Many new investors try to time the market when stocks hit an all-time high, believing they are about to buy the top. I think that’s shortsighted. If you buy a broad, cheap basket of Canadian stocks and your time horizon extends over decades (say, until retirement), it doesn’t really matter. Market highs are temporary, but long-term compounds are not.
But if you can’t shake the feeling that stocks look expensive, there are better places to park your money than cash. Savings account yields have already fallen from their 2022 peak as short-term interest rates fell. One option I like instead is a “smart beta” exchange-traded fund (ETF), designed to focus on lower-risk stocks that aim to smooth out volatility without giving up much return.
The ETF to Buy
BMO Canadian Stock ETF with Low Volatility (TSX:ZLB) does not track a traditional market cap weighted index. It is a rules-based active ETF that looks for Canadian stocks with lower beta, a measure of how sensitive a stock is to market movements.
A beta of one means a stock tends to move in line with the S&P/TSX 60 Index, the typical benchmark for Canadian stocks. A lower beta means the stock is less volatile, while a higher beta means it tends to fluctuate more.
In ZLB’s case, that translates into a heavier weighting in consumer staples and utilities, sectors known for stable demand regardless of the economy. These are called defensive sectors because people still buy groceries and pay their energy bills in both good and bad times; demand is relatively inelastic.
Lower volatility does not mean no risk. During major market selloffs, these stocks can still fall sharply. But historically, they fluctuated less from day to day and then recovered more quickly. Despite the defensive slant, ZLB has delivered an impressive ten-year annualized total return of 10.59%, which is well in line with the broader Canadian market.
ZLB other nuances
This stability does not come for free. Because it is an actively managed, non-index ETF, ZLB has a management expense ratio of 0.39%: approximately $39 per $10,000 invested per year.
You also get some income, with an annualized return of around 2% for 2024. About half of that comes from eligible dividends, while the rest is capital gains and returns on capital, making it relatively tax efficient.
Still, it’s best suited to a registered account, such as a tax-free savings account or registered retirement savings plan, where you can easily reinvest dividends to compound them.
The silly takeaway
I like ZLB more than broad Canadian market ETFs because they are less dependent on cyclical sectors like financials and energy. That’s a contrarian move in a country where most dividend-rich ETFs lean heavily on these sectors. Even with higher costs, the trade-off between smoother performance and stronger downside protection makes sense, especially when markets are expensive and volatility is increasing.
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