Evaluating the Sustainability of TD Active U.S. High Yield Bond ETF's 0.105 CAD Dividend Amid Rising Rates

The TD Active U.S. High Yield Bond ETF (TUHY.TO) has declared a monthly dividend of 0.105 CAD for June 2025, maintaining its recent distribution pattern despite rising interest rates and macroeconomic uncertainty. While the fund's 6.06% forward yield remains attractive, investors must scrutinize whether this income stream can endure in a tightening rate environment. This analysis weighs the ETF's dividend sustainability against key risks, including expense pressures, credit quality shifts, and the impact of Fed policy.

The Fund's Dividend History: A Cautionary Dip

The ETF has distributed 0.105 CAD monthly since February 2025, except for a notable drop to 0.10 CAD in January (an 8.7% decline). This aberration raises questions about the stability of its income-generating capacity. While the fund recovered to its prior payout level by March, the January dip underscores vulnerabilities in its portfolio of U.S. high-yield bonds, which are sensitive to credit downgrades and defaults.

Expense Ratio: A Manageable Overhead

The fund's 0.62% management expense ratio (MER) is a critical factor. This fee, which covers management and operational costs, consumes a portion of the fund's income. To sustain its 0.105 CAD dividend, the fund must generate sufficient income from its underlying bonds to cover expenses and distribute the remainder. At 0.62%, the MER is competitive for an actively managed high-yield bond ETF, but it still requires robust performance from the portfolio.

Interest Rates: The Sword of Damocles

The Federal Reserve's ongoing rate hikes pose a dual threat to high-yield bonds:
1. Price Declines: Rising rates typically reduce bond prices, potentially eroding the ETF's net asset value (NAV).
2. Credit Risk: Higher borrowing costs can strain corporate borrowers, increasing default probabilities.

The ETF's focus on high-yield debt amplifies this risk. For instance, if the Fed's terminal rate exceeds 5.5%, as some economists predict, the yield advantage of junk bonds may shrink, squeezing distributable income.

Credit Quality and Portfolio Resilience

The ETF's performance hinges on the health of its underlying issuers. While the fund's active management allows it to avoid the lowest-rated bonds, a recession or sector-specific downturn could test its diversification. Investors should monitor the credit ratings of its holdings and the fund's average duration (a measure of interest rate sensitivity).

Comparisons to Peers and the Broader Market

The ETF's 6.06% yield exceeds the Bloomberg U.S. Corporate High Yield Bond Index's ~5.8% yield, suggesting active management adds value. However, this premium comes with active management's higher fees and sector-specific risks. Passive ETFs like the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) charge 0.48%, but they may offer less downside protection.

Investment Considerations

• Income Seekers: The ETF's yield remains compelling for those prioritizing cash flow, but investors must accept elevated volatility.
• Risk Management: Pair this ETF with rate-insensitive assets (e.g., short-term Treasuries or dividend-paying equities) to balance portfolios.
• Fed Policy Watch: Monitor the Fed's stance—any pivot to rate cuts could stabilize bond prices and support dividends.

Conclusion: Proceed with Caution

The TUHY.TO dividend appears sustainable for now, but its longevity depends on navigating rising rates and credit challenges. While the fund's active management and 0.62% MER are strengths, the high-yield sector's inherent risks demand vigilance. Investors should allocate cautiously, treat this ETF as a tactical income generator, and remain prepared for potential volatility. For those willing to accept these risks, the 6.06% yield offers a reward—but not without due diligence.