ETF Insights Report – BMO MSCI All Country World High Qual ETF – TSE:ZGQ

BMO MSCI All Country World High Qual ETF – ZGQ.TO

The Fund seeks to replicate, to the extent possible before fees and expenses, the performance of an index that provides exposure to equity securities of large- and midcapitalization issuers in developed-market and emergingmarket countries (for the purposes of this Fund, the Index) by establishing, directly or indirectly, a long or short position in: the instruments included in the Index (each, for the purposes of this Fund, an Index Constituent), each in proportion to its positive or negative weight in the Index; and/or instruments that are not index constituents but that have, in the aggregate, investment characteristics similar to the Index or to a subset of the index constituents.

Focus area	Score	★★★★★
Performance (CAGR)	17%	★★★★★
Fees (MER)	0.50%	★★
Volatility (Beta)	0.59	★★★★★
Distribution (Yield)	0.96%	★★
Valuation (Forward P/E)	22.74	★★
5-year earnings growth	8.8%	★★★★

Pros

Because the index screens for only the highest-quality companies based on select criteria (more on that in the fund description), the fund takes a more concentrated approach to global equities by filtering out the best of the best
This high-quality approach has led to a significant outperformance of most all major indexes in the past
Gives the fund holder strong exposure to high-quality US names, but also with 30%~ exposure to international names outside of Canada
The fund contains over 500 holdings, with no more than 6% exposure to an individual equity, giving the fund holder large exposure to the S&P 500 but with lower concentration

Cons

Although the fees have been justified due to performance, they’re still relatively high at 0.5%
Although there is a global element to this fund it remains highly exposed to North America, particularly technology options, which are expensive at this point. A rotation out of high-quality technology names and into value options could cause the fund to struggle
The fund is not as diverse as a broad-based MSCI World Index Fund

We’ve covered other “High Quality” funds here at ETF Insights, including the BMO USA High Quality Index ETF (TSE:ZUQ). The BMO MSCI All Country World High Quality ETF has nearly identical quality metrics a company must pass to be included in the index, but it does so on a global scale rather than just within US equities.

The fund looks at 3 core metrics when selecting its securities. It will target companies with high returns on equity, stable and consistent year-over-year earnings growth, and low financial leverage. If a company meets these criteria, it may be included in the index.

The fund has no particular country allocation. However, with the large success of United States technology stocks and the overall strength of the US economy, it tends to have a heavy weighting towards US equities, nearing 70% at the time of update of this report.

Its screening methods have worked admiringly well in the past, and the fund has outperformed almost all major indexes since its inception.

Overall, if you want exposure to some of the highest-quality corporations on a fundamental basis across the globe and not just particularly in the United States, this is a fund that could fit your overall portfolio.

Sector Risk	Medium
Concentration Risk	Medium
Geographical Risk	Medium
Liquidity Risk	Low

One of the main risks of this fund would be valuation. Although it is a global ETF, it still holds a high level of US exposure, primarily to US technology names. Although their performance has been exceptional as of late, there is no guarantee that outperformance will continue, and if tech names do begin to struggle, it is likely that this fund will underperform.

In addition to this, there is next to no Canadian exposure inside of the fund, sitting at around 1%. For those who want a Canadian equity mix inside their portfolios, this fund will not do it for you, and you’ll need to seek other options. Another risk of this fund is the 30%~ international exposure. Although most of the exposure is in developed nations, there is some emerging market exposure inside of this fund, so investors are exposed to regulatory and economic changes in those emerging markets. The struggles of international markets moving forward could weigh on future returns.

And finally, there is no guarantee that the “high quality” criteria of this fund will guarantee similar performances in the future. As with any methodology, historical returns are solid to work off, but there are no guarantees of future returns.

Top 10 Holdings	Allocation
Meta Platforms (META)	5.88%
Apple (AAPL)	5.08%
Microsoft (MSFT)	4.92%
NVIDIA (NVDA)	4.06%
Taiwan Semiconductor (TSMWF)	3.2%
Alphabet (GOOG)	3.01%
Visa (V)	3%
Eli Lilly and Co (LLY)	2.66%
Alphabet (GOOGL)	2.6%
UnitedHealth Group (UNH)	2.1%

Even though this is a global ETF, you can see the fund is heavily concentrated in the United States. 9 of the top 10 holdings are US names, primarily in technology, but also some healthcare and financials mixed in with Eli Lilly and Visa.

Because of the fund’s strict criteria for entry into the index, this does make sense. The United States is home to some of the fastest growing and most profitable corporations in the world. There shouldn’t be any surprise that a global ETF that prioritizes profitability and efficient debt levels would contain some of the premiere US names.

In addition to this, we can see that the fund is less concentrated than the S&P 500. While the top 5 names in the S&P 500 make up 28% of the index, this fund sits around 23%.

On the international side, we see one of the biggest global semiconductor plays in Taiwan Semiconductor. That is one important thing to note about the top holdings inside of this fund: many of them depend on the further development and expansion of the AI sector.

Overall, the top holdings of this fund do give an S&P 500 with a little international exposure mixed in type feel.

	ZGQ	FCIQ	ZUQ
Returns			✅
Diversification	✅
Fees	✅
Tax efficiency	✅	✅	✅
Distribution		✅

There are simply no other funds like ZGQ outside of FCIQ, which is a Fidelity High Quality International ETF. Even then, FCIQ is 100% international equities with no North American exposure, so the comparison is hard. ZGQ truly is unique.

You’ll note that I’ve included ZUQ, another featured fund here at ETF Insights. It is BMO’s US High Quality ETF. And, you may be wondering why I am comparing a US High Quality ETF with an international one in ZGQ.

I felt it would be a good comparison to look at how an international High Quality ETF has compared against one that is solely based in the United States. Regarding that comparison, on a return basis, ZUQ is the clear winner. The United States markets have absolutely soared in recent years, which has put anyone who has exposure to international equities at a large disadvantage.

However, it is important we don’t get caught up in recency bias. The S&P 500 and US equities, in general, have performed well, yes. But there is no guarantee that they will continue to do so, and it is possible we see international stocks close the value gap if the United States were to struggle.

In this situation, ZGQ is likely to benefit. The choice is relatively simple between these two funds. If you believe US equities are expensive and due for a bit of a pullback, ZGQ will likely provide better value with its 30%~ exposure to international equities.

From a tax-efficiency basis, they’re relatively equal. None contain any significant position in Canadian equities, so there is no special treatment due to the payment of Canadian dividends.

Yield	0.95%
Frequency	Quarterly

ZGQ should be looked at as a total return type ETF. The fund only has a distribution yield of around 1%, so those looking for consistent income streams likely won’t find it here.

In addition to this, the distribution will not be tax-friendly considering it contains no Canadian holdings. A portion of the distribution will also be exposed to withholding tax even inside of an RRSP due to the fact this is a Canadian-domiciled fund that holds underlying US and international securities. There is no way to avoid this, but with the fund yielding so little, the withholding tax on the distribution is likely to be minimal.

I am a big fan of the “high quality” ETFs that screen out weaker companies fundamentally and focus only on the most profitable and those that provide the highest levels of shareholder value. ZGQ does this on a global scale (except for Canada), and in doing so, it contains a diverse portfolio of high-quality names.

The fees are a tad too high for my liking, but the fact of the matter is, its performance since its inception has more than justified these fees. I believe this is an outstanding fund for Canadians to look at for high-quality names outside of their home country. If you are worried about US valuations, this at least mitigates a bit of that risk, as it only holds around 70% US equities.

This could be a solid option for those who want to make this a satellite holding in a more diverse portfolio, or if they’re particularly bullish on the US and international markets, a core holding.

The only warning I’d possibly issue about the fund is that although it is not a pure-play US fund, it does contain quite a bit of exposure to high-value US names. In the event there is a rotation out of highly profitable but high-valuation growth names and into more defensive/value names in light of falling interest rates, this fund could lag.

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