Generating Income in a Low-Yield World: Evaluating FJFB as a Strategic Fixed-Income Solution for Canadian Investors

In an era where traditional fixed-income assets offer paltry returns, Canadian investors seeking income face a daunting challenge. With the Bank of Canada's benchmark rate hovering near historical lows and government bond yields struggling to outpace inflation, the quest for reliable income has become a high-stakes game of balancing risk and reward. Enter the First Trust JFL Fixed Income Core Plus ETF (FJFB), a fund designed to navigate this landscape by combining the safety of investment-grade Canadian bonds with the yield-enhancing potential of high-yield and international fixed-income securities.

The Low-Yield Dilemma

Canadian investors have long relied on government and corporate bonds for income, but today's environment demands a more nuanced approach. For instance, the 10-year Canadian government bond yield has languished below 2.5% for much of 2025, while the S&P/TSX Composite's dividend yield sits at a meager 1.8%. In such a climate, investors must stretch for yield without overexposing themselves to credit risk—a tightrope walk that FJFB aims to simplify.

FJFB's Strategic Composition

FJFB's structure is a masterclass in balancing safety and yield. At least 75% of its assets are allocated to investment-grade Canadian corporate, federal, provincial, and municipal bonds, which form the bedrock of capital preservation. These securities, typically rated BBB- or higher, offer lower default risk while still generating competitive returns. For example, the fund's weighted average yield-to-worst of 5.15% (as of August 2025) dwarfs the 1.5% yield of a typical 10-year Canadian Treasury bond.

The remaining 25% of the portfolio is allocated to non-investment-grade (high-yield) bonds, emerging market debt, and preferred shares, which amplify income potential. This allocation is carefully managed to avoid overexposure to volatile assets. As of July 2025, FJFB's credit quality distribution shows a conservative tilt:
- 55.89% in BBB-rated bonds (investment-grade),
- 24.15% in A-rated bonds,
- 19.98% in lower-rated (BB and B) bonds.

This mix ensures that the fund isn't overly reliant on high-risk assets while still capturing the premium offered by junk bonds. The weighted average duration of 6.07 years further mitigates interest rate risk, making the fund less sensitive to rate hikes than longer-duration alternatives.

Yield vs. Risk: A Delicate Balance

FJFB's 30-day SEC yield of 4.61% (as of August 2025) is a compelling figure in a low-yield world. For context, the iShares Core Canadian Universe Bond ETF (XBB) offers a 2.8% yield, while the BMO Canadian High Yield Corporate Bond Index ETF (ZHY) yields 6.2% but carries significantly higher credit risk. FJFB strikes a middle ground, offering a yield that's 60% higher than XBB while maintaining a credit profile that's 40% safer than ZHY.

The fund's active management approach is another key differentiator. Unlike passive ETFs that track a benchmark, FJFB's managers can adjust allocations in response to market conditions. For example, during periods of rising rates, they might increase exposure to shorter-duration bonds to reduce volatility. This flexibility is critical in a low-yield environment where market dynamics shift rapidly.

Capital Preservation and Diversification

FJFB's focus on Canadian bonds provides a layer of geographic diversification, as the Canadian economy remains relatively stable compared to its U.S. or European counterparts. However, the fund's inclusion of international bonds and emerging market debt adds another dimension. For instance, its exposure to U.S. municipal bonds (which are exempt from Canadian taxes) and high-yield corporate bonds from Asia-Pacific markets broadens its income sources.

The fund's premium to NAV of 0.02% also suggests strong investor confidence, as the market price exceeds the underlying asset value. This premium is rare for fixed-income ETFs, which often trade at discounts, and indicates that FJFB's strategy is perceived as attractive in the current climate.

Risks to Consider

While FJFB's approach is compelling, it's not without risks. The fund's 0.65% expense ratio is higher than many passive bond ETFs, which typically charge 0.25% or less. Additionally, its lack of dividend payments means investors must rely on capital gains and reinvestment of interest income to generate returns—a less predictable stream than regular dividends.

Technical analysis also raises caution: FJFB has a “sell” rating for its 1-week and 1-month outlooks, reflecting short-term volatility. Investors should monitor macroeconomic indicators like inflation and interest rate expectations, as these could impact the fund's performance.

Conclusion: A Strategic Fit for Income-Oriented Investors

For Canadian investors seeking a balanced approach to income generation and capital preservation, FJFB offers a compelling solution. Its diversified portfolio of investment-grade and high-yield bonds, combined with active management and a moderate expense ratio, positions it as a strategic alternative to traditional fixed-income assets. While it's not a risk-free investment, its ability to generate a 4.6% yield in a low-yield environment makes it a standout option for those willing to accept moderate volatility for enhanced returns.

In a world where “safe” yields are scarce, FJFB's blend of Canadian stability and global diversification could prove to be a lifeline for income-focused portfolios. As always, investors should align their allocations with their risk tolerance and consult a financial advisor to ensure this ETF fits their broader investment strategy.