BMO Short-Term US Treasury Bond Index ETF (ZTS/ZTS.U) (the ...

ANNUAL MANAGEMENT REPORT OF FUND PERFORMANCE

BMO Short-Term US Treasury Bond Index ETF (ZTS/ZTS.U) (the "ETF")

For the 12-month period ended December 31, 2021 (the "Period") Manager: BMO Asset Management Inc. (the "Manager" and "portfolio manager")

Management Discussion of Fund Performance

Investment Objective and Strategies The ETF seeks to replicate, to the extent possible, the performance of a short-term U.S. treasury bond index, net of expenses. Currently, the ETF seeks to replicate the performance of the Bloomberg U.S. Treasury 1-5 Year Bond Index (the "Index"). The investment strategy of the ETF is to invest in and hold the constituent securities of the Index in the same proportion as they are reflected in the Index. The Manager may also use a sampling methodology in selecting investments for the ETF. As an alternative to or in conjunction with investing in and holding the constituent securities, the ETF may invest in or use certain Other Securities (as defined in the prospectus) to obtain exposure to the performance of the Index.

Risk The risks associated with an investment in the ETF remain as disclosed in the ETF's most recent prospectus or any amendments thereto and ETF facts. During the Period, there were no changes to the ETF that materially affected the overall risk level associated with an investment in the ETF. The Manager reviewed the ETF using the standardized investment risk classification methodology prescribed by National Instrument 81-102 Investment Funds and determined on January 14, 2021 that the risk rating of the ETF had not changed. The Manager reviews the ETF's investment risk level and reference index, if any, at least annually.

Results of Operations The Canadian dollar ("CAD") units of the ETF outperformed the broad-based Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index (CAD) by 0.34%. However, the more appropriate comparison is to the Bloomberg U.S. Treasury 1-5 Year Bond Index (CAD) (the "Index (CAD)"), due to the concentration of the portfolio in short-term U.S. Treasury bonds. The CAD units of the ETF returned -2.04% versus the Index (CAD) return of -2.04%.

The U.S. dollar ("USD") units of the ETF returned -1.42% versus the Bloomberg U.S. Treasury 1-5 Year Bond Index (USD) (the "Index (USD)") of -1.19%. The difference in the performance of the USD units of the ETF relative to the Index (USD) during the Period (-0.23%) resulted from the management expense ratio (-0.23%).

The change in total net asset value during the Period from approximately $88 million to approximately $77 million had no impact on the performance of the ETF.

Market Conditions The U.S. Federal Reserve Board ("Fed") maintained its accommodative monetary policy and signalled intentions to overshoot its inflation target for the near-term. The Fed held the overnight rate at 0.25% over the Period. Although the Fed has been accommodative throughout the pandemic, they are signalling a hawkish tone due to inflation concerns. The U.S. 10-year Treasury yield peaked at 1.74% in March 2021 and finished the Period at 1.52%, driven by improving economic activity and rising inflation expectations. During the Period, credit spreads tightened

This annual management report of fund performance contains financial highlights but does not contain the complete annual financial statements of the ETF. If the annual financial statements of the ETF do not accompany the mailing of this report, you may obtain a copy of the annual financial statements at your request, and at no cost, by calling 1-800-361-1392, by writing to us at BMO Asset Management Inc., 250 Yonge Street, 7th Floor, Toronto, Ontario, M5B 2M8 or by visiting our website at etflegal or SEDAR at . You may also contact us using one of these methods to request a copy of the ETF's interim financial report, proxy voting policies and procedures, proxy voting disclosure record and/or quarterly portfolio disclosure.

BMO Short-Term US Treasury Bond Index ETF

further than at pre-pandemic levels, signalling a strong economic recovery. Overall, the U.S. bond market, as measured by the Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index (CAD), returned -2.4% during the Period.

The ETF's holdings in shorter duration bonds contributed the most to performance, while 3 to 5-year term bonds detracted the most from performance. The CAD units of the ETF portfolio's unhedged currency exposure detracted from its performance.

Recent Developments The portfolio manager expects increased volatility in fixed income markets for the period ahead. As the pandemic surges forward with new COVID-19 variants emerging, the economic recovery in many developed countries continues to be stalled. This puts central banks in a challenging position as inflation continues to surge higher. What was once described as pandemic-related and transitory is continuing to show more longer term and persistent characteristics, which would likely cause the central banks in Canada and the U.S. to act.

The portfolio manager expects both the Bank of Canada ("BoC") and the Fed to act swiftly in 2022 by increasing interest rates to combat inflation. In Canada, the market expects the BoC to raise rates upwards of six times in 2022. The portfolio manager believes that the BoC may begin raising rates in the spring of 2022 and will likely raise rates several times to combat inflation but fewer than the five or six times that the market is predicting. The Fed is expected to act less aggressively than the BoC. The market expectation is that the Fed will start raising rates in the spring of 2022 and raise rates two or three times throughout the remainder of 2022.

Overall, a period of rising rates can be a challenging market for fixed income. The ETF may see some underperformance as government bonds tend to underperform in periods of rising rates. However, the ETF could be well-positioned in this environment with its exposure to shorter duration bonds.

In February 2022, hostilities commenced in Ukraine. In response, a number of countries have imposed economic sanctions on Russia and certain Russian citizens and entities. The impact of the hostilities, economic sanctions and other measures may have wide-ranging global effects on price volatility for securities and commodities as well as the stability of global financial markets. It is uncertain how long the hostilities, economic sanctions and market instability will continue and whether they will escalate further.

Related Party Transactions From time to time, the Manager may, on behalf of the ETF, enter into transactions or arrangements with or involving other members of BMO Financial Group, or certain other persons or companies that are related or connected to the Manager (each a "Related Party"). The purpose of this section is to provide a brief description of any transactions involving the ETF and a Related Party.

Manager The Manager, an indirect, wholly-owned subsidiary of Bank of Montreal ("BMO"), is the portfolio manager, trustee and promoter of the ETF. The Manager is paid a management fee by the ETF as compensation for its services, which is described in the "Management Fees" section later in this document.

Designated Broker The Manager has entered into an agreement with BMO Nesbitt Burns Inc., an affiliate of the Manager, to act as designated broker and dealer for distribution of BMO exchange traded funds, on terms and conditions that are comparable to arm's length agreements in the exchange traded funds industry. The material terms and conditions of the agreement have been disclosed in the ETF's prospectus.

The Manager has also entered into agreements with certain other registered dealers in Canada to act as dealers for the creation and redemption of units of BMO exchange traded funds.

Buying and Selling Securities During the Period, the ETF relied on standing instructions provided by the independent review committee ("IRC") for any of the following related party transactions that may have occurred in the ETF (each, a "Related Party Transaction"):

(a) investments in securities issued by BMO, an affiliate of the Manager, or any other issuer related to the Manager;

(b) investments in a class of non-government debt securities and/or equity securities of an issuer during the period of distribution of those securities to the public and/or the 60-day period following the distribution period where BMO Nesbitt Burns Inc., an affiliate of the Manager, or any other affiliate of the Manager acted as an underwriter in the distribution;

(c) trades in debt securities in the secondary market with BMO Nesbitt Burns Inc., an affiliate of the Manager, that is trading with the ETF as principal; and

(d) trades of a security from or to, another investment fund or a managed account managed by the Manager or an affiliate of the Manager.

BMO Short-Term US Treasury Bond Index ETF

In accordance with the IRC's standing instructions, in making a decision to cause the ETF to enter into a Related Party Transaction, the Manager and the portfolio manager of the ETF are required to comply with the Manager's written policies and procedures governing the Related Party Transaction and report periodically to the IRC, describing each instance that the Manager relied on the standing instructions and its compliance or non-compliance with the governing policies and procedures. The governing policies and procedures are designed to ensure that each Related Party Transaction (i) is made free from any influence of BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc. and without taking into account any considerations relevant to BMO, BMO Nesbitt Burns Inc. or an associate or affiliate of BMO and/or BMO Nesbitt Burns Inc.; (ii) represents the business judgment of the Manager, uninfluenced by considerations other than the best interests of the ETF; and (iii) achieves a fair and reasonable result for the ETF.

Financial Highlights

The following tables show selected key financial information about the ETF and are intended to help you understand the ETF's financial performance for the periods indicated.

The ETF's Net Assets per Unit(1)

Financial years ended Dec. 31

Listed CAD Units

2021

2020

2019

2018

Net assets, beginning

of period

$

Increase (decrease) from

operations

Total revenue

$

Total expenses

$

Realized gains (losses) for

the period

$

Unrealized gains (losses) for

the period

$

Total increase (decrease)

from operations(2)

$

Distributions

From net investment income

(excludingdividends)

$

From dividends

$

From capital gains

$

Return of capital

$

Total Annual Distributions(3) $

Net assets, end of period $

50.08

49.90

51.32

47.34

0.21 (0.11) (1.84) 0.72 (1.02)

0.50 (0.12) 1.26 (3.91) (2.27)

1.22 (0.12) 1.14 (3.37) (1.13)

1.09 (0.06) 0.26 6.42 7.71

0.48 -- --

0.38 0.86 48.20

0.79 -- --

0.13 0.92 50.08

1.08 --

0.66 0.01 1.75 49.90

0.72 -- --

0.01 0.73 51.32

2017(4)

50.00*

0.68 (0.07)

(0.46)

(0.34)

(0.19)

0.52 -- --

0.11 0.63 47.34

Listed USD Units

Net assets, beginning

of period

$

Increase (decrease) from

operations

Total revenue

$

Total expenses

$

Realized gains (losses) for

the period

$

Unrealized gains (losses) for

the period

$

Total increase (decrease)

from operations(2)

$

Distributions

From net investment income

(excludingdividends)

$

From dividends

$

From capital gains

$

Return of capital

$

Total Annual Distributions(3) $

Net assets, end of period $

Financial years ended Dec. 31

2021

2020

2019

2018

2017(4)

51.65

50.47

49.45

49.49 50.00*

0.22 (0.12) (1.77) 0.69 (0.98)

0.48 (0.11) 1.35 (2.08) (0.36)

1.21 (0.11) 0.69 (2.40) (0.61)

1.08 (0.35) 0.54 3.10 4.37

0.69 (0.11) (0.58) (2.78) (2.78)

0.65 -- --

0.26 0.91 50.01

0.62 --

0.10 0.20 0.92 51.65

0.76 --

0.08 0.14 0.98 50.47

0.51 -- --

0.19 0.70 49.45

0.53 -- --

0.11 0.64 49.49

* Initial net assets.

Amounts stated in U.S. dollars.

(1) This information is derived from the ETF's audited annual financial statements.

(2) Net assets and distributions are based on the actual number of units outstanding at the relevant time. The increase/decrease from operations is based on the weighted average number of units outstanding over the financial period. This table is not intended to be a reconciliation of beginning to ending net assets per unit.

(3) Distributions were either paid in cash or reinvested in additional units of the ETF, or both.

(4) The information in this column is for the period beginning January 30, 2017 (the ETF's establishment date) and ending December 31, 2017.

BMO Short-Term US Treasury Bond Index ETF

Ratios and Supplemental Data

Financial years ended Dec. 31

Listed CAD Units

2021

2020

2019

2018

Total net asset value (000's)(1) $

Number of units

outstanding (000's)(1)

Management expense ratio(2) %

Management expense

ratio before waivers or

absorptions(2)

%

Trading expense ratio(3)

%

Portfolio turnover rate(4)

%

Net asset value per unit

$

Closing market price

$

49,210

1,021 0.23

0.23 --

90.43 48.20 48.18

38,558

770 0.22

0.22 --

94.03 50.08 50.02

14,721

295 0.23

0.23 --

119.10 49.90 49.91

42,085

820 0.23

0.23 --

63.16 51.32 51.33

2017(5) 9,232

195 0.24

0.24 --

55.62 47.34 47.60

Listed USD Units

Total net asset value (000's)(1) $

Number of units

outstanding (000's)(1)

Management expense ratio(2) %

Management expense

ratio before waivers or

absorptions(2)

%

Trading expense ratio(3)

%

Portfolio turnover rate(4)

%

Net asset value per unit

$

Closing market price

$

2021 28,152

Financial years ended Dec. 31

2020

2019

2018

48,980 19,334

3,038

445

745

295

45

0.23

0.22

0.23

0.23

0.23 --

90.43 50.01 50.03

0.22 --

94.03 51.65 51.61

0.23 --

119.10 50.47 50.46

0.23 --

63.16 49.45 49.51

2017(5) 2,799

45 0.24

0.24 --

55.62 49.49 49.67

Amounts stated in U.S. dollars.

(1) This information is provided as at December 31 of the period shown.

(2) Management expense ratio is based on total expenses (excluding commissions and other portfolio transaction costs) for the stated period and is expressed as an annualized percentage of daily average net asset value during the period.

(3) The trading expense ratio represents total commissions and other portfolio transaction costs expressed as an annualized percentage of daily average net asset value during the period. For all the financial periods listed, no commissions or other portfolio transaction costs were incurred by the ETF. As a result, the trading expense ratio for all the periods was nil.

(4) The ETF's portfolio turnover rate indicates how actively the ETF's portfolio manager manages its portfolio investments. A portfolio turnover rate of 100% is equivalent to the ETF buying and selling all of the securities in its portfolio once in the course of the year. The higher an ETF's portfolio turnover rate in a year, the greater the trading costs payable by the ETF in the year, and the greater the chance of an investor receiving taxable capital gains in the year. There is not necessarily a relationship between a high turnover rate and the performance of an ETF.

(5) The information in this column is for the period beginning January 30, 2017 (the ETF's establishment date) and ending December 31, 2017.

Management Fees The Manager is responsible for the day-to-day management of the business and operations of the ETF. The Manager monitors and evaluates the ETF's performance, manages the portfolio and provides certain administrative services required by the ETF. As compensation for its services, the Manager is entitled to receive a management fee payable quarterly and calculated based on the daily net asset value of the ETF at the annual rate set out in the table below. The management fee is subject to applicable taxes. The Manager may, from time to time in its discretion, waive all or a portion of the management fee charged.

Ticker

ZTS ZTS.U

Annual Management Fee Rate

%

0.20 0.20

Past Performance

The ETF's performance information assumes that all distributions made by the ETF in the periods shown were used to purchase additional units of the ETF and is based on the net asset value of the ETF.

The performance information does not take into account sales, redemption, distribution or other optional charges that, if applicable, would have reduced returns or performance. Please remember that how the ETF has performed in the past does not indicate how it will perform in the future.

Year-by-Year Returns The following bar charts show the performance of the ETF for each of the financial years shown and illustrate how the ETF's performance has changed year to year. The charts show, in percentage terms, how much an investment made on the first day of each financial year would have increased or decreased by the last day of each financial year.

Listed CAD Units 12% 6% 0% -6% -12%

10.01

2.10

-1.10

-2.04

-4.09

2017(1) 2018 2019 2020 2021

Listed USD Units 12%

6%

3.82 4.17

0%

0.25 1.36

-1.42

-6%

-12%

2017(1) 2018 2019 2020 2021 (1) For the period beginning with the performance launch date

of February 21, 2017 to December 31, 2017.

Annual Compound Returns This table compares the historical annual compound returns of the ETF with its benchmark index, the Bloomberg U.S. Treasury 1-5 Year Bond Index and a broad-based index, the Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index.

The Bloomberg U.S. Treasury 1-5 Year Bond Index measures the U.S. Treasury bond market. Eligible securities must have between one and five years to maturity, and greater than US$250 million outstanding. The Bloomberg U.S. Treasury 1-5 Year Bond Index is reported in both Canadian and U.S. dollars.

BMO Short-Term US Treasury Bond Index ETF

The Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index represents securities that are SEC registered, taxable, and denominated in U.S. dollars. The Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. Eligible securities must have at least one year to final maturity regardless of call features, rated investment-grade (Baa3/BBB- or higher) by two of the three major rating agencies, with $250 million par amount outstanding (with asset-backed securities and commercial mortgage-backed securities having further restrictions). The Bloomberg U.S. Aggregate Bond Total Return Value Unhedged Index is reported in both Canadian and U.S. dollars.

As at December 31, 2021

Listed CAD Units

Since

1Yr

3Yr

5Yr 10Yr Inception(1)

BMO Short-Term US Treasury Bond

Index ETF

% (2.04) (0.36)

0.88

Bloomberg U.S. Treasury 1-5 Year

Bond Index

% (2.04) (0.19)

1.08

Bloomberg U.S. Aggregate Bond Total

Return Value Unhedged Index (CAD) % (2.38) 2.10

2.75

Listed USD Units

1Yr 3Yr

BMO Short-Term US Treasury Bond

Index ETF

% (1.42) 2.16

Bloomberg U.S. Treasury 1-5 Year

Bond Index

% (1.19) 2.44

Bloomberg U.S. Aggregate Bond Total

Return Value Unhedged Index (USD) % (1.54) 4.79

Since 5Yr 10Yr Inception(1)

1.66

1.90

3.58

(1) Return from the performance launch date of February 21, 2017 to December 31, 2021.

A discussion on the relative performance of the ETF as compared to its benchmark index and broad-based index can be found under the Results of Operations section of this report.

Summary of Investment Portfolio

As at December 31, 2021

Portfolio Allocation

% of Net Asset Value

Government Bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99.4

Cash/Receivables/Payables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.6

Total Portfolio Allocation

100.0

Top 25 Holdings

% of Net Asset Value

United States Treasury Notes, 2.250% Nov 15, 2025. . . . . . . . . . . . . . . . . 1.2

United States Treasury Notes, 2.250% Nov 15, 2024. . . . . . . . . . . . . . . . . 1.2

United States Treasury Notes, 2.375% Aug 15, 2024. . . . . . . . . . . . . . . . . 1.2

United States Treasury Notes, 2.500% May 15, 2024. . . . . . . . . . . . . . . . . 1.2

United States Treasury Notes, 0.125% Jun 30, 2023. . . . . . . . . . . . . . . . . . 1.2

United States Treasury Notes, 0.375% Oct 31, 2023. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Bonds, 0.750% Aug 31, 2026. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.125% Aug 31, 2023. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.125% Jul 31, 2023. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.500% Feb 28, 2026. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.375% Jan 31, 2026. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.625% Oct 15, 2024. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.750% May 31, 2026. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 1.125% Oct 31, 2026. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 2.000% Aug 15, 2025. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.875% Sep 30, 2026. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.750% Mar 31, 2026. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.250% Mar 15, 2024. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 2.750% Nov 15, 2023. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.125% Jan 31, 2023. . . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.750% Apr 30, 2026.. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.250% Sep 30, 2023. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 2.000% Feb 15, 2025. . . . . . . . . . . . . . . . . 1.1

United States Treasury Notes, 0.625% Jul 31, 2026. . . . . . . . . . . . . . . . . . 1.0

United States Treasury Notes, 0.125% Feb 15, 2024. . . . . . . . . . . . . . . . . 1.0

Top Holdings as a Percentage of Total Net Asset Value

27.8

Total Net Asset Value

$77,361,715

The summary of investment portfolio may change due to the ETF's ongoing portfolio transactions. Updates are available quarterly.

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