Asset managers are pouncing on the opportunity to offer new fixed-income products as investors look to take on duration and risk amid easier monetary policy.
Investors have anticipated “falling into an interest-rate-cutting environment, and people having a renewed interest in fixed income, especially around longer duration,” said Raj Lala, CEO of Evolve ETFs in Toronto. “And so we thought, ‘This is an interesting area … How are we going to compete?’”
Evolve ETFs launched the Evolve Canadian Aggregate Bond Enhanced Yield Fund (TSX: AGG) in late September.
The actively managed ETF’s holdings include the BMO Aggregate Bond Index ETF (TSX: ZAG) and iShares Core Canadian Universe Bond Index ETF (TSX: XBB). It employs a covered-call strategy and has a 0.45% management fee.
The new fund is modelled after the $268-million Evolve Enhanced Yield Bond Fund (TSX: BOND) that launched in October 2023 and invests primarily in U.S.-listed fixed-income ETFs and features a covered-call strategy.
AGG, however, seeks to capitalize on the home bias of Canadian investors, the declining interest rate environment, and the fact that the Canadian bond market tends to be more conservative and less volatile than the U.S. Treasury market, Lala said.
AGG’s underlying portfolio provides exposure to about 1,685 bonds — including federal, provincial, municipal and corporate bonds — with a weighted-average credit rating of AA and a weighted-average duration of 7.36 years, Lala said.
“This one’s just over seven years [in duration], but long enough where if you anticipate further rate cuts, which I think most people are anticipating in Canada, then longer-dated bonds should be a beneficiary,” he said.
By writing covered calls on 50% of the ETF’s exposure, Evolve ETFs aims to reach a target yield of 6% — “much better than what you would get just owning the individual bond,” Lala said.
Also in late September, BlackRock Inc. launched a new active ETF that offers global fixed-income exposure: the iShares Flexible Monthly Income ETF (TSX: XFLI, XFLI.U). There is also a Canadian dollar–hedged version (TSX: XFLX).
Holdings include the $5.9-billion iShares Flexible Income Active ETF (TSX: BINC) as well as cash (Canadian and U.S. dollars).
The fund seeks to maximize long-term income in “a way that’s flexible, that’s global and allocates predominantly to what we perceive as harder-to-reach sectors of the fixed-income market — things like high yield and emerging market debt, securitized assets,” said Rachel Siu, head of Canada fixed-income strategy with BlackRock.
The objective is to maximize income “effectively through different market cycles and different market environments,” Siu said. She noted that “we’ve gone through a period where central banks have started cutting, and yields have moved a lot over the course of the summer.”
In a recent report, FTSE Russell said that “central bank easing and lower inflation lifted global bond markets” in 2024’s third quarter, and that the Canadian yield curve normalized after three interest rate cuts by the Bank of Canada (BoC).
With the BoC and other central banks expected to make further rate cuts, both Lala and Siu expressed a bullish view of fixed income.
“In general, we’re very excited about the fixed-income opportunities in this current environment,” Siu said. “Now that central banks are … on this easing path, we do think that there’s opportunity for investors to benefit from a price-return standpoint.”