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
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
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
Invesco Canada Ltd.
Canadian Short Term Fixed Income
Front end loan
PowerShares Management Team
AIM53203 (Front-end load)
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
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.
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