In January 2023, BMO (TSX:BMO) Global Asset Management again demonstrated its commitment to providing Canadian investors with innovative financial solutions, by launching a new series of distributing asset allocation ETFs to complement its existing lineup.
The new BMO Growth ETF (TSX:ZGRO) (Fixed Percentage Distribution Units) (ZGRO.T) and BMO Balanced ETF (T6 Series) (ZBAL.T) augment BMO's existing lineup of "vanilla" asset allocation ETFs with a unique twist: a fixed 6% annual distribution yield paid out on a monthly basis.
Let's break down how these funds work and the potential use cases for Canadian ETF investors.
Understanding the new BMO ETFs
The base elements of both ZGRO.T and ZBAL.T follow the established conventions of the existing BMO asset allocation ETF lineup, which include global diversification and a bond allocation ranging from 20% (in the case of ZGRO.T) to 40% (in the case of ZBAL.T)
Both ETFs use an "ETF of ETFs" structure, wrapping numerous underlying BMO ETFs that cover U.S., Canadian, international developed, and international emerging equities, along with Canadian and U.S. aggregate, government, and investment-grade corporate bonds.
Where ZGRO.T and ZBAL.T begin to differ is with respect to their distribution frequency and size.
Both ETFs are targeting a fixed 6% annual yield with monthly payments. These payments will be comprised of a combination of capital gains, dividends, or interest income. During down markets where these are insufficient to fund the target 6% yield, there may also be return of capital.
Since inception, both ZGRO.T and ZBAL.T have paid a consistent distribution. ZGRO.T has paid $0.15 per month from February to April, while ZBAL.T has paid $0.135 per share from January to April. Both ETFs also charge the standard BMO asset allocation ETF expense ratio of 0.20%.
Why use these ETFs?
Retirees often face a myriad of financial challenges, one of which is the psychological and irrational aversion to selling shares in order to fund withdrawals and income needs. This reluctance can stem from a fear of depleting hard-earned savings or from the notion that selling equities in a portfolio is equivalent to admitting defeat, especially during a downturn.
This mindset can potentially lead to suboptimal decision-making, increased risk exposure, and, ultimately, jeopardizing one's financial security in retirement. Some retirees trying to fund withdrawals and income needs solely via fund distributions may even end up yield-chasing. This can lead to concentration risk in high-yielding stocks or derivative-based income funds like covered call ETFs.
The BMO fixed monthly distribution ETFs are an innovative solution that can potentially help retirees overcome these psychological barriers. By having the fund manager manage and payout distributions, ZGRO.T and ZBAL.T can help provide a more consistent and dependable fixed monthly income stream.
Beyond the benefits of the fixed 6% yield, investors still receive exposure to all the benefits of normal non-distributing BMO asset allocation ETFs, which include high diversification, passive indexing, low turnover, tax efficiency, good transparency, and minimal fees.
In short, using these new distributing asset allocation ETFs can potentially alleviate the emotional burden associated with selling shares to fund living expenses, while also offering a diversified investment approach. These products can help retirees maintain their financial course, ensuring they continue to meet their income needs without compromising their long-term financial goals.
This content was originally published by our partners at the Canadian ETF Marketplace.