BlackRock Asset Management Canada Ltd. Monday announced the launch of a new iShares fund that seeks to generate income for unitholders by investing primarily in securities of one or more iShares ETFs that provide exposure to global fixed income securities, including government bonds, investment grade corporate bonds, high yield securities, emerging market debt and other types of fixed income investments.
Units of iShares Short Term Strategic Fixed Income ETF (TSX:XSI) are now trading on the Toronto Stock Exchange.
BlackRock Canada says it intends to limit the fund’s exposure to interest rate risk by limiting average portfolio duration to five years or less.
The firm notes 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. 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 after years of moving in lockstep. For example, while the U.S. is widely expected to tighten monetary policy, Europe, Japan and Canada are adopting a more accommodative stance. Such divergence in interest rates may create both opportunities and volatility in the fixed income market — pointing to the advisability of mitigating interest rate sensitivity while looking beyond Canada’s borders for yield.
“The era of stability in monetary policy and interest rates is drawing to a close, and in this new environment it makes sense for investors to consider fixed income assets with shorter durations while global forces play themselves out,” says Aubrey Basdeo, managing director, head of Canadian fixed income, BlackRock. “At the same time, yields in traditional domestic bond portfolios look poised to remain low, suggesting that investors may need to explore fixed income opportunities elsewhere to generate yield.”
XSI has an annual management fee of 0.50%.