Mutual funds and ETFs have a place in most income portfolios. They provide decent cash flow, without the need to construct a highly diversified portfolio of stocks and bonds.
However, some investors seem to have abandoned funds for higher yielding equities. They say that management expense ratios (MERs) on equity mutual funds are too high and that ETFs don't meet their targeted needs. That's not necessarily the case, however. There are some ETFs and mutual funds that would fit well into most portfolios, with less risk than high-yielding equities. Here are four funds that you should consider in the current environment. Prices are as of the close on June 10.
CIBC Global Bond Fund (CIB490)
Type: Mutual fund
Code: CIB490 (A units)
Current price: $12.98
Annual payout: $0.14 (trailing 12 months)
Yield: 1.1 per cent
MER: 2.10 per cent
Comments: This fund does not provide a big yield but it makes up for it on the capital gains side. The management team of Brandywine Global Asset Management invests in a portfolio of international bonds that are widely diversified in terms of country of origin and maturity date.
A little over 33 per cent of the assets are in the U.S. with others scattered around the globe. Just over 52 per cent of the portfolio matures in 10 years or less.
This fund was recommended to readers of my Income Investor newsletter a little over two years ago. For the two years to May 31, the average annual compound rate of return was 6.06 per cent, which was almost double the category average.
BMO Equal Weight Utilities Index ETF (ZUT-T)
Type: Exchange-traded fund
Trading symbol: ZUT
Current price: $16.51
Annual payout: 66 cents
Yield: 4.0 per cent
MER: 0.55 per cent
Risk level: Moderate
Comments: This ETF tracks the performance of the Solactive Equal Weight Canada Utilities Index, net of expenses. The fund holds 15 stocks with the largest positions being Boralex (7.25 per cent of assets), Atco (7.06 per cent) and Innergex Renewable Energy (6.99 per cent). The fund has total assets of $230.4-million.
The fund is having a very good year with a capital gain to date of just over 15 per cent. Plus investors are receiving monthly distributions of 5.5 cents a unit (reduced from 6 cents in March). Right now the fund is running ahead of the S&P/TSX Utilities Index, which is up 12.8 per cent so far in 2016.
All income portfolios should have some utilities stocks in the mix, whether in the form of individual equities or a fund such as this.
BMO U.S. Dividend ETF (ZDY.U-T)
Type: Exchange-traded fund
Trading symbol: ZDY.U
Current price: $20.37 (U.S.)
Annual payout: 57.6 cents (U.S.)
Yield: 2.83 per cent
MER: 0.30 per cent
Risk rating: Moderate risk
Comments: I recommended this fund in December 2014 as a way to obtain steady U.S. cash flow. It's available in both a hedged and unhedged version. This is the unhedged ETF so the price and the distributions are all in U.S. currency.
This ETF offers exposure to a wide range of dividend-paying U.S. equities. There are 102 stocks in the portfolio. Top top holdings include ONEOK (a pipeline company), NRG Energy Inc. (electricity generation), and Spectra Energy (also pipelines).
The trading price is up 12 per cent year to date, so the fund is outpacing the U.S. market by a wide margin. But be aware that is a small fund ETF (about 1.1 million units outstanding) so, unlike most ETFs, trading volume is very thin. If you are interested, place a limit order and wait for a fill.
CI Cambridge High Income Fund (CIG6803)
Type: Mutual fund
Code: CIG6803 (A units)
Current price: $12.48
Annual payout: 72 cents
Yield: 5.8 per cent
MER: 2.31 per cent
Comments: The objective of this fund is to generate a high level of income by investing in a portfolio of equities and fixed income assets from around the world. It is fund is running well ahead of its peer group over all time periods. It was down a fraction over the year to May 31, but still well ahead of the category average.
The portfolio is well diversified internationally. Only 13.4 per cent of the equity holdings are in Canada, with 17 per cent in the U.S. and 11.1 per cent overseas. Foreign corporate bonds comprise 22.3 per cent of the assets.
Of special interest to low-risk investors is the fund's current portfolio composition. As of April 30, the managers were holding almost 31 per cent of their assets in cash and another 27.7 per cent in bonds. Clearly, they are expecting a broad correction in the stock market and have positioned this fund accordingly. If they are right, the fund should do very well over the next couple of years.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.