Horizons Active Floating Rate Senior Loan (HSL/TSX), which invests in non-investment-grade U.S. issues, opened for trading today on the Toronto Stock Exchange. Sponsored by Horizons ETFs Management (Canada) Inc., the exchange-traded fund is also available in Advisor Class units (HSL.A).
The ETF's holdings will consist primarily of senior secured floating-rate loans, which are generally rated at or below BB+ by Standard & Poor's, or a similar rating by other ratings agencies.
Senior loans protect investors against the risk of significant capital losses arising from rising interest rates. The issuers of these debt instruments pay floating rates of interest that are adjusted up or down, generally every three months, in response to changes in a benchmark rate. At the outset, the portfolio is yielding 4.75% before fees, a Horizons spokesperson told Morningstar.
Though they're risky from a credit-quality perspective, senior loans rank ahead of non-investment-grade bonds, preferred shares and common shares in the event of a company default.
Though the ETF's strategy is to be at least 50% exposed to senior loans at all times, the portfolio managers have the flexibility to hold high-yield bonds, investment-grade bonds or higher cash reserves during adverse credit markets. A minimum of 10% will be held in cash at all times to mitigate liquidity risk.
The ETF also aims to avoid exchange-rate risk. Non-Canadian-dollar currency exposure is to be hedged back to the Canadian dollar at all times.
Horizons has hired Montreal-based AlphaFixe Capital Inc. to manage the portfolio. Formed in 2008, the employee-owned firm specializes in fixed-income investing and serves a primarily institutional clientele. It has about $2.8 billion under management.
The individual co-managers are Sébastien Rhéaume and Diane Favreau, who are both managing directors of the firm. Favreau is responsible for managing AlphaFixe's high-yield and bank-loan funds. Before joining AlphaFixe, she oversaw bank-loan and high-yield portfolios at the Caisse de dépôt et placement du Québec. Rhéaume, a founding member of AlphaFixe, is responsible for corporate-bond strategies and analyzes several sub-sectors of the corporate-bond market.
The management fee is 0.75% for Class E (HSL), which pays no compensation to brokers, and 1.25% for Advisor Class (HSL.A.), which pays brokers a trailer fee of 0.5% a year.