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Horizons Active Ultra-Short Term Investment Grade Bond ETF (HFR) has proven itself a worthwhile option for fixed income investors seeking to navigate and stay afloat amid the rising interest rate environment.

In 2022, major equity market declines and volatility has spurred a broader ‘flight to safety’, with many investors flocking to near-cash instruments, including high-interest savings ETFs and some bond ETFs.

In 2022, the fixed income market has not been an appealing space for investors. As at October 31, 2022, the Canadian bond market, as represented by the S&P Canada Aggregate Bond Index, was down -18.20% on a year-to-date basis, with a -4.83% annualized return on a three-year basis1.

Fixed income investing has traditionally been valued as a source of income and safe haven but near-record inflation and rising interest rates have suppressed the attractiveness of investment-grade bond ETFs, which just are not offering appreciable yields and capital preservation for today’s challenging marketplace.

Meanwhile, since the start of 2022, the Bank of Canada has hiked interest rates six times to 3.75% – the highest since the 2008 Financial Crisis. There’s a consensus more rate hikes could be on the horizon, too.

One potential solution: short-duration high credit quality bond ETFs, which could safeguard against capital loss and deliver higher yields, even while interest rates rise.

For investors looking for investment-grade fixed income exposure offering capital preservation and yields that will keep up with today’s rapidly rising interest rate environment, they may consider the Horizons Active Ultra-Short Term Investment Grade Bond ETF (HFR).

Sub-advised by Fiera Capital, one of Canada’s biggest fixed income managers, HFR is structured to provide ultra-short duration exposure that maintains an appreciable yield by leveraging an attractive premium from its underlying holdings of high-investment-grade Canadian corporate bonds. HFR is expected to generate a yield that will reflect any changes to key short-term lending rates, so that when interest rates change, the yield on the ETF is also expected to change.

Key Reasons to Consider HFR

High investment-grade corporate bond strategy High investment-grade corporate bond strategy HFR is a high investment-grade corporate bond product with an average credit rating of BBB+.
Reduced interest rate risk Reduced interest rate risk HFR uses an interest rate swap overlay to deliver a floating rate of income, which is estimated to be equivalent to the Canadian Dealer Offering Rate (“CDOR”), plus the current corporate bond spread.
Minimal market valuation fluctuation Minimal market valuation fluctuation When the CDOR increases, the value of underlying bonds would be expected to decrease. Conversely, the value of the bonds would be expected to rise if CDOR declines. In turn, the value of the swap is expected to increase which effectively minimizes changes to the ETFs market value regardless of whether rates rise or fall.
Attractive yield Attractive yield As at October 31, 2022, HFR carries an estimated annualized yield of 5.24%.

HFR Was One of Canada’s Top Performing Short-Term Bond ETFs as at October 31, 2022:

Name Ticker Inception
iShares Floating Rate ETF XFR 2011-12-06 0.27 0.83 1.17 1.02 1.07 0.84 1.18 1.12 1.19
RBC Target 2022 Corporate Bond ETF RQJ 2016-09-14 0.25 0.64 0.91 0.65 0.75 1.72 1.98 1.67
CIBC Active Investment Grd Fl Rt Bd ETF CAFR 2019-01-22 0.23 0.74 0.97 0.51 0.60 0.82 1.00
BMO Ultra Short-Term Bond ETF ZST 2011-01-28 0.21 0.53 0.74 0.45 0.56 0.93 1.42 1.35 1.59
Dynamic Active Investment Grd Flt Rt ETF DXV 2018-03-26 0.11 0.52 0.75 -0.58 -0.52 1.28 1.59
RBC Target 2023 Corporate Bond ETF RQK 2016-09-14 0.14 0.18 0.33 -1.65 -1.37 1.38 2.01 1.69
Horizons Active Ultra-Shrt Trm IG Bd ETF HFR 2010-12-10 0.06 0.03 0.27 -2.06 -1.90 0.95 1.50 1.77 2.01
RBC Target 2024 Corporate Bond ETF RQL 2018-09-07 0.03 -0.80 -0.57 -4.24 -3.89 1.24 2.59
iShares 1-5 Year Laddr Govt Bd ETF Comm CLF 2008-01-31 -0.04 -1.84 -0.77 -4.36 -3.68 -0.47 0.52 0.99 1.99
RBC PH&N Short Term CA Bd ETF RPSB 2017-10-19 -0.04 -1.45 -0.67 -4.39 -3.92 0.10 0.89 0.95

*Since Inception Return.
Source: Morningstar Direct as at October 31, 2022.

Whether you’re looking to earn an attractive income from investment-grade bond exposure or reduce the impact of interest rates on capital preservation in your portfolio, consider HFR as your fixed income solution for today’s rising rate environment.