Many investors are convinced interest rates are about to head higher.
There are a couple of reasons behind this logic. The first is as simple as it is powerful. Interest rates in both Canada and the United States are close to all-time lows. There’s really only one direction rates can go, although negative rates are a possibility.
The more recent reason many think rates are going up is the election of Donald Trump. Trump plans to spend billions on various infrastructure projects, including building a wall on the U.S.-Mexico border. This increased spending will lead to the U.S. government borrowing more, which then suggests higher interest rates.
This could be potentially bad news for the bond portion of many investors portfolios. Remember, bond prices move in the opposite direction as interest rates.
The iShares Floating Rate Index ETF (TSX:XFR) is an easy way for investors to protect themselves against such a move. It invests only in floating-rate Canadian bonds issued by the federal government, various provincial governments, or high-quality corporations.
Nearly 60% of assets are invested in Canada Housing Trust bonds, followed by the governments of Ontario and Quebec, respectively, at 9.2% and 6.2% of assets.
One big problem with this ETF is it doesn’t pay much in income. The trailing yield is only 0.8%, versus other bond funds paying anywhere from 2.5% to 3%. Some investors may consider the difference in yield just too much to pay for rate protection.
