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Mackenzie harnesses the power of active fixed-income ETFs

Bond investors can choose from four actively managed exchange-traded funds that give them easy access to diversification and reduce risk

By: TERRY CAIN

Date: November 24, 2016

The idea of an actively managed exchange-traded fund (ETF) might be hard for some people to wrap their head around. Don’t ETFs mean passive, not active? There’s nothing inherent to the ETF vehicle that requires the underlying investment to be passive. In fact, actively managed and smart beta ETFs may have some distinct advantages over other products.

The first generation of ETFs were mainly passive products, but it’s estimated that nearly 25 per cent of Canadian-listed ETFs are now based on smart beta or active investment strategies. A host of strategies can fit within the ETF structure, says Michael Cooke, senior vice-president and head of exchange-traded funds at Mackenzie Investments. “Investors are seeking more choice and combinations of investment strategies to help build more complete and better-rounded portfolios,” Mr. Cooke adds.

Mackenzie offers a group of five smart beta equity ETFs designed to give investors smarter diversification, enhanced protection and greater choice. These funds replicate underlying indexes provided by TOBAM, a Paris-based asset manager. The five funds use alternative index construction rules to improve diversification, enhance performance and reduce volatility.

Actively managed fixed-income ETFs are becoming more popular as well. Toronto-based Mackenzie offers four: Core Plus Canadian Fixed Income (MKB), Core Plus Global Fixed Income (MGB), Unconstrained Bond (MUB) and Floating Rate Income (MFT).

“In the current environment, with interest rates tumbling to historic lows and more government debt being issued, it has really changed the game,” Mr. Cooke says. “With yields so low, there is more interest rate sensitivity, and it’s more difficult for investors to navigate through bond markets. But the need for fixed-income allocations hasn’t diminished. So we’re at a point where active management in fixed-income investing makes particular sense.”

The Mackenzie Core Plus Canadian Fixed Income ETF mostly consists of investment-grade Canadian bonds. The fund also allocates a small amount abroad, with foreign holdings hedged to protect investors against fluctuating currency values. The investment team has access to asset classes that are difficult for investors to buy on their own, like floating-rate loans and high-yield bonds, which can help to boost income and add diversity. “This fund is patterned off our mutual-fund strategies,” Mr. Cooke says. “It’s a battle-tested, proven approach.”

The Mackenzie Core Plus Global Fixed Income ETF invests internationally, achieving an overall average credit quality of A3/A- or higher with limited non-investment grade holdings. Mr. Cooke notes that this fund provides diversification in the form of foreign fixed income, reducing investors’ exposure to Canadian government and corporate bonds and the country’s interest rate and economic cycles.

Where these two funds are fairly straightforward, the next two are more unconventional. The Mackenzie Unconstrained Bond ETF allows portfolio managers to select global fixed-income securities across various credit ratings, duration, structures, sectors currencies and countries. It has the flexibility to manage volatility arising from interest rate hikes or widening credit spreads. The fund holds securities with a low correlation to traditional fixed-income products, a feature that helps to improve its risk-return profile.

The Mackenzie Floating Rate Income ETF mitigates interest rate risk because floating-rate loans are less sensitive to rate moves than traditional fixed-income instruments. Potential income enhancement from such loans can deliver better yields than conventional bonds. Floating-rate loans rank higher in the capital structure than other forms of debt and are usually secured by company assets. They also generally have a low correlation to conventional investment-grade fixed-income assets, providing diversification benefits to a portfolio.

Mr. Cooke explains that all four ETFs offer diversification into asset classes other than government and corporate bonds, and into other geographic regions. “They provide easy fixed-income diversification, which is difficult for many investors to achieve,” he says. “And there are very few products in Canada that provide truly active exposure to these fixed-income markets.”

These ETFs can also accommodate specific strategies based on an investor’s perception of the market. Mr. Cooke points out that some investors believe the U.S. and other countries may soon raise interest rates. The MUB and MFT funds focus on higher-yielding instruments that have less sensitivity to rate fluctuations.

Active fund managers like those at Mackenzie are always weighing the relative value of securities available in their investment world, Mr. Cooke says. For government bonds, that means looking across the yield curve and determining what maturity offers the best value. For corporate fixed income, the analysis involves more fundamental research, such as looking at balance sheets and credit risks. Overlaid on this analysis, for the funds with a global mandate, are economic indicators plus fiscal and monetary policies in each country.

It’s the ability to make these assessments that gives active fixed-income ETFs an advantage over index products. This becomes especially true for corporate bonds. “In this space, it’s just as important what you don’t own as what you do,” Mr. Cooke says.

At this point, when trends that have shaped the fixed-income market for a decade or more may be about to change, index-based products carry more risk, he observes. Investors looking to reduce that risk in a simple way, while adding diversification and performance, should ask their advisor how actively managed fixed-income ETFs can be an effective part of their portfolio.

Sponsored by Mackenzie Investments

Commissions, trailing commissions, management fees, brokerage fees and expenses all may be associated with investment funds. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently, and past performance may not be repeated.

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