Smart Investment Strategies Amid Canadian Market Highs

Investors in Canada are facing a dilemma as stock prices reach record highs. Many new investors are tempted to time the market, worrying they might be buying at the peak. However, experts argue that this perspective may overlook the long-term benefits of investing in a diversified portfolio, particularly for those with a time horizon extending to retirement.

While market highs can induce anxiety, there are alternatives to cash that may offer better returns. Savings account yields have already declined from their 2022 peaks, making traditional savings less appealing. One promising option is the BMO Low Volatility Canadian Equity ETF (TSX:ZLB), which focuses on lower-risk stocks designed to mitigate volatility while maintaining decent returns.

Understanding the BMO Low Volatility Canadian Equity ETF

The BMO Low Volatility Canadian Equity ETF does not adhere to a standard market-cap-weighted index. Instead, it employs a rules-based, active management strategy that screens for Canadian stocks with lower beta values. Beta measures a stock’s sensitivity to market movements, with a beta of one indicating a stock moves in line with the S&P/TSX 60 Index. Stocks with lower beta values tend to be less volatile, making them an attractive option for cautious investors.

This ETF allocates more weight to sectors like consumer staples and utilities, known for their steady demand regardless of economic conditions. These sectors, often referred to as defensive, typically maintain stable sales even in challenging times, as consumers continue to purchase groceries and pay utility bills.

Despite the focus on lower volatility, investors should note that these stocks are not without risk. During significant market downturns, they can still experience sharp declines. However, they have historically demonstrated less daily fluctuation and quicker recovery times. Over the past decade, the ZLB ETF has provided an impressive annualized total return of 10.59%, outperforming the broader Canadian market.

Investment Considerations and Tax Efficiency

Investors should be aware that the stability offered by ZLB comes at a cost. With a management expense ratio of 0.39%, or approximately $39 per $10,000 invested annually, it is more expensive than traditional index funds. However, it also offers an annualized yield of around 2% for 2024, derived from eligible dividends, capital gains, and return of capital, thereby enhancing its tax efficiency.

Given its structure, ZLB is particularly well-suited for registered accounts such as a Tax-Free Savings Account or a Registered Retirement Savings Plan, where reinvestment of dividends can effectively compound returns over time.

The preference for ZLB over broader Canadian market ETFs stems from its reduced reliance on more volatile sectors like financials and energy. This strategy contrasts with many dividend-heavy ETFs in Canada that lean heavily on these cyclical industries. The higher fees associated with ZLB may be justified by its potential for smoother performance and better protection against market downturns, especially in an environment where stock valuations appear elevated.

In summary, while the current market highs may induce apprehension among investors, options such as the BMO Low Volatility Canadian Equity ETF present viable alternatives. By focusing on stability and lower volatility, this ETF caters to those seeking to navigate the complexities of the market while still aiming for growth.