Investors looking for higher yields in their bond portfolio can look to a new exchange-traded fund that focuses entirely on the Canadian municipal bond market.
Horizons ETFs Management (Canada) Inc. adds to its fund lineup with the launch of Horizons Active Cdn Municipal Bond ETF, which will begin trading on the Toronto Stock Exchange on Thursday.
With a management fee of 0.35 per cent, the actively managed ETF provides investors the opportunity to tap into the municipal bond market by primarily investing in a portfolio of Canadian municipal bonds, such as those of the City of Sherbrooke.
"Municipal bonds offer investors an attractive risk-return profile because they have a low risk of default but are higher yielding than other types of Canadian government and provincial bonds," Howard Atkinson, president of Horizons ETFs, said in a statement.
Municipal bonds, often referred to as "munis," are debt securities issued by a city, municipality or county to finance local capital expenditures such as the construction of bridges, highways, airports or schools.
Canadian investors should be aware that while municipal bonds in the United States offer an attractive tax advantage, the same does not cross over into the Canadian market.
They do, however, provide an advantage to those investors looking for a low-risk opportunity, said François Bourdon, chief investment solutions officer at Fiera Capital Corp.
"There hasn't been a default of a municipality since the 1950s," Mr. Bourdon said. "Municipal offerings are extremely stable."
In addition, investors can get higher yields than a corporate bond – in some cases more than 0.40 per cent.
"The City of Sherbrooke is trading at 2.26 per cent while a five-year bank bond is around 1.80 per cent," Mr. Bourdon said.
The size of the municipal-bond market in Canada is approximately $40-billion – with approximately $24-billion of that in rated issues (issues that have received a debt rating from an agency). These issues are predominantly from large municipalities such as Toronto, York Region in Ontario, Vancouver, Montreal and Edmonton.
Non-rated bonds – municipal bonds that have not been rated by a third-party credit-rating agency – are generally issued by mid-sized municipalities and offer a slightly higher yield than the rated debt of larger Canadian cities
Currently, non-rated bonds represent approximately $16-billion, or 40 per cent of the market, according to Fiera, which is sub-advising on the ETF.
Up to 75 per cent of Horizons Active Cdn Municipal Bond ETF's portfolio can be invested in non-rated Canadian municipal bonds.
"There is tremendous opportunity in the non-rated category and an experienced fixed-income manager can apply credit analysis to identify quality issuers with above-average yields and high credit quality," Mr. Atkinson added.
Investors can find broader exposure to the government bond market in several ETFs already on the Canadian market.
IShares Canadian Universe Bond Index ETF includes a diversified selection of provincial, corporate and municipal bonds – although only 1.79 per cent of holdings is in municipal bonds.
Others include: iShares Canadian Government Bond Index ETF, which includes government bonds with an investment-grade rating, and BMO Long Federal Bond Index ETF, which holds securities primarily with a term to maturity greater than 10 years.