Floating Rate ETFs

A reader wants to know: How do ETFs rate in the current interest rate environment? Gordon Pape gives his answer.


Q – Just wondering if you have any thoughts on floating rate bond ETFs in this current environment (for example HFR from Horizons). – Mike D.


A – HFR has traded in a very narrow range for most of the past year, between $10.05 and $10.25 a share. It closed on July 29 at $10.16.

This ETF invests in a portfolio of Canadian debt securities and hedges the portfolio’s interest rate risk to generally maintain a duration of less than two years. So what you’re getting is essentially an ultra short-term bond ETF, even though the portfolio may contain issues of longer maturities.

The fund is heavily concentrated in financial issues (about 70% of the total) and has an average credit rating of A. It pays monthly distributions of about $0.02 a unit. The share price held up quite well during the recent sell-off of bonds and bond funds.

You’re not going to make a lot of money with this ETF. The year-to-date return to June 30 was only 1.05% and the management fee of 0.4% is on the high side for this type of ETF. On the plus side, risk is minimal so if you are content with a yield of about 2.5% this fund is worth considering for your short-term fixed-income holdings. – G.P.

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