The Attraction of BMO Mid-Term US IG Corporate Bond Index ETF (ZIC) for Income-Seeking Investors in a Rising Rate Environment

In a world where central banks have signaled a prolonged era of higher interest rates, income-seeking investors face a paradox: traditional fixed-income assets are under pressure from rising yields, while high-yield alternatives carry outsized risks. Enter the BMO Mid-Term US IG Corporate Bond Index ETF (ZIC), a vehicle that offers a compelling middle ground. By combining the stability of investment-grade corporate bonds with a mid-term duration, ZIC provides a unique balance of income generation and capital preservation—qualities that are increasingly rare in today's market.

A Steady Stream of Income in a Volatile Climate

ZIC's appeal begins with its 3.85% dividend yield as of August 2025, a figure that has remained remarkably consistent despite macroeconomic headwinds. The ETF's monthly distribution of $0.061 per unit—paid on a predictable schedule—offers investors a reliable income stream, a critical feature in an environment where dividend cuts and corporate defaults are rising concerns. This consistency is underpinned by ZIC's focus on U.S. investment-grade corporate bonds, which, while not risk-free, carry significantly lower default probabilities than high-yield counterparts.

Strategic Positioning: Mid-Term Duration as a Buffer

ZIC's mid-term duration is its second key advantage. Unlike long-term bonds, which are highly sensitive to rate hikes, mid-term bonds experience smaller price swings when yields rise. This makes ZIC less vulnerable to the capital losses that plagued bond markets during the 2022-2023 tightening cycle. For example, a 100-basis-point rate increase would typically reduce the price of a 10-year bond by 10%, but the impact on a mid-term bond like ZIC would be closer to 5-6%. This structural resilience is particularly valuable in a rising rate environment, where investors must balance income with the risk of principal erosion.

Risk Profile: Credit Quality vs. Yield Temptation

While ZIC's investment-grade focus limits its exposure to credit risk, it also caps its yield potential. High-yield ETFs like ZJK (BMO High Yield US Corporate Bond Index ETF) offer a forward yield of 5.70%, but at the cost of increased volatility and default risk. ZJK's price has swung between $16.27 and $20.46 since 2020, reflecting the inherent instability of junk bonds. In contrast, ZIC's portfolio of BBB- and A-rated bonds ensures that even during economic downturns, the likelihood of widespread defaults remains low. This trade-off—lower yield for higher safety—is a hallmark of ZIC's strategy and aligns with the priorities of risk-averse income investors.

The Case for ZIC in a Diversified Portfolio

ZIC's strategic value extends beyond its yield and duration. In a rising rate environment, it serves as a ballast to more aggressive income strategies. For instance, pairing ZIC with high-yield ETFs like ZJK or short-duration cash equivalents allows investors to hedge against both rate volatility and credit risk. This approach mirrors Vanguard's recommendation to layer fixed-income allocations, using mid-term bonds as a core holding while allocating smaller portions to higher-yield or shorter-duration assets.

Moreover, ZIC's 0.25% expense ratio is competitive with alternatives. While high-yield ETFs like ZJK charge 0.45%, and long-term Treasury ETFs often exceed 0.30%, ZIC delivers a cost-efficient way to access a diversified portfolio of corporate bonds. This efficiency, combined with its monthly distributions, makes it an attractive option for retirees or income-focused investors seeking to avoid the reinvestment risk of annual or semi-annual payouts.

Conclusion: A Prudent Choice for the New Normal

As central banks navigate the delicate balance between inflation control and economic growth, the fixed-income landscape will remain fraught with uncertainty. For investors prioritizing predictable income and capital stability, ZIC offers a compelling solution. Its mid-term duration shields it from the worst of rate-driven price swings, while its investment-grade focus ensures a steady income stream. In a world where high yields often come with high risks, ZIC stands out as a rare combination of prudence and performance.

For those seeking to anchor their portfolios in a rising rate environment, ZIC is not just an option—it's a necessity.