CONTRIBUTORS
Alex Lee, CFA, CAIA, MFin
Head of Canada ETF Product Strategy
Franklin Templeton Canada
Franklin Canadian Ultra Short Term Bond Fund (FHIS) has been popular with clients seeking a fixed income solution with low risk that yields higher than popular cash instruments. FHIS has an ‘A’ average credit quality, yields 3.6%, and has a duration of less than one year as of January 31, 2025.
Since its launch less than 3-years ago, the Franklin Canadian Ultra Short Term Bond strategy has raised over $300 million in assets across its ETF and mutual fund series offerings, and it continues to be well supported by our clients. At a 15-bps fee, FHIS remains a compelling choice for clients seeking stability in their fixed income portfolio while generating an attractive yield.
Let’s talk about alpha
FHIS has been generating consistent alpha against its benchmark: FTSE Canada 0-1 Universe Overall Bond Index since the inception. The strategy is favourable today given the flexibility to stay opportunistic and nimble compared to a rule-based Index in this dynamic market environment. The following chart shows the cumulative excess return of FHIS compared to its benchmark since the common inception period, which captures periods of both rate hikes and cuts in Canada.
Cumulative Excess Return of FHIS vs FTSE Canada 0-1 Universe Overall Bond Index
Source: Morningstar Research Inc., as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
FHIS has an impressive batting average, which measures the managers’ ability to consistently beat the benchmark. It outperformed its benchmark 75.0% of the period on a rolling one-month basis, 96.2% of the period on a rolling three-month basis, and 100.0% on both rolling six-months and 12-months bases since the inception of the strategy.
Batting Average based on rolling returns (10/1/2022 to 01/31/2025)
|
Rolling 1 month (%) |
Rolling 3 months (%) |
Rolling 6 months (%) |
Rolling 12 months (%) |
|
|
FHIS |
75.00 |
96.15 |
100.00 |
100.00 |
|
Benchmark |
- |
- |
- |
- |
Source: Morningstar Research Inc., as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
FHIS’s performance has been especially impressive during the past year, returning 6.0% compared to 5.2% for the benchmark as an ultra-short-term strategy.
|
YTD (%) |
1 month (%) |
3 months (%) |
6 months (%) |
1 year (%) |
2 years (%) |
Common Inception (%) |
|
|
FHIS |
0.50 |
0.50 |
1.39 |
2.87 |
5.95 |
5.64 |
5.37 |
|
Benchmark |
0.37 |
0.37 |
1.10 |
2.42 |
5.22 |
5.07 |
4.81 |
Source: Franklin Templeton, as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
FHIS’s consistency in return since the launch is especially highlighted when compared to short-term bonds and the Bond Universe.
Cumulative Return Since Common Inception (%)
Source: Morningstar Research Inc., as of January 31, 2025. Bond Universe is represented by FTSE Canada Universe Bond Index. Short-term is represented by FTSE Canada Short Term Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
A great way to de-risk
The benefit of owning FHIS is the active management at a low fee of 15-bps. The Canadian fixed income team based in Calgary is very active in managing this strategy, and continues to seek ways to maximize the overall yield in the portfolio with risk in mind.
Positive monthly returns since the launch with limited drawdowns and volatility have been impressive. The worst drawdown, based on daily returns since the launch of this strategy, was -0.18%, and it took only four days to recover, compared to -2.1% for short-term bonds and -7.1% for the Bond Universe during the same period.
|
Max Drawdown (%) |
Worst Month (%) |
Max Drawdown Valley Date |
Recovery # of Periods |
|
|
FHIS |
-0.18 |
0.18 |
10/7/2024 |
4 |
|
Benchmark |
-0.10 |
0.22 |
6/7/2023 |
5 |
|
Short-Term |
-2.12 |
-0.90 |
7/7/2023 |
130 |
|
Bond Universe |
-7.05 |
-2.62 |
10/3/2023 |
63 |
Source: Morningstar Research Inc., as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Bond Universe is represented by FTSE Canada Universe Bond Index. Short-term is represented by FTSE Canada Short Term Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
Drawdowns are barely visible when you compare FHIS to short-term bonds and the Bond Universe for clients in core bonds.
Source: Morningstar Research Inc., as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Bond Universe is represented by FTSE Canada Universe Bond Index. Short-term is represented by FTSE Canada Short Term Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
The following is a risk summary during the common inception period based on monthly returns. FHIS experienced 83% less volatility than the FTSE Canada Short Term Overall Bond Index, while generating a higher return during this period, and better risk adjusted return based on both Sortino and Sharpe Ratio.
|
Return (%) |
Standard Deviation (%) |
Sortino Ratio |
Sharpe Ratio |
|
|
FHIS |
5.47 |
0.43 |
4.58 |
1.75 |
|
Benchmark |
4.89 |
0.29 |
1.44 |
0.74 |
|
Short-Term |
5.27 |
2.53 |
0.34 |
0.23 |
|
Bond Universe |
5.24 |
6.41 |
0.17 |
0.11 |
Source: Morningstar Research Inc., as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Bond Universe is represented by FTSE Canada Universe Bond Index. Short-term is represented by FTSE Canada Short Term Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
Quality, yield, and duration
FHIS offers a higher yield than its benchmark, short-term bonds, and the Bond Universe, while maintaining an ‘A’ credit quality and a duration of less than one year. Yield is strong driver of performance for ultra-short-term bonds given the short average maturity of bonds held in the portfolio.
The benefit of active management is the ability to generate an attractive yield while being selective on bonds held in the portfolio and continuously seeking alpha:
|
FHIS |
Benchmark |
Short-Term |
Bond Universe |
|
|
Average Credit Quality |
A |
AA |
AA |
AA |
|
Yield to Maturity (%) |
3.62 |
2.97 |
3.00 |
3.41 |
|
Effective Duration (Years) |
0.77 |
0.48 |
2.62 |
7.23 |
Source: Franklin Templeton, as of January 31, 2025. Benchmark is represented by the FTSE Canada 0-1 Year Universe Overall Bond Index. Bond Universe is represented by FTSE Canada Universe Bond Index. Short-term is represented by FTSE Canada Short Term Overall Bond Index. Indexes are unmanaged, and one cannot invest directly in an index. They do not reflect any fees, expenses or sales charges.
Final word
I want to express my gratitude to the Franklin Canadian Fixed Income Team for an exceptional job managing this strategy from the start. The partnership and the relationship has been tremendous between the PM team and the ETF Team, and showcases the strength of our organization as we work together to provide solutions to our clients’ needs.
Investors choose active investment for alpha, and the team has been able to deliver on its objective while keeping risk in mind for our clients. This is especially important at a time when we see a great deal of uncertainty in markets, and I encourage anyone looking to manage risk to consider FHIS.
To learn more about the fund, click here.
IMPORTANT LEGAL INFORMATION
Alex Lee’s comments, opinions and analyses are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or to adopt any investment strategy. Because market and economic conditions are subject to rapid change, comments, opinion, and analyses are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment or strategy.
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