Low Duration Strategies

Putting Cash to work with iShares fixed income exchange traded funds (ETFs)

Investors that are looking to reduce their market exposure by moving to cash often wrestle with potentially missing out on opportunities to capture yield. When the trade-off between cash and staying invested is thought of in terms of yield, cash can be an expensive drag on a portfolio. iShares low duration ETFs can provide access to a greater yield than cash while helping to minimize exposure to interest rate risk in a portfolio.

What is a Floating Rate Note?

  • Floating rate notes are bonds that pay a floating rate coupon, rather than a fixed rate coupon.
  • The coupon rate is determined in reference to a specified market interest rate and is adjusted either monthly or quarterly.
  • Floating-rate notes are generally subject to less interest rate risk than fixed-rate bonds of similar maturity and quality and may therefore be used to help fixed income investors insulate their portfolios in a rising interest rate environment

iShares ETF Solutions:

1. Replace cash with the iShares DEX Floating Rate Note Index Fund (XFR) to potentially increase yield and keep duration low

  • DEX FRN Index Duration is kept very low at 0.13 years.
  • DEX FRN Index has a yield to maturity (YTM) of 1.46%

2. Access higher potential yield by taking on slightly more credit risk while still keeping duration low

  • 75% iShares DEX Floating Rate Note Index Fund (XFR)
  • 25% iShares DEX Short Term Corporate Universe + Maple Bond Index Fund (XSH)
    • Blended Benchmark Index Average YTM: 1.75%
    • Blended Benchmark Index Average Duration: 0.81 years

3. Further diversify source of yield while keeping duration low

  • 15% iShares DEX Short Term Bond Index Fund (XSB)
  • 50% iShares DEX Floating Rate Note Index Fund (XFR)
  • 35% iShares DEX Short Term Corporate Universe + Maple Bond Index Fund (XSH)
    • Blended Benchmark Index Average YTM: 1.88%
    • Blended Benchmark Index Average Duration: 1.44 years

Low Strategies Graph

Yield to maturity (YTM) and duration are weighted average figures. All data as of 31 October 2011. Source: PC-Bond, a business unit of TSX Inc., BlackRock Asset Management Canada Limited ("BlackRock Canada") and Bloomberg L.P.