Loonie ETF with Floating Rates

07/25/2017 2:51 am EST

Focus: BONDS

Vivian Lewis

Editor and Publisher, Global Investing

We are adding a new position to our funds, a Canadian ETF investing in loonie-denominated floating rate notes to reduce our exposure to higher interest rates, explains international investing expert Vivian Lewis, editor of Global Investing.

This recommendation is iShares Floating Rate ETF (Toronto: XFR), managed by BlackRock which launched it 6 years ago, and covered by Morningstar.

Its benchmark is the FTSE TMX Canada FRN Index, and it offers a DRIP for reinvesting your monthly dividends — which I advise using.

The fund holds under 50 positions and trades about 1,000 shares per day, max. Its fees and expenses come to 0.23% of assets held.

The fund is the best of a bad lot, having failed to match its benchmark and doing dismally in 2016, the last year for which we have reports, earning 1.02% in Canadian dollars while the FT index it tracks gained 1.3%.

Half its investments are in Canada Housing Trust No. 144A, an institutions-only floating rate vehicle, in which it has invested no less than 57.29% of its assets.

Its 2nd and 3rd largest holdings are under 10% in the Provinces of Ontario and Quebec, and 2.1% in the Province of Alberta.

The rest of the pile is in Hydro-Quebec and Financement Quebec, jointly at 14% with the rest in the Bay Street banks' FRNs: Bank of Montreal; CIBC; Toronto-Dominion; and Royal Bank of Canada. It has virtually nothing in industrial FRNs and here are no options out.

Rating-wise it is 45%+ in triple A holdings; and 21.2% in double and single A ones, leaving 33.3% at higher risk. Duration is 18% less than a year; 21.74% 1-2 years; 28.14% 2-3 years; 28.73% 3-5 years; and the remaining 3.19% 5-7 years.

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