This is a multi-part series exploring in-depth each of the individual allocations I have in my B&D investment portfolio.
In today’s post, I’ll dig into MFT which is the stock ticker symbol for the Mackenzie Floating Rate Income ETF. I’ll talk about:
- what it is
- the actual allocation in the portfolio
- why I hold this in my B&D portfolio
- fees/costs to hold it
- the income it pays me
- its growth potential
- which investment vehicles (TFSA, RRSP, LIRA, non-registered account) I put this ETF in
- Alternative ETF(s) for tax loss harvesting purposes
- the future of it in my B&D portfolio
Information provided is considered accurate and up to date at the time this post was published.
What is it?
MFT is a floating rate debt ETF that is managed by Mackenzie (Please note I have no affiliation whatsoever to them, I just hold it as part of my portfolio. I just chose this one to invest in it). They define it as follows in their Annual Management Report:
The ETF seeks to generate current income by investing primarily in floating-rate debt instruments and/or high-yield debt securities of issuers located anywhere in the world. The ETF invests in senior loans, which are generally rated below investment grade debt. Settlement periods for senior secured loans may be longer than for other types of debt securities, such as corporate bonds. The ETF is not a substitute for holding cash or money market securities.
I found a more digestible definition as well.
The fund seeks to generate current income by investing primarily in floating rate debt instruments and/or high yield debt securities of issuers located anywhere in the world.
One other thing in the Annual Management Report that I found of interest was their risk definition for MFT:
The ETF is suitable for short- to medium-term investors looking for the current income potential of floating-rate instruments linked to interest rate changes to hold as part of their portfolio to diversify their fixed income holdings, who can handle the volatility of bond markets and who have a low to medium tolerance for risk.
THE PORTFOLIO ALLOCATION
Why Hold it in my b&D portfolio?
Yields on traditional bonds have been quite low since Covid hit in 2020. My thought was that interest rates would eventually start to rise as they can’t stay so low forever and when they would, the capital portion of traditional fixed rate bond ETFs would suffer. To take advantage of that, I wanted something in my portfolio to counter that. I thought having a floating rate debt ETF might mitigate that. Preserve the capital allocated to it while getting a much higher yield.
I added it to my portfolio holdings in January 2022 by selling off some of my VSB holdings. Still unsure, I left my allocation at only 3.00% of the overall portfolio.
At the time that I write this (June 26, 2022), MFT has performed, including interest distributions YTD, about 1% worse than the ETF VSB (VSB -4.41% YTD, MFT -5.45%). You can read more on VSB in the prior blog post here. In other words, I’ve added some additional risk to the B&D without seeing a lift in overall return. It’s to be seen how things go for the rest of 2022.
the associated fees/costs
The one fee I always look at is the MER (management expense ratio) and the ETF provider, like Vanguard, has an obligation to provide what it is so investors understand the total cost of owning this type of investment. It’s defined as follows:
The management expense ratio (MER) is an annualized measure of the cost charged to investors, to invest in a fund. It is calculated by dividing the total of the expenses charged to manage and operate the fund by the total assets of the fund. The expenses include the management fee paid to the fund manager and operating expenses (taxes and administrative costs). The MER is calculated as a percentage of the total assets under management for the fund (AUM).
For MFT, the MER comes in at 0.67%. Therefore, for every $1,000 invested, they charge me $6.70 annually. Compared to many index ETFs, this is a higher MER and it’s at the high end of what I’d prefer to be paying for an ETF. Versus a potential MER of 2%-3% on many mutual funds translating to $20-$30, $6.70 feels ok. Not great but ok.
income Received from this etf
MFT pays out interest income. That means for every dollar earned, you will be taxed. For context, it’s the same as taxing every dollar earned for employment income. The only exceptions are if the interest income is tax sheltered or tax deferred. The investment vehicle (e.g.: TFSA, RRSP, LIRA, non-registered/cash/margin account) that houses the ETF will determine which tax situation applies.
Growth potential for this etf
MFT is a low growth ETF. As can be seen in the chart below, it doesn’t grow much.
Placement in Investment vehicles
I’m a Canadian with tax residency in Canada so investment vehicles and tax treatments are related to Canada. I currently have a TFSA, RRSP, LIRA, and a non-registered account which is also known by many as a cash account or a margin account.
Legally minimizing and/or deferring the greatest amount of taxes possible is the primary criteria I use to decide which investment vehicle to house an ETF. Since I have a TFSA, RRSP, LIRA and a non-registered account, I use a 3 level filter which is below.
PRIMARY: TFSAs are for investments with the highest capital growth potential as it offers tax-free compounding and any withdrawals made are tax free as well.
SECONDARY: The non-registered account takes up any of the surplus that doesn’t fit in the TFSA. Also, any investment income that has preferential tax treatment such as capital gains (as I write this, only 50% of capital gains are taxable) or is eligible for the Canadian Dividend Tax Credit should be going in this account.
TERTIARY: RRSPs/LIRAs take up any of the surplus that doesn’t fit in the TFSA and the non-registered account. Therefore, the lowest growth investments would be found here as well as investments with the heaviest taxable income generated (in most cases, that would be bonds). The benefit of an RRSP/LIRA is that any income taxes owing are deferred until I decide to withdraw from them. The full amount withdrawn is taxable in the same way as employment income. Any taxes paid at withdrawal are based on whatever tax bracket I fall into for that particular calendar year. Therefore, compounding can occur tax free until then.
Based on the above criteria, in which investment vehicle(s) do I currently have MFT?
Since MFTis a low growth ETF, I have it sitting in my RRSP. I don’t have any in my LIRA as the overall percentage allocation is small.
tax loss harvesting strategy
Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada. You can then use these losses to offset your taxable capital gains. This applies to the non-registered account only. The other investment vehicles (TFSA, RRSP, LIRA) are not eligible for this.
In Canada, the last day in a calendar year for tax-loss selling is typically the third to last business day of the year (not counting any statutory holidays that could happen between then and the end of the year). If you sold at a loss on or before that date, you’re able to deduct your loss against your gains in that calendar year. However, you can also carry your loss back for the previous three years to offset capital gains or carry it forward indefinitely to offset future capital gains.
Also, beware causing a wash sale. This can also be called the superficial loss rule. What this means is that if an investor buys back a security within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes. Failing to obey the 30-day rule will result in the capital loss being disallowed for tax loss harvesting. To avoid this, I would buy an ETF similar to the one sold but measured on a slightly different index. A wash sale can also occur if you sell in one investment vehicle (e.g.: your non-registered account) and buy that same ETF in another (e.g.: your TFSA) so be careful to not do that within the 30 day period.
I don’t actually have an alternate ETF for MFT for tax loss harvesting purposes. I purposefully chose to only hold Canadian based ETFs and I haven’t been able to find another Canadian based ETF similar to it.
Lastly, tax loss harvesting does not apply for MFT in my situation as it is held in my RRSP (not the non-registered account) however I will discuss the potential for tax loss harvesting for each of my holdings regardless for illustrative purposes.
The future of this etf
Central banks in Canada and the rest of the world are currently continuing to raise their interest rates to fight inflation. Based on that, I felt MFT would be a good fit in the portfolio.
Looking at it 6 months since I added it in and with interest rates rising as they are, either I haven’t been patient enough with this new addition to the portfolio or it’s a flop.
This hasn’t been too costly of an experiment so far. As with VSB, once interest rates have peaked or get near to that, I’ll be considering swapping out MFT from my B&D portfolio in favour of something like VAB or XLB. For now though, it will stay put as a part of my portfolio however I’ll be keeping my eye out on it.
Summary
So that’s my overview of the ETF MFT that currently holds an allocation in my B&D portfolio. Please let me know what you think. Was the overview useful? Was anything missing? I’m happy to hear all feedback.
About the picture: I snapped this on June 21st, 2022 on one of the mountain peaks in the Parc National de la Jacques-Cartier located about 45 minutes north of Quebec City. The changing landscapes climbing up the mountain were fascinating. Here, the forest floor is pretty much completely covered by moss.