Mark Webster, Vice President, Exchange Traded FundsBMO Global Asset Management

Smart Beta: The Future of Your Portfolio

Superior Smart Beta

Innovative Speciality Solutions

Effective Core

Solutions

Comprehensive Fixed Income

*Calculations based on Bloomberg data†CREDO Research February 2013 Loyalty Ranking Survey of 33 financial services firms

BMO ETFs

BMO ETFs – Our Strategy

“ Global assets in strategic beta ETFs have increased by 87% in two years and now account

for US$380 billion” Morningstar data

Source: Morningstar Canada – “Are strategic-beta ETFs a threat to active fund managers? “ Feb 2015

• Smart beta or “factor investing” is a strategy that institutional investors have been using since the 1970’s

• Rules based investing built around factors that have exhibited enhanced risk adjusted returns over the long term

• Can be market or trading factors, fundamental balance sheet factors, or multi-factor strategies

• Also known as strategic beta and enhanced beta

Smart Beta Defined

Smart Beta

Active Management

Complex & Costly

PassiveInvesting

MarketReturn

Rule Based & Low Cost

Active Return

• Smart beta brings together the best of both worlds by blending the benefits of traditional market capitalization indexing with active management

• Smart beta is based on finding outcome oriented solutions

• Smart beta can be used as either complimentary or replacement strategies

Smart Beta Strategies

PortfolioPortfolioPortfolioPortfolioReturnReturnReturnReturn

SectorBeta

BetaBetaBetaBeta

AlphaAlphaAlphaAlphaFactorFactorFactorFactorBetaBetaBetaBeta

AlphaAlphaAlphaAlpha

Country Beta

1970s1970s1970s1970s 1980s1980s1980s1980s 2000s2000s2000s2000s

RegionalBeta

• 1970s: Total return approach

• 1980s: Deconstructing manager value add (alpha) from market returns (beta)

• Today:Deconstructing alpha into multiple factor components plus security selection

Beta Deconstruction

• Market capitalization investing still makes up the majority of passive assets, smart beta strategies are gaining momentum

• Low-volatility and dividend weighted strategies have been the most popular

• Smart Beta equity global assets have quadrupled since 20081

Current Assets (US$B) Current Assets (US$B) Current Assets (US$B) Current Assets (US$B) 2013 Flows (US$B) 2013 Flows (US$B) 2013 Flows (US$B) 2013 Flows (US$B)

1 Data as of November 2014 - Global ETF Assets (US) , Data – CETFASource: Investor Economics Insight January 2015 Annual ReviewEmergence of Smart Beta ETFs in Canada

2012 2014

# of Smart Beta ETFs 43 64

Assets in Smart Beta ETFs (millions) 4,914 8,676

Smart Beta Growth

• More recent strategies either combine single factor portfolios, or use multi-factor holistic portfolios

Passive Index Fund

Equally Weighted

Market Factor Based

Fundamentally Weighted

Multi-Factor

Smart beta strategies can be customized to meet investor demand

Smart Beta Evolution

• Deconstruct portfolio performance to geographic, sector, and factor biases to isolate security selection skills

• Create a modular portfolio based on views of market efficiency

• Complete a core-satellite approach

• Correct biases of a managed portfolio

1. Portfolio risk profile

2. Portfolio factor profile

3. Portfolio pricing

ModifyModifyModifyModify

Smart Beta & Active Management

• Research has shown that six key factors have historically earned a persistent premium over longer time periods relative to traditional market cap-weighted portfolios

• These factors play an important role in portfolio construction and security selection

SizeSizeSizeSize

YieldYieldYieldYield

MomentumMomentumMomentumMomentum

ValueValueValueValue

Low VolatilityLow VolatilityLow VolatilityLow Volatility

QualityQualityQualityQuality

It is possible to capture Value & Momentum by screening for other desirable attributes:� Dividend & Low Volatility

reflect Value:� Quality picks up the

Momentum benefits

Smart Beta Factors

Superior Smart Beta:BMO ETFs

• Selected factors that deliver long term outperformance

• Effective portfolio construction – can be used a core portfolio holding

• Targeted exposures across various regions and countries

• Reduced portfolio risk

BMO ETFs is one of the global leaders in smart-beta solutions, with about 25% of our global ETF AUM in various factor-based and smart-beta

products1

1 BMO Global Asset Management – Feb 2015

BMO ETFs Smart Beta Focus

• Effective exposure across market cycles

Why Quality?

Fundamental Screening Variable

1. High Return on Equity – Screens for companies that have solid fundamentals

2. Stable year-over-year Earnings Growth – Identifies growing companies are positioned to consistently outperform over the long term

3. Low Financial Leverage – Identified companies with low volatility

ZEQMSCI Europe High

Quality Index Hedged to CAD ETF

ZUQMSCI US High Quality

Index ETF

ZGQMSCI ACWI High Quality Index ETF

Quality

Factors 1. Large Cap Equity Universe - dividends

2. Dividend Growth – upside potential

• Based on 3 year dividend growth rate

• Illustrated company’s willingness to pay and grow dividends

3. Dividend Payout Sustainability – avoid yield traps

• 5 year analysis and weighted to the most recent year

• Forward looking consideration

4. Yield Weighted – enhanced yield

• Sector and security cap applied to ensure diversified portfolio

Focused on higher yields with sustainable growth

ZUDUS Dividend Hedged

to CAD ETF

ZDY/ZDY.UUS Dividend ETF

ZDVCanadian Dividend

ETF

ZDIInternational Dividend

ETF

Dividend

Dividend Strategies – What to Look For?

Avoid yield trapsAvoid yield traps

• Dividend strategies can be viewed as a core holding for income oriented investors

• Is the dividend sustainable?

• Look for a measure of growing payments

• Look for a measure of financial health and payout ratios

• Where are the risks?

• Dividend cuts

• Sector biases

• Capitalization biases

Avoid the surprise of unintended biases

Dividend Strategies – BMO’s Approach

• Yield weighted to emphasize high dividend payers

• Constituents screened for sustainability of dividend payment

• Overall portfolio constraints and controls to ensure no undue concentration or biases

ZUDUS Dividend Hedged

to CAD ETF

ZDY/ZDY.UUS Dividend ETF

ZDVCanadian Dividend

ETF

ZDIInternational Dividend

ETF

• Ability to target a specific portfolio risk that is lower than the board market

• Lower volatility stocks have historical outperformed the broad market over the long-term

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

ZLB S&P/TSX Capped Composite

ZLU/ZLU.ULow Volatility US

Equity ETF

ZLBLow Volatility

Canadian Equity ETF

Source: Morningstar as of Feb 2015 – Data based on monthly returns from Nov 2011 – Feb 2015

Why Low Volatility?

• Beta weighted – smarter portfolio construction tool than standard deviation or other risk reduction approaches

• Balances short term trends with long term risks as beta is measured over five years with an emphasis on the most recent year

Low Volatility

• Selective strategy for more developed sectors to reduce security concentration typically found in other sector based ETFs

• Helps to reduce single security risk

ZREEqual Weight REITs

Index ETF

ZBKEqual Weight US Banks Index ETF

ZINS&P/TSX Equal

Weight Industrials Index ETF

ZUHEqual Weight US

Health Care Hedged to CAD Index ETF

0%0%0%0%20%20%20%20%40%40%40%40%60%60%60%60%80%80%80%80%100%100%100%100%CNRCNRCNRCNR CPCPCPCP OtherOtherOtherOtherBMO S&P/TSX Equal Weight Industrials Index ETF (ZIN)

Bloomberg - Data as of Feb 2015

Equal Weight

ComparisonsBMO Low Volatility

Canadian Equity ETFiShares MSCI Canada Min.

Volatility Index ETFPowerShares S&P/TSX Composite

Low Volatility Index ETF First Asset MSCI Canada Low Risk Weighted ETF

Ticker ZLB XMV TLV RWC

Index ProprietyMSCI Canada Minimum

Volatility (CAD)S&P/TSX Composite Low Volatility

Index MSCI Canada Low Risk

Weighted ETF

Weighting

Methodology

Beta Weighted • Ranks securities using

5 year beta

Variance• Optimized for lowest

absolute risk

Standard Deviation • Securities are ranked by 1 year

standard deviation

Variance • Ranks securities using a

3 year historical return

Additional Screens

Liquidity & Market Cap Market Cap - Market Cap

# of Holdings 40 75 50 95

Top 3 SectorsFinancials – 21.7%

Cons. Staples – 18.9%Energy – 14.2%

Financials – 41.1%Energy – 18.0%

Cons. Staples – 9.5%

Financials – 66.6%Utilities – 8.5%

Cons. Disc. – 7.2%

Financials – 38.6%Energy – 18.1%

Cons. Disc. – 8.3%

Sectors Limits 35% None None None

AUM 485 million 23 million 48 million 6 million

MER 40 bps 33 bps 33bps 60 bps

TER 1bps 1 bps 4bps 1bps

Holdings Physical Physical Physical Physical

Source: BMO ETFs, iShares, Poweshares & First Asset – Feb 2015

Comparisons

BMO Canadian Dividend ETF iShares Canadian Select

Dividend Index ETFiShares S&P/TSX Canadian

Dividend Aristocrats Index ETF

Ticker ZDV XDV CDZ

Index Proprietary Dow Jones Canada Select

DividendS&P/TSX Canadian Dividend

Aristocrats

WeightingMethodology

Yield Yield Yield

Additional Screen

3 year dividend growth rate5 year analysis of payout ratio

with forward looking consideration

3 year dividend growth rate 5 year dividend coverage ratio

Non- negative EPS

5 consecutive years of increased dividend

Min. C$ 300 million market cap.

AUM 567 million 1.4 billion 1 billion

MER 40 bps 55 bps 66 bps

TER 4 bps 0 bps 3 bps

# of Holdings 51 31 74

Sector Cap 35% - -

Top 3 Sectors Financials – 31.9%

Energy – 26.5%Cons. Disc. – 11.9%

Financials – 55.5%Comm. – 13.4%Energy – 11.8%

Financials – 25.0%Energy – 22.1%

Industrials – 14.5%

Source: BMO ETFs & iShares – Feb 2015

Alternative Strategies – Covered Calls

• Generates additional income while reducing portfolio volatility, making covered calls income substitutes for lower yielding products

• Benefits: additional yield provides limited downside protection, outperforms in a down or flat market

• Costs: will underperform in strong short term runs, or potentially in longer choppy markets, as the portfolio return is capped by the strike prices of the options

• Return profile: similar long term returns to traditional portfolios, with lowered risk levels

Covered Calls – Where Does the Yield Come From?

Portfolio Dividend Yield – look for a good yield base, a portfolio with dividend yield

Portfolio Volatility – avoid high volatility, while these securities will have higher premiums, they are

subject to large downside moves. Leave these securities to aggressive growth investors

Option Selection – Pick shorter dated, OTM options. Look for options with 1 to 2 months to expiry to

take advantage of time decay and to reset the portfolio in rising markets. OTM options allow for some growth.

Percentage Written – be aware of how much of the portfolio is overwritten. By not writing on the entire

portfolio, more upside is available.

Covered Calls – Where Are the Risks?

• Large market movements and volatility – a covered call strategy outperforms in flat, down, or moderately rising markets. It underperforms in quickly rising or choppy markets.

• Overly Aggressive Call Writing – an over emphasis on yield based on writing too close to the money in combination with writing on a high percentage of the portfolio, may deplete the invested capital.

• Promised or Expected Yields – the calls are selected based on premium levels and volatility. The writing strategy should be dynamic by responding to market conditions, to avoid capital depletion.

Covered Calls – BMO’s Implementation

• We target a sustainable yield as we pay only the income received

• As volatility rises we write further out of the money, as volatility falls, we write closer to the money

• Calls are written 1 to 2 months to expiry to maximize time decay

• We write on 50% of the portfolio to allow for upside participation

� ZWH/ZWH.U BMO US High Dividend � ZWB BMO Canadian Banks � ZWU BMO Utilities� ZWA BMO Dow 30 Hgd to CAD

� BMO team developed several ‘ETF world firsts’Recent Highlights:

• Launched and manage over 62 ETF Disclaimer s different beta strategies across equities, fixed income and derivative strategies

• Offer the most comprehensive line-up of fixed income beta strategies

• Smart beta solutions that provide effective long term exposures based on in-depth security selection and risk mitigating portfolio construction

• A global leader in innovation, developing solutions such as Covered Call Strategies, Preferred Share Ladder, Low Volatility and alternative beta ETFs

• Efficient broad market ETFs with industry leading benchmarks at market leading pricing

BMO ETF Advantage