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One of the fastest growing areas in the exchange-traded fund (ETF) sector is the introduction of funds that invest in a basket of other ETFs – a fund of funds. Among the several options available, the Invesco Monthly Income ETF Portfolio from Invesco Canada aims to generate a high level of monthly income and some growth of capital over the long-term.
The fund changed its mandate in early 2018 to ETFs from mutual funds. Understandably, it has a heavy bias towards income-generating investments, with a target asset mix of 57% fixed income and 43% equities. At the end of December, it had just under 1% in cash and short-term investments, about 43% in equities, and the balance in fixed income and preferred shares. It achieves this mix by holding a variety of Invesco ETFs.
The fixed-income holdings are very well diversified across term structure and credit quality, including government and corporate bonds, high-yield bonds, and bank loans, along with preferreds.
On the equity side, the fund focuses on dividend and low-volatility stocks with 70% of its assets in Canada, 23% in the U.S., and the rest around the globe. The underlying asset mix is rebalanced periodically. Portfolio turnover is expected to be very low with the spike in 2018 a result of the change in its mandate.
Top holdings as of Dec. 31 included Invesco 1-10 Year Laddered Investment Grade Corporate Bond Index ETF (NEO: PIB) at 15.8% of asset weighting, Invesco Long Term Government Bond Index ETF (NEO: PGL) (13.5%), Invesco Canadian Dividend Index ETF (TSX: PDC) (12.6%), Invesco Canadian Preferred Share Index ETF (TSX: PPS) (8%), and Invesco 1-5 Year Laddered Investment Grade Corporate Bond Index ETF (TSX: PSB) (7.4%).
After the preferred share meltdown in the fourth quarter of 2018, the fund recovered nicely, logging a solid 9.2% gain for 2019, putting it in the first quartile of performance for the year and topping the category average of 8.4%. Longer term the fund has also delivered solid gains with a 5-year average annual compounded rate of return of 3.5% to Dec. 31, also in the first quartile of performance and again topping the category average of 2.9% for the period.
Given the fund’s broad fixed-income diversification and the defensive equity positioning, I would expect it to do well in periods of elevated volatility. With 3-year average annual standard deviation of 3.5, it places comfortably near the category median of 3.7. Still, if we do hit a recessionary environment somewhere down the road, we may see some increased volatility in the high-yield and levered loan holdings.
In their fourth-quarter 2019 commentary, managers Duy Nguyen and Jacob Borbidge look for modest global growth but no recession in the near-term. While the U.S.-China Phase One trade deal won’t ease all fears, they believe it should ease some economic policy uncertainty. Still, they write, “Continued volatility is expected given that risks – especially geopolitical risks – are on the rise.” In this environment the managers continue to look to broad diversification.
Costs are extremely reasonable. The fund carries a management expense ratio of of 1.70% for the Series A units. At current prices, the fund’s monthly distributions yield 2.3% for the Series A units.
For more conservative investors looking for a very modest cash flow, this may be a fund to consider. There may be better options for those investors seeking growth.
Invesco Monthly Income ETF Portfolio, Series A
Fund Company: Invesco Canada
Fund type: Canadian Fixed Income Balanced
FundGrade: C (January)
Style: Blend
Risk level: Low
Load status: Optional
RRSP/RRIF suitability: Good
Managers: Duy Nguyen and Jacob Borbridge since January 2010
MER: 1.70% (Series A)
Fund code: AIM61203 (Series A, front-end load)
Minimum investment: $500
Dave Paterson, CFA, is a money manager and an expert on investment fund research and due diligence on a variety of investment products.
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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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