BMO Floating Rate High Yield ETF (ZFH.TO): A Steady Anchor in Volatile Markets

In a world where interest rates are climbing and equity markets oscillate, income-focused investors often face a dilemma: seek safety or chase yield? The BMO Floating Rate High Yield ETF (ZFH.TO) emerges as a compelling middle ground. With a 5.63% forward yield as of June 2025 and $0.07 CAD monthly dividend payments maintained since March 2025, this ETF offers both stability and income potential, even as broader markets face headwinds. Let's dissect why this fund deserves a place in conservative portfolios.

Dividend Consistency Amid Turbulence

The ETF's dividend history reveals resilience. Despite a 20% cut in November 2024 and a further 12.5% reduction in February 2025, the fund stabilized at $0.07 CAD per month starting in March 2025—a level it has held consistently for over a year. This stability contrasts sharply with many fixed-income instruments, which face principal erosion as rates rise.

The fund's consistency stems from its floating rate structure. Unlike traditional bonds, floating-rate securities reset their interest payments periodically, aligning with prevailing rates. This mechanism shields investors from the inverse relationship between bond prices and interest rates—a critical advantage in an era of Fed tightening.

Yield Attractiveness in a Low-Yield World

At 5.63%, ZFH.TO's forward yield outperforms most Canadian fixed-income alternatives. For context, the iShares Core Canadian Universe Bond ETF (XBB) yields ~2.5%, while government bonds offer even less. The ETF's yield is also competitive with U.S. high-yield corporate bonds (~5.8%) but with the added benefit of Canadian dollar exposure, reducing currency risk for domestic investors.

This yield is achievable through the ETF's focus on floating-rate corporate loans, which typically carry higher risk but compensate investors with premium income. While defaults remain a concern, the fund's diversified portfolio—spanning sectors like energy, real estate, and industrials—limits concentration risk.

Floating Rate: The Secret to Rate Risk Mitigation

The ETF's floating rate feature is its crown jewel. By resetting coupon payments every 30–90 days, it avoids the prolonged lag seen in traditional bonds. For instance, if the Bank of Canada raises rates by 50 basis points, ZFH.TO's income will eventually reflect this increase within a quarter. This dynamic makes it an ideal hedge against inflation.

Is ZFH.TO Right for Your Portfolio?

Yes, if you prioritize steady income and inflation-linked returns. The ETF's monthly distributions provide predictable cash flow, while its floating rate structure offers a buffer against rising rates. However, investors must acknowledge risks:

1. Credit Risk: High-yield loans are issued by companies with weaker balance sheets, raising default probabilities.
2. Liquidity Constraints: While listed on the Toronto Stock Exchange, its volume is lower than mega-ETFs, potentially leading to wider bid-ask spreads.

For a balanced approach, consider allocating 10–15% of a fixed-income portfolio to ZFH.TO, pairing it with shorter-duration bonds for diversification.

Final Take

In an era of market volatility and rising rates, BMO Floating Rate High Yield ETF (ZFH.TO) stands out as a pragmatic income solution. Its $0.07 CAD monthly dividend since early 2025, coupled with a 5.63% yield, delivers reliable returns while shielding investors from the perils of fixed-rate instruments. For those willing to accept moderate credit risk, this ETF offers a compelling path to steady income and inflation resilience.

Investors should review the ETF's prospectus and consider consulting a financial advisor before making allocation decisions.