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 like these, people look to fixed-income securities for safety and cash flow. But with interest rates on the rise, many bond mutual funds and ETFs 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 (TSX: XFR)
Type: Exchange-traded fund
Recent price: $20.16
Entry level: Current price
Annual payout: $0.372
Risk Rating: Conservative
Recommended by: Gordon Pape
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. It 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%. There are 43 securities in the portfolio, all short-term. The duration is a very low 0.1 years and the weighted average maturity if 2.48 years, which means the assets carry an extremely low interest rate risk.
Performance: The average annual three-year return to Nov. 30 was 1.31%. Year-to-date (to Dec. 10) the fund is ahead 1.37%. 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 $0.023 but have been increased four times and are now at $0.031.
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 last year between $20.12 and $20.20.
Summing up: Low risk, low return, safety. That’s what you are getting here.
Action now: This ETF is a Buy for conservative investors. Ask your financial advisor if it is suitable for your account.
Gordon Pape is Editor and Publisher of the Internet Wealth Builder and Income Investor newsletters. For more information and details on how to subscribe, go to www.buildingwealth.ca.