BMO Canadian MBS Index ETF (ZMBS) (the "ETF")
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ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE
BMO Canadian MBS Index ETF (ZMBS) (the “ETF”)
For the 12-month period ended December 31, 2021 (the “Period”)
Manager: BMO Asset Management Inc. (the “Manager” and “portfolio manager”)
Management Discussion Results of Operations
of Fund Performance The ETF outperformed the broad-based FTSE Canada
Universe Bond Index by 1.61%. However, the more
Investment Objective and Strategies
appropriate comparison is to the FTSE Canada NHA
The ETF seeks to replicate, to the extent possible, the
MBS 975 Index (the “Index”), due to the concentration
performance of a mortgage backed securities index, net
of the portfolio in Canadian mortgage-backed securities.
of expenses. Currently, the ETF seeks to replicate the
The ETF returned -0.93% versus the Index return of
performance of the FTSE Canada NHA MBS 975 Index
-0.80%. The change in total net asset value during the
(the “Index”). The investment strategy of the ETF is to
Period from approximately $128 million to approximately
invest in and hold the constituent securities of the Index
$268 million had no impact on the performance of the ETF.
in the same proportion as they are reflected in the Index.
The difference in the performance of the ETF relative to
The Manager may also use a sampling methodology in
the Index during the Period (-0.13%) resulted from the
selecting investments for the ETF. As an alternative to or
management expense ratio (-0.17%) and the impact of
in conjunction with investing in the constituent securities
sampling and certain other factors (0.04%), which may
of the Index, the ETF may invest in or use Other Securities
have included timing differences versus the Index, and
(as defined in the prospectus) to obtain exposure to the
market volatility.
performance of the Index.
Market Conditions
Risk
The Canadian mortgage-backed securities (“MBS”) market
The risks associated with an investment in the ETF remain
had negative returns over the Period as bond yields
as disclosed in the ETF’s most recent prospectus or any
increased across the term spectrum. The FTSE Canada NHA
amendments thereto and ETF facts. During the Period,
MBS 975 Index returned -0.80% during the Period. MBS
there were no changes to the ETF that materially affected
outperformed short-term Canadian bonds as historically
the overall risk level associated with an investment
low interest rates increased the demand for mortgages and
in the ETF. The Manager reviewed the ETF using the
helped fuel the housing market rally, in addition to the
standardized investment risk classification methodology
broad housing demand based on less time in the office,
prescribed by National Instrument 81-102 Investment Funds
which kept credit spreads stable. MBS outperformed federal
and determined on January 14, 2021 that the risk rating
bonds over the Period, providing more protection from
of the ETF had not changed. The Manager reviews the
short-term rising interest rates, as the 2-year Bank of Canada
ETF’s investment risk level and reference index, if any, at
bond yield increased from 0.20% to 0.95% over the Period.
least annually.
This annual management report of fund performance contains financial highlights but does not contain the complete annual financial
statements of the ETF. If the annual financial statements of the ETF do not accompany the mailing of this report, you may obtain a copy of
the annual financial statements at your request, and at no cost, by calling 1-800-361-1392, by writing to us at BMO Asset Management Inc.,
250 Yonge Street, 7th Floor, Toronto, Ontario, M5B 2M8 or by visiting our website at www.bmo.com/etflegal or SEDAR at www.sedar.com.
You may also contact us using one of these methods to request a copy of the ETF’s interim financial report, proxy voting policies and
procedures, proxy voting disclosure record and/or quarterly portfolio disclosure.BMO Canadian MBS Index ETF
The ETF’s exposure to all maturities led to negative returns. Manager (each a “Related Party”). The purpose of this
However, its exposure to 1-to 3-year term bonds detracted section is to provide a brief description of any transactions
the least from performance, while 3- to 5-year term bonds involving the ETF and a Related Party.
detracted the most from performance.
Manager
Recent Developments The Manager, an indirect, wholly-owned subsidiary of Bank
The portfolio manager expects increased volatility in fixed of Montreal (“BMO”), is the portfolio manager, trustee and
income markets for the period ahead. As the pandemic promoter of the ETF. The Manager is paid a management
surges forward with new COVID-19 variants emerging, the fee by the ETF as compensation for its services, which
economic recovery in many developed countries continues is described in the “Management Fees” section later in
to be stalled. This puts central banks in a challenging this document.
position as inflation continues to surge higher. What
Designated Broker
was once described as pandemic-related and transitory
The Manager has entered into an agreement with
is continuing to show more longer term and persistent
BMO Nesbitt Burns Inc., an affiliate of the Manager, to
characteristics, which would likely cause the central banks
act as designated broker and dealer for distribution of
in Canada and the U.S. to act.
BMO exchange traded funds, on terms and conditions that
The portfolio manager expects both the BoC and the U.S. are comparable to arm’s length agreements in the exchange
Federal Reserve Board (“Fed”) to act swiftly in 2022 by traded funds industry. The material terms and conditions of
increasing interest rates to combat inflation. In Canada, the the agreement have been disclosed in the ETF’s prospectus.
market expects the BoC to raise rates upwards of six times
The Manager has also entered into agreements with certain
in 2022. The portfolio manager believes that the BoC may
other registered dealers in Canada to act as dealers for
begin raising rates in the spring of 2022 and will likely raise
the creation and redemption of units of BMO exchange
rates several times to combat inflation but fewer than the
traded funds.
five or six times that the market is predicting. The Fed is
expected to act less aggressively than the BoC. The market Buying and Selling Securities
expectation is that the Fed will start raising rates in the During the Period, the ETF relied on standing instructions
spring of 2022 and raise rates two or three times throughout provided by the independent review committee (“IRC”) for
the remainder of 2022. any of the following related party transactions that may have
occurred in the ETF (each, a “Related Party Transaction”):
Overall, a period of rising rates can be a challenging
market for fixed income. However, the ETF could be well- (a) investments in securities issued by BMO, an affiliate of
positioned with its exposure to shorter duration MBS. In the Manager, or any other issuer related to the Manager;
addition, the ETF’s holdings in MBS could provide some
(b) investments in a class of non-government debt securities
protection from the impact of rising rates.
and/or equity securities of an issuer during the period of
In February 2022, hostilities commenced in Ukraine. In distribution of those securities to the public and/or the
response, a number of countries have imposed economic 60-day period following the distribution period where
sanctions on Russia and certain Russian citizens and BMO Nesbitt Burns Inc., an affiliate of the Manager, or any
entities. The impact of the hostilities, economic sanctions other affiliate of the Manager acted as an underwriter in
and other measures may have wide-ranging global effects on the distribution;
price volatility for securities and commodities as well as the
(c) trades in debt securities in the secondary market with
stability of global financial markets. It is uncertain how long
BMO Nesbitt Burns Inc., an affiliate of the Manager, that is
the hostilities, economic sanctions and market instability
trading with the ETF as principal; and
will continue and whether they will escalate further.
(d) trades of a security from or to, another investment
Related Party Transactions
fund or a managed account managed by the Manager or an
From time to time, the Manager may, on behalf of the ETF,
affiliate of the Manager.
enter into transactions or arrangements with or involving
other members of BMO Financial Group, or certain other In accordance with the IRC’s standing instructions, in
persons or companies that are related or connected to the making a decision to cause the ETF to enter into a Related
Party Transaction, the Manager and the portfolio manager
of the ETF are required to comply with the Manager’sBMO Canadian MBS Index ETF
written policies and procedures governing the Related Party Ratios and Supplemental Data
Transaction and report periodically to the IRC, describing Financial years ended Dec. 31
Listed CAD Units 2021 2020(5)
each instance that the Manager relied on the standing
Total net asset value (000’s)(1) $ 267,698 128,385
instructions and its compliance or non-compliance with the
Number of units outstanding (000’s)(1) 8,942 4,182
governing policies and procedures. The governing policies Management expense ratio(2) % 0.17 0.17
and procedures are designed to ensure that each Related Management expense ratio before waivers or
absorptions(2) % 0.17 0.17
Party Transaction (i) is made free from any influence of
Trading expense ratio(3) % — —
BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of Portfolio turnover rate(4) % 26.13 35.84
BMO and/or BMO Nesbitt Burns Inc. and without taking into Net asset value per unit $ 29.94 30.70
account any considerations relevant to BMO, BMO Nesbitt Closing market price $ 29.94 30.65
Burns Inc. or an associate or affiliate of BMO and/or
(1)
This information is provided as at December 31 of the period shown.
(2)
Management expense ratio is based on total expenses (excluding commissions and other portfolio
BMO Nesbitt Burns Inc.; (ii) represents the business transaction costs) for the stated period and is expressed as an annualized percentage of daily
judgment of the Manager, uninfluenced by considerations average net asset value during the period.
(3)
The trading expense ratio represents total commissions and other portfolio transaction costs
other than the best interests of the ETF; and (iii) achieves expressed as an annualized percentage of daily average net asset value during the period. For all
a fair and reasonable result for the ETF. the financial periods listed, no commissions or other portfolio transactions costs were incurred by
the ETF. As a result, the trading expense ratio for all the periods was nil.
(4)
The ETF’s portfolio turnover rate indicates how actively the ETF’s portfolio manager manages its
portfolio investments. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling
Financial Highlights all of the securities in its portfolio once in the course of the year. The higher an ETF’s portfolio
turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater
The following tables show selected key financial the chance of an investor receiving taxable capital gains in the year. There is not necessarily
information about the ETF and are intended to help a relationship between a high turnover rate and the performance of an ETF.
(5)
The information in this column is for the period beginning January 10, 2020 (the ETF’s establishment
you understand the ETF’s financial performance for the date) and ending December 31, 2020.
period indicated. Management Fees
The ETF’s Net Assets per Unit (1) The Manager is responsible for the day-to-day management
Financial years ended Dec. 31 of the business and operations of the ETF. The Manager
Listed CAD Units 2021 2020(4) monitors and evaluates the ETF’s performance, manages
Net assets, beginning of period $ 30.70 30.00* the portfolio and provides certain administrative services
Increase (decrease) from operations
Total revenue $ 0.45 0.54
required by the ETF. As compensation for its services, the
Total expenses $ (0.05) (0.05) Manager is entitled to receive a management fee payable
Realized gains (losses) for the period $ (0.06) 0.06 quarterly and calculated based on the daily net asset value
Unrealized gains (losses) for the period $ (0.62) 0.62
of the ETF at the annual rate set out in the table below.
Total increase (decrease) from operations(2) $ (0.28) 1.17
Distributions The management fee is subject to applicable taxes. The
From net investment income Manager may, from time to time in its discretion, waive all
(excluding dividends) $ 0.43 0.45
or a portion of the management fee charged.
From dividends $ — —
From capital gains $ — 0.06 Annual
Return of capital $ 0.05 0.02 Ticker Management Fee Rate
Total Annual Distributions(3) $ 0.48 0.53 %
Net assets, end of period $ 29.94 30.70 ZMBS 0.15
* Initial net assets.
(1)
This information is derived from the ETF’s audited annual financial statements. Past Performance
(2)
Net assets and distributions are based on the actual number of units outstanding at the relevant
time. The increase/decrease from operations is based on the weighted average number of units The ETF’s performance information assumes that all
outstanding over the financial period. This table is not intended to be a reconciliation of beginning
to ending net assets per unit. distributions made by the ETF in the periods shown were
(3)
Distributions were either paid in cash or reinvested in additional units of the ETF, or both. used to purchase additional units of the ETF and is based on
(4)
The information in this column is for the period beginning January 10, 2020 (the ETF’s establishment
date) and ending December 31, 2020. the net asset value of the ETF.
The performance information does not take into account
sales, redemption, distribution or other optional charges
that, if applicable, would have reduced returns or
performance. Please remember that how the ETF has
performed in the past does not indicate how it will perform
in the future.BMO Canadian MBS Index ETF
Year-by-Year Returns Summary of Investment Portfolio
The following bar chart shows the performance of the ETF As at December 31, 2021
for each of the financial years shown and illustrates how
% of Net
the ETF’s performance has changed year to year. The chart
Portfolio Allocation Asset Value
shows, in percentage terms, how much an investment made Mortgage-Backed Securities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.8
on the first day of each financial year would have increased Cash/Receivables/Payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.2
or decreased by the last day of each financial year.
Total Portfolio Allocation 100.0
Listed CAD Units
6% % of Net
3.81
3% Top 25 Holdings Asset Value
Equitable Bank, NHA MBS, Pool #97518508, 0.750% Dec 1, 2025.. . . . . 10.3
0%
-0.93 Merrill Lynch, NHA MBS, Pool #97518515, 0.580% Dec 1, 2025. . . . . . . . 6.7
-3% RBC Dominion Securities, NHA MBS, Pool #97519120, 0.940%
-6% Apr 1, 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4
2020(1) 2021 Scotia Capital Inc., NHA MBS, Pool #97518704, 0.550% Jan 1, 2026. . . . . 5.6
(1)
For the period beginning with the performance launch date Bank of Nova Scotia, The, NHA MBS, Pool #97515401, 1.890%
of February 5, 2020 to December 31, 2020. Oct 1, 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6
First National Financial Corporation, NHA MBS, Pool #97512505,
Annual Compound Returns 2.650% Sep 1, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5
This table compares the historical annual compound returns Laurentian Bank, NHA MBS, Pool #97510867, 2.040% Feb 1, 2023. . . . . . 5.1
of the ETF with its benchmark index, the FTSE Canada NHA Equitable Bank, NHA MBS, Pool #97519073, 0.840% Mar 1, 2026.. . . . . . 4.1
MBS 975 Index and a broad-based index, the FTSE Canada Royal Bank of Canada, NHA MBS, Pool #97517581, 0.600%
Universe Bond Index. Aug 1, 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.8
Merrill Lynch, NHA MBS, Pool #97515148, 1.800% Sep 1, 2024. . . . . . . . 3.6
The FTSE Canada NHA MBS 975 Index is designed to reflect Laurentian Bank, NHA MBS, Pool #97517222, 0.700% Jun 1, 2025. . . . . . 3.6
the performance of the fixed-rate 975 Pool of the Canadian Laurentian Bank, NHA MBS, Pool #97516013, 1.850% Jan 1, 2025. . . . . . 3.4
National Housing Act Mortgage-Backed Securities market, Bank of Nova Scotia, The, NHA MBS, Pool #97518499, 0.600%
denominated in Canadian Dollars. Eligible securities Dec 1, 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2
must have a minimum issuance size of $200 million and Merrill Lynch, NHA MBS, Pool #97510312, 1.840% Dec 1, 2022. . . . . . . . 3.2
a minimum amount outstanding of $100 million, with an Bank of Nova Scotia, The, NHA MBS, Pool #97516339, 1.250%
Mar 1, 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8
effective term to maturity of greater than one year. Each
Laurentian Bank, NHA MBS, Pool #97514937, 1.500% Aug 1, 2024.. . . . . 2.6
security is weighted by its relative market capitalization and
Laurentian Bank, NHA MBS, Pool #97519039, 0.880% Mar 1, 2026.. . . . . 2.1
rebalanced on a monthly basis.
Merrill Lynch, NHA MBS, Pool #97518962, 0.990% Mar 1, 2026. . . . . . . . 1.9
The FTSE Canada Universe Bond Index is designed to be Merrill Lynch, NHA MBS, Pool #97516361, 1.120% Mar 1, 2025. . . . . . . . 1.9
a broad measure of the Canadian investment-grade fixed Bank of Nova Scotia, The, NHA MBS, Pool #97514581, 1.900%
Jul 1, 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
income market consisting of federal, provincial, municipal
RBC Dominion Securities, NHA MBS, Pool #97517982, 0.600%
and corporate bonds. The FTSE Canada Universe Bond
Oct 1, 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8
Index consists of semi-annual pay fixed rate bonds issued
Merrill Lynch, NHA MBS, Pool #97514361, 1.750% Jun 1, 2024. . . . . . . . . 1.7
domestically in Canada and denominated in Canadian First National Financial Corporation, NHA MBS, Pool #97511561,
dollars, with an effective term to maturity of greater than 2.390% May 1, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.7
one year and a credit rating of BBB or higher. Laurentian Bank, NHA MBS, Pool #97518030, 0.500% Oct 1, 2025. . . . . . 1.6
As at December 31, 2021 First National Financial Corporation, NHA MBS, Pool #97512973,
Listed CAD Units Since 2.690% Nov 1, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
1Yr 3Yr 5Yr 10Yr Inception(1)
BMO Canadian MBS Index ETF % (0.93) 1.48 Top Holdings as a Percentage of Total Net Asset Value 91.3
FTSE Canada NHA MBS 975 Index % (0.80) 1.63
FTSE Canada Universe Bond Index % (2.54) 1.81
Total Net Asset Value $267,697,977
(1)
Return from the performance launch date of February 5, 2020 to December 31, 2021.
The summary of investment portfolio may change due to the ETF’s ongoing
A discussion on the relative performance of the ETF as compared to its
portfolio transactions. Updates are available quarterly.
benchmark index and broad-based index can be found under the Results of
Operations section of this report.Caution regarding forward-looking statements
This document may contain forward-looking statements relating to anticipated future events, results, circumstances,
performance or expectations that are not historical facts but instead represent our beliefs regarding future events. By their nature,
forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties.
There is significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers
of this document not to place undue reliance on our forward-looking statements as a number of factors could cause actual future
results, conditions, actions or events to differ materially from the targets, expectations, estimates or intentions expressed or
implied in the forward-looking statements. Actual results may differ materially from management expectations as projected in
such forward-looking statements for a variety of reasons, including but not limited to market and general economic conditions,
interest rates, regulatory and statutory developments, the effects of competition in the geographic and business areas in which
the ETF may invest in and the risks detailed from time to time in the ETFs’ prospectus. We caution that the foregoing list of
factors is not exhaustive and that when relying on forward-looking statements to make decisions with respect to investing in
the ETF, investors and others should carefully consider these factors, as well as other uncertainties and potential events, and the
inherent uncertainty of forward-looking statements. Due to the potential impact of these factors, BMO Asset Management Inc.
does not undertake, and specifically disclaims, any intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise, unless required by applicable law.
The ETF is not in any way sponsored, endorsed, sold or promoted by FTSE Global Debt Capital Markets Inc. (“FGDCM”), FTSE
International Limited (“FTSE”), Frank Russell Company (“Frank Russell”), FTSE Fixed Income LLC (“FTSE FI”) or the London Stock
Exchange Group companies (together with FGDCM, FTSE, Frank Russell and FTSE FI, the “Licensor Parties”). The Licensor Parties
make no claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be
obtained from the use of the FTSE BMO ETF Indices, (ii) the figure at which any of the FTSE BMO ETF Indices stands at any
particular time on any particular day or otherwise, or (iii) the suitability of an Underlying Index for the particular purpose to
which is it being put in connection with the FTSE BMO ETFs. Each of the FTSE BMO ETF Indices is compiled and calculated by FGDCM
of FTSE and all copyright in any of the FTSE BMO ETF Indices values and constituent lists vests in FGDCM or FTSE, respectively. The
Licensor Parties shall not be liable (whether in negligence or otherwise) to any person for any error in any of the FTSE BMO ETF
Indices and the Licensor Parties shall not be under any obligation to advise any person of any error therein. “FTSE®” is a trade
mark of the London Stock Exchange Group companies and is used under licence.
BMO exchange traded funds are managed and administered by BMO Asset Management Inc., an investment fund manager and
portfolio manager and separate legal entity from Bank of Montreal.
®/TM
Registered trade-marks/trade-mark of Bank of Montreal, used under license.
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