The BMO Real Assets ETF Portfolio for Canadian Investors

When inflation heats up, plenty of asset classes struggle. Traditional long-term bonds get hammered as yields rise. Growth stocks often compress under the weight of higher discount rates. Tech-heavy portfolios see margin pressure.

Conversely, real assets tend to hold up better. By real, I mean assets with a tangible component or direct link to physical infrastructure, housing, land, or commodities. These often carry pricing power or inflation-linked cash flows.

You don’t need to buy farmland, gold coins, or a condo to get that kind of exposure, although those can work too. With ETFs, you can replicate much of that real asset exposure in a registered account, gaining liquidity, transparency, and in many cases, regular income.

Here are three BMO ETFs I would combine to build a diversified real assets allocation for Canadian investors seeking inflation protection.

BMO Global Infrastructure Index ETF (ZGI)

We’ll start with a 50% allocation to ZGI, which tracks the Dow Jones Brookfield Global Infrastructure North American Listed Index.

It owns 50 stocks across key infrastructure categories, including oil and gas midstream (like pipelines), diversified utilities (water, electricity, and natural gas), tower REITs (think wireless communications), airport operators, and even marine port companies.

What links all these businesses together is that they provide essential services backed by long-term physical infrastructure. These are often monopolistic or oligopolistic businesses with strong pricing power, inflation-indexed contracts, and steady demand. The nature of their cash flows tends to be stable and defensive, which is valuable during volatile markets.

ZGI currently yields 2.67% annually, paid out quarterly. Over the last five years, it’s delivered a strong 10.24% annualized total return. The expense ratio comes in at 0.61%, which isn’t cheap, but still competitive in the Canadian infrastructure ETF space. I’d like to see BMO lower the MER, but for now, it’s not a deal-breaker.

BMO Equal Weight REITs Index ETF (ZRE)

Canadian housing prices continue to outpace wage growth, and for many people, buying property just isn’t realistic. It’s an unfortunate reality that will persist until a major housing correction.

However, publicly traded REITs (Real Estate Investment Trusts) can be a useful substitute. Because Canada’s REIT market is fairly narrow, I prefer to avoid market cap-weighted REIT ETFs. Those tend to overweight a few big players.

Instead, ZRE offers equal weight exposure to the Solactive Equal Weight Canada REIT Index, which holds 20 REITs spread across retail, residential, healthcare, office, and industrial categories, plus some diversified REITs that own assets across multiple sectors. 30% in ZRE should do the trick.

REITs are known for high income, and ZRE doesn’t disappoint with a 4.8% annualized distribution yield. Distributions are paid monthly, just like rent, but without the hassle of being a landlord.

However, since these are mostly classified as ordinary income, ZRE is best held in a registered account like an RRSP or TFSA. The 0.61% MER is on the high side, but it’s in line with peers.

BMO Gold Bullion ETF (ZGLD)

The final 20% of this portfolio goes to ZGLD, which offers exposure to one of my favourite long-term assets: gold. Gold can’t be printed, diluted, or inflated away. Central banks stockpile it. It doesn’t generate cash flow, but it also doesn’t come with counterparty risk or balance sheet surprises.

Still, physical gold has drawbacks: big spreads at retail dealers, security risks, and storage challenges. Keeping it in a bank safety deposit box and buying insurance defeats the purpose if you believe in gold as a hedge against systemic risk.

That’s why I like ZGLD. It holds fully allocated, unencumbered gold bullion in 400-troy-ounce bars, with no use of derivatives and no active trading strategy. It’s designed to closely track the spot price of gold minus expenses and trading costs.

ZGLD now manages over $745 million in assets and charges just 0.23% annually, which is competitive even among global gold ETFs. Since gold doesn’t generate income, ZGLD doesn’t pay distributions, making it a relatively tax-efficient holding in taxable accounts.