BMO's US Small-Cap ETF: A Stable Dividend Anchor in Volatile Markets

The global economy is navigating choppy waters, with inflation, interest rate uncertainty, and geopolitical tensions clouding the outlook. Amid this volatility, BMO's S&P US Small Cap Index ETF (ZSML.TO) offers investors a compelling entry point into US small-cap equities—a sector that often thrives in uneven markets. The ETF's recent CAD 0.14 dividend declaration, paired with its hedged counterpart (ZSML-F.TO), positions it as a strategic tool for diversification and risk mitigation. Here's why investors should take note.

The Dividend Story: Stability Amid Flux

The CAD 0.14 dividend, payable on April 2, 2025, marks the ETF's fourth consecutive quarter of consistent payouts at this rate. This stability contrasts with the erratic swings of past years: the dividend dropped as low as CAD 0.10 in 2020 before spiking to CAD 0.26 in late 2022 (likely reflecting a one-off adjustment to reflect index changes). Since 2024, however, the payout has stabilized, with a 6.82% average annual growth rate over the past three years. The forward yield of 1.45% may seem modest, but it's a reliable cash flow source in an era of rising interest rates.

Why US Small Caps? A Sector in the Sweet Spot

US small-cap equities (those under $2 billion in market cap) often exhibit low correlation to broader markets and Canadian assets, making them ideal diversifiers. Historically, they've outperformed large caps during economic expansions and periods of rising earnings optimism. Today, with valuations at a 20-year discount to large caps and a focus on niche industries like AI, cybersecurity, and healthcare innovation, the sector is primed for a rebound. The S&P US SmallCap 600 Index—the benchmark for ZSML.TO—has a 10-year annualized return of 9.2%, outpacing the S&P 500's 8.5%, despite recent volatility.

Currency Hedging: The Dual Strategy for Canadian Investors

The ETF's hedged sibling, ZSML-F.TO, offers a critical advantage for Canadian investors: it shields against CAD/USD fluctuations, which have swung wildly in 2025. For those wary of currency risk—especially with the US dollar hovering near multi-year highs—the hedged ETF locks in USD exposure without the volatility of exchange rates. The unhedged ZSML.TO, meanwhile, suits investors betting on a weaker CAD or seeking direct USD exposure.

BMO's Risk-Management Edge

BMO Asset Management's credibility is key here. As a trusted ETF provider, BMO leverages its low-cost indexing strategy and rigorous risk controls to mirror the S&P US SmallCap 600 Index efficiently. The fund's low expense ratio (0.25%) ensures that most returns flow to investors, while its daily liquidity and transparent holdings reduce tracking error risks.

Putting It All Together: A Diversification Play

For Canadian investors, ZSML.TO/F offers a dual-purpose tool:
1. Sector Exposure: Access to US small caps, which are underrepresented in many Canadian portfolios.
2. Currency Flexibility: Choose hedged or unhedged exposure based on macro views.
3. Low Correlation: The ETF's 0.65 correlation coefficient with the S&P/TSX Composite means it can stabilize a portfolio during domestic market slumps.

Risks and Considerations

• US Economic Slowdown: If the US economy falters, small caps could underperform.
• Valuation Risks: While cheap relative to large caps, some sectors (e.g., tech) face overvaluation concerns.
• Currency Volatility: Unhedged investors face CAD/USD swings.

Investment Takeaway

For a risk-aware portfolio, allocate 5–10% to ZSML-F.TO to hedge currency risk while gaining small-cap exposure. Aggressive investors might pair it with ZSML.TO for tactical USD bets. BMO's ETFs are not get-rich-quick tools but foundation stones in a diversified strategy, offering steady dividends and a buffer against Canadian market dependency.

In a world of uncertainty, anchoring part of your portfolio to US small caps—through BMO's disciplined ETFs—could be the calm in the storm.