An exchange-traded fund generating monthly income using stocks and bonds from the financial sector sounds like a no-brainer investment.
Given that there’s about $888-million invested in the iShares Canadian Financial Monthly Income ETF (FIE-T), investors seem to agree. FIE’s portfolio is pretty simple - a mix of common shares, preferred shares and bonds issued by banks and other financials. FIE shareholders have received 4 cents of income per share each month this year, a distribution that recently offered a rather large yield of 7.3 per cent.
The problem with FIE this year is that its price was down 17.2 per cent for the year through Oct. 20. Consider FIE a cautionary story about how the financial market events of 2022 are causing grief in surprising places.
Balanced funds are another example of this disruption. Both stocks and bonds have fallen this year, producing extremely bad results from portfolios built on the tried and true blueprint of 60 per cent stocks and 40 per cent bonds.
FIE’s problems are similar. Its second-largest holding is a corporate bond ETF, which is itself 40 per cent weighted to bonds issued by banks and other financial companies. The top holding is a preferred share ETF, which is close to 55 per cent weighted to financials. Both of these underlying funds have fallen hard this year because of rising interest rates.
Common shares issued by the big banks account for about 52 per cent of FIE’s assets, but there’s no relief here, either. On average, shares of the Big Six banks have fallen about 10 per cent in the past 12 months.
As a sector fund, FIE is pretty well diversified. And yet, you can add this fund to the list of investments and strategies that have been hurt in 2022 by diversification challenges.
Times like these are a good opportunity to review what you own and decide whether disappointing holdings continue to make sense. FIE has a management expense ratio of 0.84 per cent, which is outrageously high at the best of times. FIE’s tax profile in non-registered accounts is complicated by the fact that dividends account for only about half of distributions, which means limited use of the dividend tax credit. A return of capital and capital gains account for the rest.
FIE’s been a strong long-term performer, with a 10-year annualized gain of 7.4 per cent to Sept. 30. That’s pretty much what the S&P/TSX Composite Index made over that period. But FIE also offers a reminder that even the long-term stalwarts in your portfolio need some attention in 2022.
-- Rob Carrick, personal finance columnist
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Compiled by Globe Investor Staff