Many new investors try to time the market when stocks hit all-time highs, convinced they’re about to buy the top. I think that’s short-sighted. If you’re buying a broad, low-cost basket of Canadian stocks and your time horizon stretches decades—say, to retirement—it doesn’t really matter. Market highs are temporary, but long-term compounding isn’t.
Still, if you can’t shake the feeling that stocks look expensive, there are better places to park your money than cash. Yields on savings accounts have already fallen from their 2022 highs as short-term rates declined. 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.
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The ETF to buy
BMO Low Volatility Canadian Equity ETF (TSX: ZLB) doesn’t follow a traditional market-cap-weighted index. It’s a rules-based active ETF that screens 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 equities. A lower beta means the stock is less volatile, while a higher beta means it tends to swing more.
In ZLB’s case, that translates to a heavier weighting in consumer staples and utilities, sectors known for steady demand regardless of the economy. These are called defensive sectors because people still buy groceries and pay power bills in both good and bad times—demand is relatively inelastic.
Lower volatility doesn’t mean zero risk. During major market sell-offs, these stocks can still fall sharply. But historically, they’ve fluctuated less from day to day and recovered faster afterward. Despite the defensive tilt, ZLB has delivered an impressive 10-year annualized total return of 10.59%, which stacks up well against the broader Canadian market.
ZLB other nuances
This stability isn’t free. Because it’s an actively managed, non-index ETF, ZLB carries a 0.39% management expense ratio—about $39 per $10,000 invested each year.
You also get some income, with an annualized yield of around 2% for 2024. Roughly half of that comes from eligible dividends, while the rest is capital gains and return of capital, making it relatively tax efficient.
Still, it’s best suited for a registered account, such as a Tax-Free Savings Account or Registered Retirement Savings Plan, where you can easily reinvest dividends for compounding.
The Foolish takeaway
I like ZLB more than broad Canadian market ETFs because it’s less dependent on cyclical sectors like financials and energy. That’s a contrarian move in a country where most dividend-heavy ETFs lean heavily on those industries. Even with higher fees, the trade-off for smoother performance and stronger downside protection makes sense—especially when markets are expensive and volatility is rising.
