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Bond yields have been rising sharply lately by bond market standards, but the net effect on income-hungry investors is negligible.

So we should expect interest to remain strong in one of the ETF world’s most interesting products, the iShares Canadian Financial Monthly Income ETF (FIE-T). This exchange-traded fund has been around for more than 11 years – eons by ETF industry standards – and has attracted an impressive $944.7-million.

The fee for investors who own FIE is 0.82 per cent, which for this type of ETF is at the outer reaches of bloated. A competing product, the BMO Equal Weight Banks Index ETF (ZEB-T), recently had its management expense ratio lowered to a comparatively svelte 0.28 per cent.

What gives with FIE? My theory is the yield, which shows up at 5.8 per cent on Globeinvestor. With five-year Government of Canada bond yields around 1.3 per cent, that’s huge. Also, FIE has produced some strong total returns – 39.6 per cent for the 12 months to Sept. 30 and 9.7 per cent on an annualized basis over the past 10 years.

FIE is a play on a favourite sector of investors – financials. Banks make up about 48 per cent of the portfolio, insurance companies represent another 26 per cent and much of the rest are diversified financial companies and even a couple of real estate investment trusts.

How, you have to ask yourself, does FIE produce income yielding almost 6 per cent with this mix of investments? You’ll find answers if you check its online profile and dig into the data on distributions. In 2020, FIE paid out 48 cents in total distributions per unit, as it has since 2011. This ETF has been dead reliable.

However, only 28 cents per unit was accounted for as dividends in 2020. The rest was a return of capital, which in non-registered accounts is not taxed each year. Instead, the RoC amount is subtracted from your adjusted cost base, thereby accentuating your capital gain when you sell or easing a capital loss.

RoC can be an issue if a fund consistently pays out more than it takes in via dividends, bond interest and capital gains from securities it has sold at a profit. Over time, the fund’s unit value could get ground down. This doesn’t seem to be a problem with FIE, but investors using non-registered accounts should know what they’re dealing with here. There is work to be done in keeping track of your adjusted cost base over the years.

The big issue with FIE is the weighty cost. Sure, returns are fine. But there’s no getting around the fact that you’re paying almost triple what a similar product, ZEB, charges. Holding only banks, ZEB has produced a one-year return of 49.4 per cent and a 10-year annualized return of 12.1 per cent. The yield is 3.2 per cent, based mostly on dividends. The RoC portion in recent years has been negligible.

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