * * * Management expense ratio before waivers or absorptions* % * * * * Trading expense ratio (3) % 0.10 0.07 0.10 0.02 Portfolio turnover rate (4) % 65.03 98.70 39.24 31.35 Net asset value per unit $ 23.87 20.63 19.50 18.66 * Management fees are paid directly to the Manager as negotiated with the investor. This information is provided as at December 31 of the period shown. Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period. (3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. (4) The ETF s portfolio turnover rate indicates how actively the ETF s portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. The higher an ETF s portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of an ETF. (5) The information shown in this column is for the period beginning February 10, 2014 (the ETF s establishment date) and ending December 31, 2014. Past Performance The ETF s performance information assumes that all distributions made by the ETF in the periods shown were used to purchase additional units of the ETF and is based on the net asset value of the ETF. The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the ETF has performed in the past does not indicate how it will perform in the future. On April 1, 2013, the ETF changed its investment objective and underlying index from the Dow Jones Developed Markets ex-north America Index (CAD hedged) to the MSCI EAFE 100% Hedged to CAD Index. In addition, the ETF reduced its maximum annual management fee rate from 0.455% to 0.35%. 20
On May 1, 2014, the ETF reduced its maximum annual management fee rate from 0.35% to 0.20%. These changes could have affected the performance of the ETF, had they been in effect throughout the performance measurement periods presented. Year-by-Year Returns The following bar charts show the performance of the ETF for each of the financial years shown. The charts show, in percentage terms, how much an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year. Listed CAD Units 28% 14% 0% -14% -28% 28% 14% 0% -14% -28% 0.44 1.12 Unlisted Institutional Units -12.59 18.40 25.86 5.51 4.53 6.52 2009 2010 2011 2012 2013 2014 2015 2016 2017 6.19 4.22 5.79 16.12 15.75 2014 2015 2016 2017 For the period beginning with the performance launch date of October 20, 2009 to December 31, 2009. For the period beginning with the performance launch date of January 3, 2014 to December 31, 2014. Annual Compound Returns This table compares the historical annual compound returns of the ETF with its benchmark index, the MSCI EAFE 100% Hedged to CAD Index. The MSCI EAFE 100% Hedged to CAD Index is an equity index that captures large and mid capitalization representation across developed market countries around the world, excluding the U.S. and Canada. The MSCI EAFE 100% Hedged to CAD Index covers approximately 85% of the free float-adjusted market capitalization in each country. Foreign currency exposure is also hedged back to the Canadian dollar. As of December 31, 2017 Listed CAD Units Since 1Yr 3Yr 5Yr 10Yr Inception BMO MSCI EAFE Hedged to CAD Index ETF % 16.12 8.94 11.42 7.46 MSCI EAFE 100% Hedged to CAD Index % 16.46 9.04 11.95 8.27 Unlisted Institutional Units Since 1Yr 3Yr 5Yr 10Yr Inception BMO MSCI EAFE Hedged to CAD Index ETF % 15.75 8.47 7.91 MSCI EAFE 100% Hedged to CAD Index % 16.46 9.04 8.49 Return from the performance launch date of October 20, 2009 to December 31, 2017. Return from the performance launch date of January 3, 2014 to December 31, 2017. A discussion on the relative performance of the ETF as compared to its benchmark index can be found under the Results of Operations section of this report. 21
Summary of Investment Portfolio As at December 31, 2017 Portfolio Allocation % of Net Asset Value Japan................................................. 22.9 United Kingdom......................................... 14.8 France................................................. 9.5 Germany............................................... 9.3 Switzerland............................................. 8.2 Australia............................................... 6.8 United States............................................ 5.7 Netherlands............................................. 4.4 Hong Kong.............................................. 3.3 Spain.................................................. 3.1 Sweden................................................ 2.7 Italy.................................................. 2.0 Denmark............................................... 1.8 Singapore.............................................. 1.2 Belgium................................................ 1.1 Cash/Receivables/Payables................................. (0.3) Other.................................................. 3.5 Total Portfolio Allocation 100.0 Sector Allocation % of Net Asset Value Financials.............................................. 20.4 Industrials............................................. 14.2 Consumer Discretionary................................... 11.3 Consumer Staples........................................ 10.6 Health Care............................................. 9.3 Materials............................................... 7.8 Information Technology.................................... 6.3 International Equity Fund................................... 5.5 Energy................................................. 5.1 Telecommunication Services................................. 3.6 Real Estate.............................................. 3.3 Utilities................................................ 2.9 Cash/Receivables/Payables................................. (0.3) Top 25 Holdings % of Net Asset Value ishares MSCI EAFE ETF*..................................... 5.5 Nestle S.A............................................... 1.8 HSBC Holdings PLC........................................ 1.4 Novartis AG............................................. 1.3 Roche Holding AG........................................ 1.2 Toyota Motor Corporation................................... 1.2 British American Tobacco p.l.c................................ 1.0 Royal Dutch Shell plc, A Shares.............................. 1.0 BP p.l.c................................................. 0.9 Total S.A................................................ 0.9 BHP Billiton Plc.......................................... 0.8 Royal Dutch Shell plc, B Shares.............................. 0.8 SAP SE................................................. 0.8 Commonwealth Bank of Australia............................. 0.8 Siemens AG............................................. 0.8 Allianz SE............................................... 0.7 BASF SE................................................ 0.7 AIA Group Limited........................................ 0.7 Bayer AG............................................... 0.7 Novo Nordisk A/S, Class B.................................. 0.7 Diageo plc.............................................. 0.7 Unilever N.V............................................. 0.7 Anheuser-Busch InBev SA/NV................................ 0.6 Sanofi................................................. 0.6 Daimler AG............................................. 0.6 Top Holdings as a Percentage of Total Net Asset Value 26.9 Total Net Asset Value $627,705,031 * The prospectus and other information about the underlying exchange traded fund held in the portfolio may be found on the issuer s website. The summary of investment portfolio may change due to the ETF s ongoing portfolio transactions. Updates are available quarterly. Total Sector Allocation 100.0 22
This document may contain forward-looking statements relating to anticipated future events, results, circumstances, performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions, interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which the ETF may invest in and the risks detailed from time to time in the ETFs prospectus. We caution that the foregoing list of factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Asset Management Inc. does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, unless required by applicable law. BMO exchange traded funds are managed and administered by BMO Asset Management Inc., an investment fund manager and portfolio manager and separate legal entity from Bank of Montreal. BMO (M-bar roundel symbol) is a registered trade-mark of Bank of Montreal. The ETF or securities referred to herein are not sponsored, endorsed, sold or promoted by MSCI Inc. or any of its affiliates or information providers or any third parties involved in any MSCI index (the MSCI Parties ). The MSCI Parties do not make (and hereby disclaim) all representations and warranties, express or implied, to (a) the issuer or owners of the ETF, or securities referred to herein and (b) any other person or entity regarding the ETF or securities. None of the MSCI Parties shall have any liability with respect to (i) the ETF or securities or any index on which the ETF or securities are based, (ii) any errors, omissions or interruptions of or in connection with any MSCI index or any data included therein, or (iii) any direct, indirect, special, punitive, consequential or any other damages (including lost profits). The ETF s prospectus contains a more detailed description of the limited relationship MSCI has with the Manager and any related ETFs. www.bmo.com/etflegal For more information please call 1-800-361-1392 23