Fixed Income Opportunities in Canada | ETF Trends

Fixed income ETFs are a hot topic across North America. As we have written, TMX VettaFi hosted in mid-May a symposium for more than 600 people. We tapped into the expertise of some of the leading voices in the U.S. ETF market.

This week, TMX VettaFi helped host an in-person event in Toronto, Canada. Many of the same topics were discussed, including the timing and potential impact of rate cuts and the potential role of active management. The event was not recorded, but I caught up with my panelists for some added insights.  

VettaFi: When do you see the Bank of Canada cutting rates? 

Alex Lee, head of ETF strategy, Franklin Templeton Canada: Barring a shocking turn of events, I believe there’s a strong case for rate cut[s]in Canada during the second half of the year given the progress that’s been made on inflation. This may have a favorable impact on the price of bonds, particularly short maturity bonds.  

For clients comfortable with some interest rate risk, the Franklin Bissett Short Duration Bond Fund (FLSD) provided an attractive yield of 5.3% with a short duration of 2.8 years as of March 31. The Franklin Bissett Ultra Short Bond Fund (FHIS), which is the ultra-short-term bond strategy, continues to make sense also for clients who want consistency and ultra-low-volatility. The ETF had a yield of 5.6% and duration of only 0.7 years as of March 31. 

VettaFi: Does active management make sense in this environment?  

Jacqueline Tung, vice president, ETF leader, BlackRockWith the large number of products available today, advisors have multiple options for portfolio construction. The ETF industry has experienced tremendous growth in the last 20 years. And with that, indexing has evolved significantly.

The first fixed income ETF globally was launched here in Canada in 2000: the iShares Core Canadian Universe Bond Index ETF (XBB). Since there, indexing has expanded to include optimized and active strategies. RBC iShares has the largest and more comprehensive offering of ETFs in Canada. That provides advisors with a lot of choice.

We are suggesting advisors look at a whole portfolio approach which combines index, factor, and active to deliver a consistent client experience. Within the RBC iShares lineup, in addition to index solutions such as XBB, we recently the launched RBC Fixed Income Pool ETFs to help advisors build portfolios with active building blocks.

VettaFi: What is the biggest challenge facing Canadian investment advisors when allocating to the fixed income portion of their portfolios?  

Naseem Husain, ETF strategist, Global X Investments Canada: With the overnight rate [CORRA] in Canada being at the 5% level, and rates expected to stay higher for longer, the biggest challenge is choosing between the benefits of investing in the short end of this inverted yield curve [where short term rates are higher than longer term rates[ or increasing duration exposure in anticipation of rate cuts and potential capital appreciation.  

On the low-duration-side Treasury bill ETFs, like our Canadian T-Bill Product, the Global X 0-3 Month T-Bill ETF (CBIL) is yielding near 5%. The Global X 0-3 Month U.S. T-Bill ETF (UBIL.U) is yielding a little bit more while also providing USD exposure. We think 5% with low-risk government exposure is enough for many investors.  

As fixed income ETFs were first created in Canada, innovation in this space continues with options-writing ETFs like the Global X Short-Term US Treasury Premium Yield ETF (SPAY). That adds covered call [and put]writing income on top of the attractive T-bill yields to provide a AA+ credit high-quality product with low duration risk and more yield.

Investors looking to participate in future rate cuts later this year and early into next year for potential capital gains can benefit from other products. The Global X Long-Term U.S. Treasury Premium Yield ETF (LPAY), has the same AA+ credit rating with higher duration. This means more sensitivity to interest rate movements, and more income from options premiums, which also allows the investor to get “paid to wait” for future rate cuts to unfold. 

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