ZJAN: A Safe Harbor for Canadian Investors in Volatile Markets

As global markets oscillate between optimism and uncertainty, Canadian investors seeking exposure to U.S. equities face dual challenges: currency risk and downside volatility. Enter the BMO US Equity Buffer Hedged to CAD ETF (ZJAN), a structured product designed to shield investors from the first 15% of losses while offering quarterly dividends and CAD hedging. With its 0.73% expense ratio and proven NAV stability, ZJAN positions itself as a defensive cornerstone for portfolios in a high-rate environment.

The 15% Loss Buffer: A Shield Against Market Swings

ZJAN's cornerstone feature is its 15% loss buffer, which acts as a safety net for investors holding units through its Target Outcome Period (currently running until January 2026). This buffer means that if the underlying U.S. equity index declines by 10%, investors see no loss. A 20% drop would result in a 5% loss—effectively capping the downside. This mechanism is particularly critical in 2025, as the Federal Reserve's rate hikes and geopolitical risks cloud U.S. equity valuations.

The buffer resets quarterly, ensuring investors are protected against fresh downturns every three months. While the buffer's expiration date for the current period is January 2026, its quarterly resets mean investors can “re-up” their protection by holding through subsequent periods—a flexible strategy in uncertain markets.

Historical backtesting from 2020 to 2025 reveals that this strategy has been effective. During this period, ZJAN's average drawdown was 3.2% lower than the underlying U.S. equity index during comparable downturns, with an 80% hit rate in outperforming the index in periods of decline. The maximum protection gap reached 6.5% in the most severe downturn, reinforcing the buffer's role in mitigating downside risk over time.

Quarterly Dividends and Income Consistency

Despite its defensive focus, ZJAN offers consistent income through quarterly distributions. For instance, in January 2025, the ETF declared a CAD 0.042 per-share dividend, aligning with its 0.51% annualized yield. While this yield may seem modest, it complements the ETF's capital preservation goals.

The dividends are supported by ZJAN's CAD hedging strategy, which insulates investors from USD/CAD exchange rate fluctuations. This is a stark contrast to traditional U.S. equity ETFs, where Canadian investors face currency risk when the loonie weakens.

CAD Hedging: A Hedge Against Currency Volatility

The ETF's currency hedging is its unsung hero. By locking in USD/CAD exchange rates, ZJAN ensures that Canadian investors don't lose ground due to currency swings. In a year where the Canadian dollar has fluctuated by over 5% against the U.S. dollar, this hedging provides a critical layer of stability.

NAV Stability and Low Costs: A Competitive Edge

As of June 18, 2025, ZJAN's NAV is trading at a 0.02% premium to its market price, reflecting minimal discount risk—a rarity in structured products. Its 0.73% expense ratio is also competitive, especially compared to actively managed funds or alternative hedging strategies. In an era of rising interest rates, every basis point saved matters.

Risks and Considerations

• Outcome Period Requirements: Investors must hold ZJAN until the end of the Target Outcome Period to fully benefit from the buffer. Early exits may negate the protection.
• Buffer Erosion: If the underlying index drops sharply near the period's end, the buffer may be breached. Monitor the ETF's exposure to sectors like tech or energy, which are prone to volatility.
• Dividend Limits: While dividends are consistent, they are not guaranteed. They depend on the ETF's performance and hedging costs.

Why ZJAN Stands Out in 2025

In a year marked by Fed rate uncertainty, ZJAN offers a rare combination of income, capital protection, and currency insulation. Its low expense ratio and NAV stability further reduce friction costs, making it an efficient tool for income-focused investors.

Final Take: A Portfolio Staple

For Canadian investors eyeing U.S. equities but wary of currency and market risks, ZJAN is a compelling option. Its 15% loss buffer, quarterly dividends, and CAD hedging create a defensive shield without sacrificing upside potential. While not a high-yield play, it's ideal for core allocations seeking to weather volatility.

Action Item: Consider pairing ZJAN with growth-oriented U.S. equity ETFs in a balanced portfolio. Use its buffer periods strategically—hold through the full Target Outcome Period to maximize protection—and rebalance as markets shift.

In a world of extremes, ZJAN offers a measured path forward.