BlackRock Asset Management Canada Limited has retooled one of its exchange traded funds in advance of changes to the federal tax regulations governing income trusts that will come into effect in January 2011.

iShares Diversified Monthly Income Fund, which launched Thursday on the Toronto Stock Exchange under the symbol XTR, offers investors a consistent monthly income stream, along with full liquidity and the potential for modest long-term capital growth.

The new ETF replaces the former iShares S&P/TSX Income Trust Fund, which traded under the same symbol. The conversion was approved by a special meeting of unitholders on August 23.

“The goal here is to ensure investors continue to receive a reliable monthly income stream while still enjoying the benefits they’ve come to associate with iShares ETFs,” said Oliver McMahon, director of product management for iShares ETFs at BlackRock Canada.

“The new XTR is an income product that has the ETF’s inherent advantages, including diversification, transparency, low costs, tax efficiency and the ability to use value-adding trading strategies, such as limit and stop orders.”

XTR will invest primarily (though not exclusively) in other Canadian iShares ETFs. It will offer a diversified portfolio of income-bearing asset classes including, but not limited to, dividend-paying common equities, fixed-income securities (such as corporate bonds and long-maturity vehicles) and property investments, such as real-estate investment trusts. In addition to other Canadian iShares ETFs, XTR may also hold other income-bearing investments directly and/or through the use of derivatives.

BlackRock Canada will maintain a strategic asset allocation policy for XTR that emphasizes income generation while maintaining the potential for modest long-term capital growth.

The initial target asset allocation is expected to be composed of approximately 50% equities (mostly Canadian, although foreign holdings may be included for diversification) and approximately 50% fixed-income investment vehicles. The fund will rebalance its strategic asset allocation on a quarterly basis, but will do so more frequently if market conditions dictate.

The aim of XTR is to distribute net income regularly to investors in a way that maximizes benefit while minimizing the sting of the new tax rules.

XTR has been specially designed to be transparent and offers a methodology that provides a consistent income stream through monthly nominal distributions, to be determined annually.

The strategy will distribute the fund’s net income to the extent that the fund will not be liable for ordinary income tax on the earnings. Net capital gains will be distributed so that they, too, are not subject to ordinary income taxes.

Should XTR’s net income and net realized capital gains in any year not be sufficient to fund pre-determined monthly distributions, the balance of the monthly payouts will constitute a return of capital to unitholders. Returns of capital are generally non-taxable to unitholders, but ultimately reduce the adjusted cost base of their units for tax purposes.

XTR has a management fee of 0.55%, much lower than 1.84% management fee of the average balanced mutual fund in Canada, as reported by Morningstar Research Inc. XTR’s assets under management totalled $207.9 million as of August 16.