TSX hits all-time highs? These ETFs can be a good alternative

Many investors are worried right now. Concerns about falling home prices, slower immigration and continued rate uncertainty with the U.S. dominate the conversation about the Canadian economy. These concerns are valid, but it’s worth keeping a basic investing truth in mind: the economy is not the stock market, and the stock market is not the economy.

For investors, Canadian stocks have done much better than the headlines suggest. The S&P/TSX Composite hovering around new all-time highs, driven largely by strong profits from major Canadian banks and resilient performance in energy and materials. That creates a new challenge. What if you’re worried about buying at the top?

The standard answer is still diversification, low costs, and dollar-cost averaging. But if valuations are an issue, there are ways to stay invested without simply owning more of what has already risen the most. Exchange-traded funds (ETFs) that go beyond traditional market cap weighting offer such an approach. Below are two Canadian stock ETFs from BMO that take a different path.

Low volatility ETFs

If managing downside swings is more important to you than capturing every bit of upside, low-volatility strategies are worth a look. One option is BMO Canadian Stock ETF with Low Volatility (TSX:ZLB).

This is an actively managed ETF that looks for stocks with lower beta, a measure of how sensitive a stock is to market movements. A beta of one means the stock tends to move in line with the market. ZLB typically focuses on companies with betas below that level.

The result is a portfolio that still leans heavily toward financials, which is typical of Canadian stock funds, but also has an above-average allocation to consumer staples and utilities. These sectors tend to have more stable demand, which can help dampen volatility during market pullbacks.

Income is reasonable for a defensive stock ETF. The fund currently delivers an annualized return of 1.93%, taking into account the management expense ratio of 0.39%.

ZLB is also one of the largest and most established ETFs in Canada, with approximately $5.7 billion in assets. Despite the low volatility mandate, performance has held up well, with a ten-year annualized total return of 11.33%, assuming dividends are reinvested.

Canadian value stocks

If you’re concerned about high valuations and not volatility, ETFs can do the stock picking work for you. A good example is BMO MSCI Canada Value Index ETF (TSX:ZVC).

Unlike ZLB, this ETF is passive. It tracks the MSCI Canada Enhanced Value Cap Index, which selects stocks based on three fundamental measures: price-to-book value, forward price-to-earnings ratio and enterprise value-to-cash flow. The portfolio is relatively concentrated and contains approximately 50 stocks.

Sector exposure remains focused on financials, materials and energy, but with more selectivity than a simple market capitalization weighted index. The fund also offers an annualized return of 2.2%, after a management expense ratio of 0.4%.

ZVC is much smaller than ZLB, with about $43 million in assets, but size alone doesn’t determine usefulness. Over the past five years, the ETF has delivered an annualized total return of 17.84%, including reinvested dividends, showing that value strategies can still work.