This is the third installment in a blog series about a variety of Exchange Traded Funds (ETFs) listed on TSX and the various strategies ETF investors could use to help achieve their investment objectives.*
We began this series by looking at the simplest way to get started as an ETF investor: through equity ETFs that passively track the performance of a broad market index. In Part 2, we looked at ETFs that provide access to dividends and may help reduce volatility in your investment portfolio. Today, we will cover fixed income strategies available to ETF investors.
There is much discussion in the industry about the risks associated with a potential rise in interest rates and the return of volatility in global financial markets. To help mitigate these risks, there are several fixed income strategies available to ETF investors that provide some flexibility in fixed income investment.
Laddering strategies are used to manage interest rate risk. They provide exposure to bonds of staggered maturities or successive maturity dates along the yield curve. Here are two examples of ETFs that provide a laddered approach:
- iShares 1-5 Year Laddered Government Bond Index Fund (TSX:CLF) provides exposure to a diversified government bond portfolio with laddered maturity levels from one to five years; and
- iShares 1-5 Year Laddered Corporate Bond Index Fund (TSX:CBO) provides exposure to a diversified corporate bond portfolio with staggered maturity levels from one to five years.
Investors could also consider a barbell strategy; that is, investing at the short and long ends of the yield curve. This strategy allocates equally between short term and long term bonds, and in the current environment allows for higher income from long term bonds while the short term exposure provides a counterbalance of safety and flexibility. Here are three examples of ETFs that offer a barbell strategy:
- First Asset DEX All Canada Bond Barbell Index ETF (TSX:AXF) consists of Canadian government and corporate bonds;
- First Asset DEX Corporate Bond Barbell Index ETF (TSX:KXF) consists of only corporate bonds; and
- First Asset DEX Government Bond Barbell Index ETF (TSX:GXF) consists of only government bonds.
All three products above comprise short maturity bonds with one to two years to maturity, as well as long maturity bonds with ten to 20 years to maturity.
A tactical bond strategy is another fixed income approach that uses a combination of strategic and tactical allocation strategies. For example, the PowerShares Tactical Bond ETF (TSX:PTB) provides exposure to mainly government, corporate and real return bonds. It makes tactical shifts based on economic conditions and opportunities. It uses an overall diversification strategy that employs asset classes that have historically performed well in different economic cycles (e.g. recessionary, non-inflationary and inflationary).
There are also opportunities for diversification through products like the PowerShares Senior Loan (CAD-Hedged) Index ETF (TSX:BKL) which provides exposure to senior loans, including leveraged loans, syndicated loans, bank loans and floating rate loans. These typically fall below investment-grade quality, but offer enhanced yields. Their low duration nature could help an investor reduce their risk of rises in interest rates. Another example is the First Trust Senior Loan ETF (CAD-Hedged) (TSX:FSL), which is actively managed. This ETF invests in a portfolio of senior ﬂoating rate loans and will generally hedge its U.S. dollar currency exposure back to the Canadian dollar.
Finally, there are also opportunities to target maturities through ETFs. For instance, RBC Target Maturity Corporate Bond ETFs (such as TSX:RQA and TSX:RQI) are fixed income ETFs maturing in successive years ranging from 2013 to 2021. Each fund tracks an index that maintains a portfolio of Canadian investment-grade corporate bonds structured to mature in the same year as the ETF itself.
In the next installment of this blog series, we will discuss ETF products that provide exposure to global and emerging markets, as well as exposure to commodities.
To learn more about ETFs listed on TSX, visit tmx.com/etf
*This series is primarily focused on Canadian-domiciled ETFs; however, it is worth mentioning that TSX also lists Exchange Traded Notes (ETNs) and Exchange Traded Receipts (ETRs).
Filed under: Exchange Traded Funds, Toronto Stock Exchange |