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Nearly a dozen new fixed-income exchange-traded funds have been launched in Canada this year, as anxious investors look for new alternatives for their bond holdings in a climate of rising interest rates.

The fixed-income market – including preferred shares – accounts for almost a third of the money flowing into ETFs, with a total of $36.8-billion in assets under management (AUM) as of Feb. 28, according to National Bank Financial, and was the fastest-growing asset class in 2017.

Already this year, fixed-income ETFs have seen approximately $1.3-billion in net flows, according to Bloomberg data.

As interest rates rise, bond prices move inversely, potentially limiting the returns for fixed-income investors. As a result, investors are increasingly seeking out actively managed funds that use strategies aimed at improving overall returns beyond just an index, or are shortening the duration of their bond exposure (shorter-term bonds have less vulnerability to rising rates).

In the eight or so past years of the postcrisis era, bond investing was continually challenging given the near-zero interest rates that were on offer,” says Daniel Straus, an ETF research analyst with NBF. “Now that rates are moving up, bond prices themselves are set to suffer, and many investors are turning to ETFs to simultaneously cut costs and position themselves for the coming turbulence.”

Evolve Funds recently added a third actively managed fixed-income fund to its lineup. With a management fee of 0.4 per cent and a ticker of FIXD, the Evolve Active Core Fixed Income ETF began trading last Thursday on the NEO Exchange. With subadviser Foyston, Gordon & Payne Inc., the fund provides investors with a total investment return through income and long-term capital appreciation primarily through investments in debt obligations of Canadian, U.S. and international issuers.

“This is a sector that is going to continue to see a lot of growth as more advisers and investors are realizing that an actively managed strategy within fixed income actually makes a lot of sense,” Raj Lala, chief executive of Evolve, said in an interview. “You can exploit some of the dislocations in the market and you can pivot in terms of your duration and in the holdings that you have. ”

BlackRock Asset Management Canada Ltd. is the largest fixed-income provider in the country (excluding fund of fund products) with $15.8-billion in AUM, just slightly ahead of BMO Asset Management with $13.4-billion.

Under a partnership with Dynamic Funds, BlackRock has expanded its actively managed fixed-income shelf with the launch of the Dynamic iShares Active Investment Grade Floating Rate ETF (DXV), which began trading on the Toronto Stock Exchange on Wednesday with a management fee of 0.3 per cent.

“We’re seeing significant uptake in actively managed ETFs, particularly for fixed income,” said Pat Chiefalo, head of iShares Canada at BlackRock. “After many years of expectations of the potential rising rates, I think this year we are actually seeing it happen. Now, investors are starting to look at strategies to mitigate that potential decrease in value in the fixed-income side.”

Mark Raes, head of ETF business development at BMO Global Asset Management, says active fixed income is an area he is currently exploring, specifically in the global fixed-income space.

“As people look more to global fixed-income exposures, I think having active ETFs is going to be a valuable part of the market place,” Mr. Raes says. “A lot of people and institutions feel more comfortable making allocation decisions within the domestic or the North American market, but once you branch out to global fixed income, you are starting to step outside some people’s area of comfort or expertise, and therefore having an active manager can help with those decisions.”

Last month, the bank added three passive ETFs to its already robust fixed-income shelf – including BMO Short-Term Bond Index ETF (ZSB), BMO Corporate Bond Index ETF (ZCB,) and BMO Government Bond Index ETF (ZGB). Management fees range from 0.09 per cent to 0.15 per cent.

Fixed-income ETFs launched in 2018

FIXD Evolve Active Core Fixed Income ETF

DXV Dynamic iShares Active Investment Grade Floating Rate ETF

ZSB BMO Short-Term Bond Index ETF

ZGB BMO Government Bond Index ETF

ZCB BMO Corporate Bond Index ETF

QBB Mackenzie Canadian Aggregate Bond Index ETF

QSB Mackenzie Canadian Short-Term Bond Index ETF

QCB Mackenzie Canadian All Corporate Bond Index ETF

QUIG Mackenzie US Investment Grade Corporate Bond Index ETF CAD-Hedged

QHY Mackenzie US High Yield Bond Index ETF CAD-Hedged

QTIP Mackenzie US TIPS Index ETF CAD-Hedged

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