Purpose Investments, a Toronto-based asset manager, has announced the launch of the Purpose Tactical Investment Grade Bond ETF (BND) on the Toronto Stock Exchange. The exchange-traded fund is actively managed, offering a yield maximisation strategy while also seeking to control risk through careful management of portfolio duration.

Som Seif, President and Chief Executive Officer of Purpose Investments.

Som Seif, President and Chief Executive Officer of Purpose Investments, commented: “The biggest challenge facing investors and advisors today is how to allocate to fixed income in their portfolios. Passively holding bonds over the past 30 years has been extremely rewarding. However today, the reward relative to the risk of a ‘buy and hold’ bond portfolio is no longer as attractive.

“With the Purpose Tactical Investment Grade Bond ETF we are focused on enhancing the return opportunities in bonds while reducing the amount of interest rate risk. The result should be a better reward per unit of risk in a bond portfolio.”

The fund aims to beat the reference benchmark, the DEX Universe Bond Index, a broadly diversified selection of investment-grade Government of Canada, provincial, corporate and municipal bonds issued domestically in Canada and denominated in Canadian dollars.

Investors may be increasingly wary of rising interest rates as many analysts predict the US Federal Reserve to move the country’s base reference rate off zero early in 2016. To counter this, the fund may employ derivatives to hedge the duration risk of the portfolio. In this scenario, while down-side risk from duration is reduced, the fund seeks alpha returns through carefully selected yield opportunities.

The fund has laid out allowable weighting ranges for various bond sectors which the ETF is required adhere to. These include a range of 50%-75% for Canadian corporate bonds, 20%-35% for US corporate bonds, and 0-15% for high yield bonds.

As of 28 October 2015, the fund’s holdings were geographically distributed between Canada (57.3%), and the US (38.0%), while a small cash reserve (4.7%) was maintained to take advantage of market opportunities. The sector breakdown was as follows: Canadian Corporate (57.3%), US Corporate (26.0%) and High Yield (12.0%). The fund contained 49 holdings of which no one issuer contributed more than 2.5% to the total weight of the portfolio.

The weighted average coupon was 4.1%, the weighted duration was 5.8 years, and weighted yield-to-maturity was 3.4%. The fund is currently employing their stated option overlay strategy whereby it either sells call options and/or writes put options on US Treasury bonds. The current result of this strategy is to increase expected portfolio yield to 4.4% while reducing portfolio duration by 1 year. The fund carries a total expense ratio of 0.35%.