In the most recent CBOE Canada ETF Market Webinar, Franklin Templeton Canada’s  Ahmed Farooq, CFP, CIMA®, Senior Vice President Head of Retail ETF Distribution, Brian Calder, Vice President, Portfolio Manager and Senior Trader, and Naveed Sunderji, CFA®, Portfolio Manager and Research Analyst discuss the benefits investors can derive from short duration bonds and why the Franklin Bissett Ultra Short Bond Fund (Ticker: FHIS) can be additive to one’s portfolio. This article will reflect the ideas expressed in this conversation and highlight the defining attributes of FHIS as an investment solution. 

Changing fixed income landscape

While the Bank of Canada, and other central banks globally, have managed to bring inflation down from their record highs, the monetary tightening actions utilized to achieve this feat have resulted in a consequential shift within the fixed income landscape – an inversion of the yield curve. In normal conditions, yields for longer-dated bonds are higher than for shorter-dated bonds, as longer-dated bonds, if held to maturity, compensate investors with more yield for the time it takes to pay the initial investment back. But these are exceptional times, and with short-dated bonds yielding more than their long-dated peers, there is a window of opportunity for investors to capitalize on.  

The case for short-duration bonds

Short-dated bonds have the innate advantage of low-duration exposure and higher liquidity. In the current rising rate environment, having limited sensitivity toward interest rate changes allows for lower return volatility. The liquidity advantage of these bonds stems from them being traded more frequently. With maturities of less than two years, short-duration high-quality bonds are often seen as highly liquid, ‘near-cash’ equivalents.

With elevated rates, short-dated bonds are currently trading at a discount to their face value; as these bonds trend towards their original issuance price as the maturity date nears, this results in capital gains beneficial to bondholders. 

Benefitting from the Franklin Bissett Ultra Short Bond Fund (Ticker: FHIS)

The Franklin Bissett Ultra Short Bond ETF is an actively managed solution that leverages Franklin Templeton’s institutional knowledge and fixed-income expertise in fulfilling the fund’s objective. As noted by Brian Calder at the beginning of the webinar, with this solution, they aim to generate an enhanced yield, manage volatility, and provide a consistent investment experience for investors.  

The investment strategy underpinning FHIS invests primarily - almost 50% - in a combination of short-term money market paper, like Banker’s Acceptance notes, U.S. Treasury bills, certificates of deposit (CDs), commercial paper, and short-term corporate bonds. Regarding the fund’s corporate bond exposure, these securities are evaluated through the firm’s research group to ensure no adverse or unnecessary credit risk exposure is present within the portfolio, ensuing that the credit quality of the ETF is high.  

In terms of performance, the fund has recently attained a 1-year performance track record, and has fared well, given the prevailing macroeconomic backdrop. As shown from the following chart, there have been no drawdowns in performance for the year, a function of the fund’s investment strategy. 

Investors interested in gaining exposure to short-duration bonds should consider FHIS, as its exposure within one’s portfolio can help diversify the overall investment mix and reduce risk. Since the fund has a low correlation to equities, they can help balance out a portfolio's risk and return profile. Furthermore, investors will be able to derive income from this solution - gaining higher yields over cash rates, while taking on as little additional risk as possible.

In conclusion, the Franklin Bissett Ultra Short Bond ETF is a comprehensive solution that investors can utilize to gain meaningful fixed income exposure, while minimizing interest rates and credit risk.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.