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Two PowerShares fixed-income ETF picks
11/24/2017 9:02:14 PM
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By Dave Paterson  | Wednesday, November 15, 2017


 



Invesco’s Powershares ETFs have been a strong competitor in the market for some time now. In the fixed-income space, I have two particular favorites, PowerShares Senior Loan Index ETF (TSX: BKL.F) and the PowerShares Tactical Bond ETF (TSX: PTB). Here’s a closer look at these funds.

PowerShares Senior Loan Index ETF (TSX: BKL.F)

One of the appeals of floating-rate investments is that there is very little duration risk because the interest rate earned fluctuates with a reference rate, quite often LIBOR. This makes them attractive in periods of rising yields, and that has been the case so far this year.

For the 12 months ending October 31, this ETF rose by more than 2.67%, while the FTSE/TMX Short Term Bond Index fell by 0.13%, and the broader FTSE/TMX Canada Universe Bond Index was off nearly 0.47%. The drop in the indices was the result of a rise in yields, which have been quite volatile in the first year of the Trump Administration. The combination of the U.S. Federal Reserve increasing rates last December, combined with market expectations of Trump’s economic plans likely to result in higher inflation has pushed global yields up. In Canada, the benchmark Government of Canada 5-year bond saw its yield rise from 0.96% a year ago to a recent 1.68%. It was a similar story with other rates, with the three-month LIBOR rate jumping from 0.91% to 1.39% in the same period.

With the underlying reference rate on the rise, so too were the prices of many of the loans in the portfolio. The gain in the portfolio was significantly lower than the rise in the underlying yield in the portfolio. This is because many of the loans had a rate floor in place, meaning the lowest rate the loan would pay was set at a predetermined level. In most cases, this floor rate was set at 1%, so even though there was a sharp rise in the reference rate, the coupon rates on many of the loans wouldn’t move higher until LIBOR crossed 1%. Now that LIBOR is above this threshold, Invesco estimates that nearly 95% of floating rate loans meet or exceed their floor, making them true floaters once again.

Whether or not the U.S. Federal Reserve raises rates before the end of the year, it is widely expected there will be increased volatility in the interest rate markets. That should prove to be a positive for floating rate products, particularly if we see further upward pressure on yields.

This remains my top fixed-income ETF pick. It offers broad exposure to floating rate loans, has a yield to maturity of 4.7%, and is available at a reasonable cost. This can be a solid addition to the fixed-income sleeve of your well-diversified portfolio.

PowerShares Tactical Bond ETF (TSX: PTB)

This is a tactically-managed portfolio that invests in a mix of underlying fixed-income ETFs. Because of this tactical approach, I believe it has the potential to outperform a passive bond index, particularly in periods of market volatility. That has happened year to date, with the ETF gaining 2.23% as of the end of October, a modest outperformance of the broader FTSE/TMX Canada Universe Bond Index at 2.13%.

At the end of October, about half was invested in short term, investment grade bonds, which outperformed. This contributed to the fund’s modest outperformance. Also, contributing to the return was the allocation to high-yield bonds.

The ETF did what I expected it to do – outperform in a volatile market. The tactical management from Invesco’s Intactive team aims for risk-managed exposure to the various segments of the fixed-income market. This can help the fund hold up better in periods of volatility.

The drawback comes from the team’s consistency in executing the strategy. So far, it has been decent, but unspectacular, and as of Oct. 31, performance has somewhat lagged the broader market for 3- and 5-year periods. Another drawback to this ETF is its cost, with a management fee of 0.49%, compared with 0.12% for Vanguard’s Aggregate Bond Index ETF (TSX: VAB).

Still, I see this fund as having the potential to outperform in a volatile market, helping to more than offset its higher cost.

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

 

 
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