Opportunities within the Invesco 1-3 Year Floating Rate Note Index ETF

Marcus Berry:

00:12

PFL is an ultra short fixed income strategy that invests 100% in Canadian federal and provincial floating rate notes. As a result, the ETF carries a triple-A credit rating, which is attractive for investors looking to avoid credit risk associated with corporate bonds.

00:27

The floating rate structure means the coupon is reset every three months based on the Canadian deposit offered rate, commonly known as CDOR. Given that we've seen the Bank of Canada raise interest rates from 0.25% to 5% since March 2022, PFL has been able to increase its yield over this period. So today the net yield offered to investors is 5.28%.

00:51

More importantly, in addition to having seen its yield increase so much, the net asset value of the ETF has remained fairly stable given the ultra short duration of only 0.17 years.

01:10

Currently, there are compelling opportunities across the fixed income spectrum, especially on the very front end of the yield curve.

01:16

For the first time since 2008, investors can clip a very attractive coupon without having to stretch for risk by looking into longer term or lower quality bonds. In fact, with an inverted yield curve, investors receive a higher yield by owning short maturity bonds rather than longer ones.

01:36

The big question going forward is how long these yields will last. We can look at the market expectations for future interest rates for an answer.

01:44

As of November 30, 2023, the market expects rates to decline by only 75 basis points in 12 months.

01:52

Should that be the case, we would expect PFL to carry a net yield of approximately 4.5%, which is still very attractive given the triple-A rating and ultra short duration.

02:11

The most common way we're seeing advisors use PFL is as an alternative to money market funds and high interest savings ETFs, or HISAs. They're looking for the highest possible yield in a strategy with minimal risk.

02:25

While HISAs have seen record inflows over the past few years, they're likely to see a decline in yields following the announcement by OSFI last month. Going forward, we could see more investors switch from HISAs to PFL given the difference in yield.

02:41

Another way advisors use PFL is as a core building block in a broader fixed income portfolio. In some cases, it can be paired with a long duration strategy like the Invesco Long Term Government Bond ETF to form a “barbell” to take advantages of opportunities at both ends of the yield curve.

02:59

Additionally, PFL is an excellent complement to a more actively managed tactical income strategy given the low risk and transparent approach.