iShares has launched a new fund (called the Short-Term Strategic Fixed Income ETF, or XSI) that seeks to generate income by investing primarily in securities of one or more its global fixed income ETFs.
The new fund will invest in:
- government bonds;
- investment-grade corporate bonds;
- high-yield securities;
- emerging market debt; and
- other fixed income investments.
The fund will invest directly in these products, as well as use derivatives. Further, the bank will limit its exposure to interest rate risk by limiting average portfolio duration to five years or less.
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It adds XSI has an annual management fee of 0.50%.
Background on today’s bonds
BlackRock Canada says the new fund was designed in response to the evolving fixed-income landscape. For several years, it adds, central banks around the world have kept yields low, but the average duration of bonds has risen—this has largely been driven by governments that have lengthened the maturity date of their debt instruments to lock in low interest rates.
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This means the spread between yield and duration is at historic highs: the average duration of the broad Canadian bond universe stands over seven years, while average yields are in the 2% to 3% range, says the company. If interest rates rise, returns from these long-duration bonds will be reduced.
Meanwhile, on the global level, investors are beginning to see interest rate policy divergence among central bankers. For example, while the U.S. is widely expected to tighten monetary policy, Europe, Japan and Canada are more accommodative stances.
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Such divergence in interest rates, says BlackRock Canada, may create both opportunity and volatility in the fixed-income market. “The era of stability in monetary policy and interest rates is drawing to a close,” says Aubrey Basdeo, managing director and head of Canadian Fixed Income at BlackRock. “In this new environment, it makes sense for investors to consider fixed-income assets with shorter durations.”
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To date, he notes, “yields in traditional domestic bond portfolios look poised to remain low.”