Investors have suddenly turned cautious. It’s no wonder. The stock markets have been extremely volatile since the beginning of October and that shows no sign of abating.
In times such as these, people look to fixed-income securities for safety and cash flow. But with interest rates on the rise, many bond mutual funds and exchange-traded funds are in the red as well.
But there are a few that are actually making money in this environment. The returns are low, but at least they are on the plus side. And, in the case of the one I am recommending today, the risk is very small. Here are the details.
iShares Floating Rate Index ETF (XFR-T)
Type: Exchange-traded fund
Current price: $20.17
Entry level: Current price
Annual payout: 37.2 cents
Yield: 1.8%
Risk rating: Conservative
The security: This ETF invests in a portfolio of Canadian floating rate bonds. The interest payments adjust to change in interest rates, so at times of rising rates the cash flow will gradually increase.
Why we like it: This is a low-risk ETF. It won’t make you a lot of money, but it will protect your assets in times of market turmoil. In the current climate, it’s a useful anchor to a conservative portfolio.
Key metrics: The fund was launched in December, 2011. It has assets of just over $700-million and a management expense ratio of 0.23 per cent. There are 43 securities in the portfolio, all short-term. The duration is a very low 0.1 years (that is, the fund would fall 0.1 per cent in price if interest rates go up by one percentage point) and the weighted average maturity is 2.48 years, which means the assets carry an extremely low interest rate risk.
Performance: The average annual three-year return to Oct. 31 was 1.27 per cent. Year-to-date (to Nov. 30), the fund is ahead 1.34 per cent. As you can see, returns are very low.
Risks: While returns are low, so is the risk. The fund has never lost money over a calendar year since it was launched. However, if interest rates should drop, the payout will also fall.
Distribution policy: Distributions are paid monthly, and they have been steadily increasing this year. Payments started the year at 2.3 cents, but have been increased four times and are now at 3.1 cents.
Tax implications: Distributions are in the form of interest, which would be fully taxed outside a registered plan.
Who it’s for: This fund is suitable for very conservative investors who want a low-risk, fixed-income asset for their portfolio.
How to buy: The units trade on the TSX. Volume is small, so enter a limit order. The shares trade in a very narrow range – over the past year, between $20.12 and $20.20.
Summing up: Low risk, low return, safety. That’s what you are getting here.
Ask your financial adviser whether it is suitable for your account.
Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.
Gordon Pape