Defensive Income in a Low-Yield World: Why BMO's ZTS ETF Stands Out

In today's low-yield environment, investors are increasingly challenged to balance income generation with capital preservation. With the U.S. projecting a gradual decline in interest rates through 2028 and inflation stubbornly lingering above 3%, the search for stable, defensive assets has never been more urgent. Enter the BMO Short-Term US Treasury Bond Fund ETF (ZTS), a compelling option for income-focused portfolios. Let's dissect why ZTS deserves a closer look—and how it stacks up against the headwinds of 2025.

The Case for Short-Term Treasuries

ZTS tracks the Bloomberg U.S. Treasury 1-5 Year Bond Index, focusing on U.S. government debt with maturities between one and five years. This short-duration strategy inherently limits interest rate risk, a critical advantage in a market where rate cuts are on the horizon. According to a report by BMO Asset Management, the fund's average duration is well below that of intermediate or long-term bond ETFs, making it less sensitive to yield curve shiftsBMO Announces Cash and Reinvested Distributions for Certain BMO ETFs and ETF Series of BMO Mutual Funds for September 2025 [https://www.theglobeandmail.com/investing/markets/markets-news/PR/34953279/bmo-announces-cash-and-reinvested-distributions-for-certain-bmo-etfs-and-etf-series-of-bmo-mutual-funds-for-september-2025/]^[1].

Moreover, U.S. Treasuries are the gold standard of credit quality, offering near-zero default risk. In a year where global supply chain disruptions and geopolitical tensions continue to weigh on markets, ZTS's holdings provide a safe harbor. As stated by the 's September 2025 projections, core PCE inflation is expected to remain elevated until 2028, underscoring the need for assets that preserve principal while generating modest incomeFOMC Summary of Economic Projections, September 2025 [https://fredblog.stlouisfed.org/2025/09/fomc-summary-of-economic-projections-september-2025/]^[2].

Dividend Yield: A Closer Look

ZTS recently announced a for September 2025, payable on October 2 to unitholders of record as of September 29BMO Short-Term US Treasury Bond Index ETF (NEO:ZTS) Stock [https://stockanalysis.com/quote/neo/ZTS/]^[3]. While the exact share price on the ex-dividend date remains undisclosed, , 2025), the implied dividend yield would be approximately ZTS - BMO Short-Term US Treasury Bond Index ETF [https://ca.finance.yahoo.com/quote/ZTS-U.NE/history/]^[4]. This may seem modest, but context is key.

In a low-yield environment where 10-year Treasury yields hover near 3.5%, ZTS's yield is competitive for its risk profile. What's more, its BMO Short-Term US Treasury Bond Fund ETF USD (ZTS-U.NE) [https://www.investing.com/etfs/bmo-long-term-us-treasury-bond]^[5] is among the lowest in its category, enhancing net returns for investors. For comparison, the average bond ETF charges 0.40% or more.

Historical backtesting of ZTS's dividend announcements from 2022 to 2025 reveals mixed short-term performance. Over a 30-day window post-announcement, , , respectively. Relative to the S&P 500, ZTS outperformed the benchmark in only one of four events, . These results suggest that dividend announcements for ZTS have not historically generated consistent alpha, likely due to market pricing in advance of predictable payoutsZTS - BMO Short-Term US Treasury Bond Index ETF [https://ca.finance.yahoo.com/quote/ZTS-U.NE/history/]^[4].

Navigating the Fed's Tightrope

The Federal Reserve's 2025 policy path—projecting a decline from 3.6% to 3.1% by 2028—creates a unique dynamic for short-term bonds. While falling rates typically boost bond prices, the short maturities in ZTS's portfolio mean the fund will roll over into higher-yielding securities as older bonds mature. This “riding the yield curve” strategy could amplify returns in a declining rate environmentFour fixed income predictions poised to shape 2025 [https://bmofundcentral.com/articles/four-fixed-income-predictions-poised-to-shape-2025/]^[6].

However, investors must remain cautious. The Fed's projections include a wide dispersion of outcomes, with some participants forecasting rates as low as 2.6%. If inflation surprises to the downside, the yield curve could flatten, reducing the fund's income potential. ZTS's focus on 1-5 year bonds mitigates this risk, but it's not immune to broader market forces.

Why ZTS Stands Out

1. Stability in Volatility. While equities face headwinds from high borrowing costs, ZTS offers a consistent, low-volatility alternative.
2. , ZTS adds balance to portfolios overexposed to equities or longer-duration bonds.
3. Liquidity: As an ETF, ZTS provides intraday trading and transparency, advantages over mutual funds or less liquid fixed-income instruments.

Final Take

For investors prioritizing capital preservation and steady, albeit modest, income, ZTS is a standout. Its short-duration strategy, low expense ratio, and U.S. Treasury backing make it a defensive play in a world where “safe” assets are scarce. While the dividend yield may not dazzle, its role as a stabilizer in a diversified portfolio is irreplaceable.

As the Fed navigates its delicate balancing act, ZTS offers a bridge between income and security—a rare combination in 2025.