BMO adds emerging markets ETF to ‘Income Leaders’ suite

Jan 12th, 2017 | By | Category: Equities

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BMO Global Asset Management has expanded its ‘Income Leaders’ suite of exchange-traded funds with the launch of the BMO MSCI Emerging Markets Income Leaders UCITS ETF (LON: ZIEM).

Marc Knowles BMO Global ETFs

Marc Knowles, Director of ETFs Europe, BMO Global Asset Management.

Developed in collaboration with MSCI, the ‘Income Leaders’ ETF suite seeks to provide investors with sustainable income from high calibre companies. The underlying indices use a multi-factor approach, first screening stocks for quality before selecting those with the highest dividend yields. By identifying quality firms, the strategy aims to select companies with long-term sustainable business models and clear competitive advantages.

The fund tracks the MSCI Emerging Markets Select Quality Yield Index, based on the MSCI Emerging Markets Index, which includes large and mid-capitalisation stock across emerging market countries. The index’s methodology identifies the 50% of constituents of the MSCI Emerging Markets Index scoring highest on three main fundamental variables: high return on equity (ROE), stable year-over-year earnings growth and low financial leverage. The second step is to identify the 50% of the securities identified through the first step which have the highest dividend yield. The index rebalances on a semi-annual basis and is market capitalisation weighted with a 5% issuer cap.

Rob Thorpe, Head of UK Intermediary, BMO Global Asset Management (EMEA), commented: “As the low yield, low interest rate environment continues, investors’ focus on yield coupled with their concerns around volatility are only intensifying. At BMO Global Asset Management, our priority is to innovate and seek solutions to the challenges that investors are faced with and that is why we have created our ETF range to be fully aligned with investors’ needs. We are delighted to add the BMO MSCI Emerging Markets Income Leaders UCITS ETF to our current Income Leaders ETF range.”

The ETF addresses the shortcoming of strategies based on dividend yield alone, which overlook the ability of the underlying companies to continue paying dividends. By assessing company profitability and leverage to identify those with the ability to generate strong future cash flows, investors are more likely to avoid falling into a value trap.

The fund may also provide an intelligent strategy for navigating market volatility, a factor which may be more pressing for investors in emerging markets as Marc Knowles, Director of ETFs Europe, BMO Global Asset Management, explains:

“Emerging market equities have historically been more volatile than those in developed markets and more sensitive to swings in the US dollar,” he said. “Investments in quality companies with lower debt levels can help to reduce the portfolio volatility and deliver enhanced risk adjusted returns. Furthermore, a company’s stable earnings stream is a good indicator that they are better suited to cope with market shocks. Our Emerging Markets Income Leader ETF is constructed to help investors meet these challenges.”

As of 31 December 2016, the underlying index was up 11.9% over the year with an annualized five-year standard deviation of 15.9%. This compared favourably to growth of 11.2% with an annualized five-year standard deviation of 16.2% for the MSCI Emerging Markets Index over the same period. Additionally the dividend yield was higher at 4.2% compared to 2.6% for the MSCI Emerging Markets Index.

BMO MSCI Income Leaders ETF

Source: MSCI.

The largest country exposures are to Taiwan (24.6%), China (19.6%), South Africa (11.5%), Brazil (8.6%) and Indonesia (6.6%) and the largest sector exposures are to financials (25.9%), information technology (16.5%), telecommunications (14.9%), consumer staples (11.6%) and consumer discretionary (9.3%).

The fund trades in British pounds and has a total expense ratio (TER) of 0.38%.

BMO entered the European ETF marketplace in November 2015 by rolling out five ‘Income Leaders’ ETFs along with four fixed income ETFs aimed at helping UK and European investors diversify their exposure to global investment grade corporate bonds and high yield bonds.

The full ‘Income Leaders’ suite, listed below along with their respective TERs, now consists of portfolios allocated to emerging markets, UK, US and European equities.

BMO MSCI USA  Income Leaders UCITS ETF (LON: ZILS): TER – 0.35%
BMO MSCI Europe ex-UK Income Leaders UCITS ETF (LON: ZILE): TER – 0.35%
BMO MSCI UK Income Leaders UCITS ETF (LON: ZILK): TER – 0.35%
BMO MSCI USA Income Leaders (GBP Hedged) UCITS ETF (LON: ZISG): TER – 0.40%
BMO MSCI Europe ex-UK Income Leaders (GBP Hedged) UCITS ETF (LON: ZIEG): TER – 0.40%
BMO MSCI Emerging Markets Income Leaders UCITS ETF (LON: ZIEM): TER – 0.38%

The fund will compete with the PowerShares FTSE Emerging Markets High Dividend Low Volatility ETF (LON: EMHD) which, through tracking the FTSE Emerging High Dividend Low Volatility Index, provides exposure to 100 emerging markets securities screened by dividend yield and then volatility. Constituents are weighted according to their dividend yields. The fund has a TER of 0.49%.

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