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iShares recently introduced a Floating Rate Note ETF (Factsheet, Prospectus) that mostly holds federal and provincial bonds that pay a variable coupon that is referenced to a specified market interest rate and adjusted regularly. iShares says that the rationale for owning floating-rate securities is to minimize losses in the bond portion of the portfolio in a rising interest rate environment. The ETF’s management fee is 0.20% and iShares will be waiving the management fees for an introductory period.

Traditional fixed income securities typically decrease in value when interest rates rise and increase in value when interest rates decrease. Floating-rate bonds, on the other hand, are less sensitive to interest rate fluctuations but the income stream from floating-rate securities will fluctuate based on prevailing interest rates. Currently, XFR sports an yield-to-maturity of 1.46% and the duration is just 0.13 years (duration is a measure of the sensitivity of a fixed-income security to interest rate changes). In other words, XFR offers cash like exposure.

Given XFR’s cash-like risk/return profile, it seems to me that investors have better options. High Interest savings accounts offered through discount brokers currently offer an yield of 1.25%, which is pretty much exactly the same as XFR’s yield of 1.46% less the management fee of 0.20%. However, unlike an ETF, the high interest savings accounts can be bought and sold without incurring a trading commission.

This article has 5 comments

  1. Looks like a money market fund (the capital will fluctuate a little) with bond-like management fee (compare Vanguard Bond ETFs). Extra short term bond fund? My HISA (no capital fluctuation!) pays 2%!!!

  2. You can get much better cash returns than 1.25%.

    For example, Canadian Direct Financial (division of Canadian Western Bank) pays 3% on TFSA deposits and there are no fees of any kind. The only drawback there is that some investors may already have used all their TFSA contribution room. I currently use Canadian Direct Financial’s TFSA for part of my TFSA investment and have been quite happy with them thus far.

    Other options are the People’s Trust, based in Vancouver, which pays 2.1% on savings accounts. People’s Trust also offers 3% on TFSA accounts. If memory serves, Canadian Tire financial also pays around 2% on savings accounts.

    One last note regarding fixed income is a ETF that Claymore offers. I have their CLF ETF (Claymore 1-5 Yr Laddered Government Bond ETF) which currently has a yield over 4% and a management fee of 0.17%.

  3. @Jerry: That’s my reading as well. The trouble is since this is an ETF, one has to pay trading commissions to buy and sell. That makes the ETF unsuitable for parking cash for most people.

    @Tom: I agree you can do better in terms of yield alone. But if you want to park cash in a discount brokerage account, I do not think you can much better. I suppose you can use an online savings account for taxable accounts provided you are willing to wait a few business days for the transfer to go through. But this is impractical for registered accounts.

    Also, note that CLF cash distribution is not the same as its yield. The cash yield may be over 4% but the yield-to-maturity is only 1.45%. In other words, if interest rates stay the same, you can expect CLF to post capital losses because its cash yield is higher than its yield-to-maturity. It’s kind of like buying a $100 bond maturing in a year that pays 4% when the current yield is 2%. The bond won’t be selling for $100, it will be higher, say $102. If you hold it to maturity, you’ll collect a interest of $4 but you’ll lose $2 when the bond matures.

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  5. Sorry if this is considered double post. I just wrote a comment in the “parking cash in your portfolio” comment section regarding this. Questrade charges mutual fund purchases, 10$ per trade, on the HISAs. Plus, I can’t seem to find them in theur mutual funds lookup tool.

    In that case, for Questrade clients, would the XFR make sense for parking cash? 50% less trading comission and available online as opposed to the HISAs.