Canadians sure like their fixed-income investments. Both mutual funds and exchange-traded funds (ETFs) have been in growing demand since 2009, shortly after the financial crisis of 2007-2008, as investors began their hunt for yield in a low-interest rate environment.

In fact, Canada has the highest proportion of fixed-income ETFs in the developed world at 35 per cent of assets, compared with 17 per cent globally, says Mark Noble, senior vice president, head of sales strategy, at Toronto-based Horizons ETFs Management (Canada). 

Statistics from The Investment Funds Institute of Canada (IFIC) indicate fixed-income mutual fund assets under management stood at almost $92 billion in 2008, almost quadrupling to $363.6 billion as of this past September.

Noble says that in the recent past, being a fixed-income investor in Canada has been expensive as interest rates dropped and the fixed return on the underlying coupon fell.

Lower cost

ETFs, with their inherently lower costs, liquidity and ability to trade easily on stock exchanges, have benefited.  Noble says the cost of a typical fixed-income (i.e. bond) mutual fund is in the neighbourhood of 1.2-1.3 per cent, while its ETF counterpart comes in 40-50 basis points lower. “That’s a huge difference,” he says.

The result is that fixed-income is the fastest-growing asset class for ETFs, not just in Canada, but around the world, says Stephen Leong, director, head of Canada iShares product at BlackRock in Toronto. 

“We do expect to see really significant growth both in Canada and abroad as more and more fixed income users start to adopt ETFs,” says Leong. 

As with other asset classes, ETFs provide a wide range of fixed-income selections – everything from high-yield bonds, to emerging market bonds, as well as government bonds in countries other than Canada. In doing so, says Leong, the ETFs provide increased diversification to an investor’s portfolio.  It’s difficult for example, to find mutual funds that focus in areas such as U.S. high-yield bonds, floating rate paper and emerging market bonds, he says.

In addition to broad-based exposure to different bonds there’s an increasing selection of managed income ETFs that incorporate some degree of asset selection from a professional manager like BlackRock. “We’ve also seen a significant growth in those types of products where again, you’re combining the benefit of the ETFs in terms of cost and flexibility and also incorporating professional management.”

The mutual fund industry has partly added to the growth of fixed-income ETFs. An increasing number of mutual fund companies now also offer ETFs, with the result that some firms have started incorporating ETFs as underlying investments in their mutual fund products, says IFIC.

Leong says a variety of investors use fixed-income ETFs – everyone from the do-it-yourselfer using a discount brokerage, to those with an advisor and even institutional users.

A steady anchor

While different investors have different applications for fixed-income ETFs, the one characteristic joining them all together is the fact that the asset provides a solid, steady anchor for their portfolios.

“Fixed income is … a diversifier of equity risk and so regardless of the particular market environment, we find that all of our clients always incorporate some degree of fixed income for that diversification benefit,” says Leong. “When it comes to specific returns, we’ve seen a little tightening of interest rates this year and when interest rates move up, bond prices come down and that’s been a little bit of a headwind in terms of performance. But again, the role of fixed income within a portfolio is a little bit of return seeking, but [more so, a] diversifier of equity risk.”