Fund in Focus: Invesco 1-5 Year Laddered Corporate Bond Index ETF Fund

Bounces back after dismal first quarter

Typically a strong performer, the Invesco 1-5 Year Laddered Corporate Bond Index ETF Fund was hit hard in the March market meltdown. It has bounced back, however, posting a category-beating 1-month gain of 3.0% in April. Dragged down by the dismal first quarter, the fund was ahead a marginal 0.5% year-to-date to April 30. This was largely due to the fund’s overweight exposure to corporate bonds. Contrast this with the iShares Canadian Government Bond Index ETF, which is ahead 6.5% year to date. However, the fund continues to be a first-quartile performer in its Canadian Short-Term Fixed Income Category, for periods of more than five years.

The fund, which Invesco offers in both a mutual fund and ETF version (hence the odd name), uses a passive approach and is designed to replicate the performance of the FTSE/TMX Canada Investment Grade 1-5 Year Laddered Corporate Bond Index. It invests only in investment-grade corporate bonds, and only those rated BBB or better can be considered for inclusion in the index.

The index uses a laddered methodology and is divided into five equally weighted term buckets with maturities from one to five years. Each of these term buckets receives an equal 20% weight in the portfolio. Each term bucket holds 10 bonds equally weighted. Bonds must meet credit quality, liquidity, and issue-size requirements before they can be considered for inclusion in the index. Within each of the term buckets, the 10 largest, most liquid issues are included in the fund.

The portfolio is re-run every June, with the result that bonds in the one-year term bucket will be removed, while bonds in each of the other term buckets will roll down to the next bucket. As a consequence, duration will jump after each rebalancing because new, longer-dated bonds are added to the portfolio while the shortest-dated bonds roll off. Over the year, the duration gradually falls, only to have the cycle repeat.

I like this Invesco offering because it is fully transparent, and you fully understand what you are investing in. Its yield will likely be higher than other more diversified short-term issues, because of its corporate bond bias, and it’s likely to outperform in most market environments. But in a market selloff or flight to safety of the kind we experienced in the first quarter of this year, it will likely lag.

The fund is reasonably priced, with an MER of 0.99% for the full freight dealer-sold units, and 0.39% for the Series F fee-based units. It’s also available as an ETF Invesco 1-5 Year Laddered Investment Grade Corporate Bond Index ETF – CAD Units (TSX: PSB) for those who wish to “do it yourself.”

Invesco 1-5 Year Laddered Corporate Bond Index ETF Fund
Fund company: Invesco Canada Ltd.
Fund type: Canadian Short-Term Fixed Income
FundGrade: C (April)
FundGrade A+® Award: 2013
Style: Rules-based/Laddered
Risk level: Low
Load status: Optional
RRSP/RRIF suitability: Fair
Manager: Invesco Management Team
MER: 1.00% (Series A); 0.39% (Series F)
Fund codes: AIM53203 (Front-end units); AIM53207 (Fee-based units)
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.

Notes and Disclaimer

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. Dave Paterson is employed as an advising representative (portfolio manager) by Empire Life Investments Inc. (ELII), a subsidiary of Empire Life Insurance Company. ELII is the investment fund manager and portfolio manager of the Empire Life Mutual Funds and the portfolio manager of the Empire Life Segregated Funds (collectively, the Empire Funds). As such, his employment and his compensation may be connected to the success of ELII and the Empire Funds. From time to time, the Empire Funds may buy, sell, hold, or otherwise have an interest in securities that may be discussed in this report.