A Member of Pat McKeough’s Inner Circle asked for his advice on an ETF that focuses on Canadian finance firm common shares, preferred shares and corporate bonds.
Pat likes the high distribution rate but warns that rate may be unsustainable. He also feels the MER is too high and has alternate ETF recommendations in the same space.
iShares Canadian Financial Monthly Income ETF (Symbol FIE on Toronto; www.blackrock.com/ca), invests primarily in the common shares, preferred shares and corporate bonds of firms in the Canadian finance industry.
The fund charges investors an MER of 0.80%, which is high by ETF standards. However, its distributions to investors now yield 6.9%, which is also high.
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The ETF’s portfolio does not generate enough dividend income to cover those high distributions to unitholders in addition to its management expenses and fees. To make up the difference, iShares Canadian Financial Monthly Income ETF must make capital gains by trading the stock holdings of its portfolio.
Inner Circle: Distributions could be cut unexpectedly
If those gains fail to materialize, then the fund will be forced to either cut its distributions, or, more likely in the short term, sell some of its stockholdings. It could then use the proceeds to maintain the high monthly payments to investors.
However, ultimately, if markets fail to rise fast enough, this ETF is more likely to cut its distribution to avoid shrinking its asset base. That could sharply drop its attractive 6.9% yield.
We think investors are better off directly buying Canadian finance shares such as those of the Big Five banks (Bank of Montreal, Royal Bank, CIBC, TD Bank and Bank of Nova Scotia).
Recommendation in Pat’s Inner Circle: iShares Canadian Financial Monthly Income ETF is not recommended.
