BMO has quietly made its asset allocation ETFs more tax efficient — and most investors haven’t noticed.
In this video, I break down the recent changes to:
- ZCON (BMO Conservative ETF)
- ZBAL (BMO Balanced ETF)
- ZGRO (BMO Growth ETF)
Behind the scenes, BMO replaced traditional aggregate bond exposure with discount bond strategies that may improve after-tax returns for investors holding these ETFs in a taxable (non-registered) account.
We’ll cover:
- Why ZAG was replaced with ZDB
- How discount bonds improve tax efficiency
- The estimated after-tax impact for each ETF
- The difference between ZUAG.F and Vanguard’s VBU
- Why coupon management matters in taxable accounts
- Whether this changes the BMO vs Vanguard vs iShares decision
If you’re investing in asset allocation ETFs in a non-registered account, this may be worth understanding before making new contributions.
Chapters:
00:00 – Introduction
00:56 – BMO vs Vanguard Size Comparison
01:29 – The ZDB Swap Explained
02:25 – Estimated After-Tax Benefit
03:08 – U.S. Bond Structure Surprise
04:45 – Coupon Management Advantage
06:12 – Should You Switch?
New-ish to DIY ETFs. I’ve been reading about the importance of tracking the ACBs for ETFs in taxable accounts (it seems complicated and I’m terrible at math). I’ve been considering investing in ZBAL however, I read that ZBAL is rebalanced quarterly. Does this impact ACB tracking? If I invest with a roboadvisor such as Just Wealth do I still need to track the ACBs? (I would love to invest with PWL but I don’t meet the criteria) Thank you!
@Stacey – ZBAL pays quarterly distributions, so there will likely be four ACB transactions per year that require an update (but the other product providers would have similar requirements). Most brokerages attempt to track the ACB for their clients, but I would still recommend doing this manually to ensure they don’t make any mistakes :)
Here’s a video on the process: https://www.youtube.com/watch?v=84qCOhMuA8g
If one decided to keep their bonds separate from a single all-equity ETF, is holding only ZDB sufficient? The ZUAG.F structure is very interesting, but would make re-balancing a bit more involved compared to these asset allocation ETFs that include everything together.
@Robert – It’s up to each individual investor. I tend to hold ZDB in non-registered accounts and 1-5 year laddered GICs in RRSPs whenever possible in my client accounts (I don’t generally add a tax-efficient U.S. bond ETF to the portfolios, like ZUAG.F). I think it’s great in an asset allocation ETF, but maybe not ideal if a DIY investor is managing a mix of ETFs.
It’s fantastic to have a tax-efficient all in one ETF option for those investing in a taxable account. That did not exist before so kudos to BMO.
Though I am also a fan of VIC1000 (et al) for a mutual fund option in taxable accounts, which also allows for easier tracking of ACB (or so I believe). Questrade let’s you buy mutual funds for $9.95 so if you limit yourself to one or two trades a year it can be cost-effective.
However, I’m interested in the implications for ZGRO and ZBAL in registered accounts. Would there be any downside to holding these in registered accounts compared to vanguard and iShares alternatives?
@Mark H – Good question. The only downside I see of holding ZBAL or ZGRO in registered accounts (instead of something like VBAL or VGRO) is modest short-term tracking error (As ZDB and ZUAG.F are targeting lower coupon bonds, they won’t track the the broad Canadian and U.S. bond markets as closely over the short-term).
But other than that very small nuance, I don’t see any issues.
If you’re investing in a taxable account, does this change make you reconsider which asset allocation ETF you use for new money?