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This PowerShares short-term bond fund a solid pick
6/20/2018 1:58:20 AM
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By Dave Paterson  | Wednesday, May 03, 2017


In June, PowerShares 1-5 Year Laddered Corporate Bond Index Fund, an index-tracking mutual fund, will undergo its annual reconstitution. The five shortest-duration bonds will be removed from the index and replaced with 10 bonds that have a term to maturity of five years are added in their place. How is this change likely to impact the portfolio performance of the fund?

The fund tracks the performance of the FTSE TMX Canada Investment Grade 1-5 Year Laddered Corporate Bond Index, consisting only of Canadian investment-grade corporate bonds rated BBB or higher in the composite PC-Bond rating.

FTSE TMX, the index provider, announced that over the next five years, the number of bonds in the index would be increased to 50 from 25. As a consequence, the fund is replacing the five bond that were removed 1ast year with 10 new bonds. I see this as a positive, as the increasing number of bonds improves the diversification, and reduces the security specific risk in the fund.

Whenever these reconstitutions take place, there are a few changes to the makeup of the portfolio. One such change is that the duration will likely increase slightly, as longer-term bonds are being added to the mix. Last June, the duration was increased to 3.39 years from 2.47 years. I would expect a comparable jump this time around as well. While this increases the shorter-term interest rate sensitivity of the portfolio in the short-term, the duration gradually shortens as the next June 30 reconstitution date approaches.

Another change that happens is the yield to maturity (YTM) will often increase. That didn’t happen so much last time around in the rate environment at the time, with the YTM remaining essentially flat. Again, I wouldn’t expect to see a big jump in yield. Still, given its corporate focus, I would expect the fund to offer a higher yield to maturity than many of its peers.

Given the current makeup of the portfolio, I would expect it to outperform except in a sharply rising yield environment. However, given the state of the economy, I find it tough to envision a circumstance in the near term where that is likely to happen, making this a solid pick in the near term.

PowerShares 1-5 Year Laddered Corporate Bond Index Fund A
Fund company:
Invesco Canada Ltd.
Fund type:
Canadian Short Term Fixed Income
FundGrade™ Rating: B (March)
Style: Laddered/Rules Based
Risk level: Low
Load status: Front end loan
RRSP/RRIF suitability: Excellent
Manager: PowerShares Management Team
MER: 0.99%
Fund code: AIM53203 (Front-end load)
Minimum investment: $500

Dave Paterson, CFA, is the Director of Research, Investment Funds for D.A. Paterson & Associates Inc., a consulting firm specializing in providing research and due diligence on a variety of investment products. He is also the publisher of Dave Paterson’s Top Funds Report, offering regular commentary and in-depth analysis of Canada’s top investment funds. He uses a unique analytical approach to identify funds with strong, risk-adjusted returns, and regularly publishes his insights and analyses in Fund Library.

Notes and Disclaimer

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

Commissions, trailing commissions, management fees and expenses all may be associated with fund investments. Please read the simplified prospectus before investing. Mutual funds are not guaranteed and are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer. There can be no assurances that the fund will be able to maintain its net asset value per security at a constant amount or that the full amount of your investment in the fund will be returned to you. Fund values change frequently and past performance may not be repeated. No guarantee of performance is made or implied. This article is for information purposes only and is not intended as personalized investment advice.

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