In this Review we will compare BMO ETF vs iShares core ETF portfolios and help you get the right ETF.

BMO & iShares Asset Allocation

BMO asset allocation ETF’s deserve your attention as well , the only reason you probably don’t care about BMO as often as Vanguard or iShares is because investors just don’t ask about them as often today .

Unlike iShares which has 5 asset allocation ETF’s to choose from BMO has so far launched only 3 ETFs with options for 40% , 60% and 80% stock allocations.

Too fewer funds is not likely a deal breaker for most investors as the most popular asset allocation ETF’s tend to be more of a balanced and the growth portfolios . Most of the three funds include several underlying ETF’s which invests in thousands of individual stocks and bonds providing Canadian investors with extensive global diversification

BMO product fees are also comparable to the iShares portfolios with MER of 0.2%

There’s one obvious difference between the BMO and iShares asset allocation ETF’s . BMO excludes small cap foreign stocks in their funds while the iShares portfolios include them.

In fact the iShares portfolios include more than 6000 additional stocks.  You might think having more small cap stock exposure is better but since the Market Indexes tracked by both the BMO and iShares portfolios are market cap weighted, larger companies will take up most of the weight near portfolio any way.  The performance of these bigger companies will have significantly more impact on your risk and returns than the thousands of smaller companies excluded from the BMO funds.

Coming to iShares ETF portfolios , these smaller companies make up only around 10 to 20% of US, International and Emerging markets equity.

Let’s check out the historical performance of an all equity index portfolio containing small cap foreign stocks versus another portfolio with no small cap foreign companies over the past 25 years

In December 2019 both portfolios had an annualized return of 8.2% and both portfolios had similar risks with standard deviations of 11.7% .

If we plot this data in a graph showing the growth of $10,000 over this period. We find that the blue and Gray lines are almost identical. In other words whether or not your asset allocation ETF includes thousands of additional small cap companies is not a decision worth agonizing over.

Your investment returns are mostly going to be determined by the performance of the larger companies within the portfolio . One of the factors deriving which one to select , BMO ETF vs iShares

Foreign Stocks versus Domestic Stocks Coverage

Let’s now talk about Foreign Stocks versus Domestic Stocks Coverage .

Both iShares & BMO has allocated 25% of its equity mix to Canadian stocks and 25% to international developed market stocks .

U.S. stocks receive another 40 to 41.5% weighting in BMO portfolios , which is slightly lower than the 45% U.S. stock allocation found in the iShares.

BMO allocates between 10% and 8.75% to these developing markets where as iShares allocates just 5%. You’ll notice that I share significantly underweight emerging markets and overweight’s the US stock market relative to BMO.

Conclusion : If you prefer more emerging market stocks in your portfolio BMO is the way to go .

Some Investors may have already noticed that the BMO asset allocation ETF’s hold a more tax efficient emerging markets equity ETF than its I Shares counterpart . It specifically holds the BMO MSCI emerging markets index ETF with ticker symbol ZEM.

ZEM holds most of its underlying stocks directly resulting in one less layer of unrecoverable form withholding taxes across all account types.

Fixed Income Holdings

In comparison the emerging markets equity holding in the iShares portfolios will have an additional layer of tax drag however ZEM structure generates other indirect costs .

ZEM don’t increase tax efficiency as a make or break reason to favor BMO ETF’s over the iShares.

Regards to Portfolio Fixed Income allocations , BMO targets 90% Canadian and 10% foreign bonds but that foreign allocation is made up entirely of US mid term investment grade corporate bonds. BMO also hedges away the foreign bonds currency risk which makes them behave more like Canadian bonds.

In comparison, iShares targets 80% Canadian and 20% US bonds in their portfolios split evenly between government and corporate investment grade issues. iShares also hedges away to foreign currency risk.  

BMO Bond portfolios have a couple of other characteristics to note.

 1. Their government bond allocation is slightly higher compared to the I shares portfolios around 72% versus 68%

2. Most bond portfolio has a higher average maturity and duration than the iShares bond portfolio so it’s expected to be more sensitive to changes in interest rates . The higher duration may make the most BMO Bond portfolio a bit more volatile but the extra helping of government bonds also decreases the credit risk .

BMO Portfolio will be good if you prefer more Government Bonds in your portfolio.

BMO ETFs are tight contenders to both iShares and Vanguard ETFs.

Hope these details and comparison on “BMO ETF vs iShares” have provided you enough information to choose the right ETF.

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