Harvesting Income Amid Rising Rates: The Strategic Case for Manulife Smart Short-Term Bond ETF

Investors seeking stable income in a volatile rate environment now face a pivotal question: How can you secure consistent dividends while shielding capital from the risks of rising interest rates? The recent declaration of a CAD 0.0281 dividend per unit by the Manulife Smart Short-Term Bond ETF (TERM) offers a compelling answer. This article dissects how this payout aligns with the ETF's historical patterns, leverages current short-term bond yields, and positions TERM as a cornerstone for yield optimization in 2025.

The Dividend Declaration: Stability Amid Volatility

The CAD 0.0281 dividend announced for May 2025 marks the latest installment in a consistent dividend history for TERM. Since its launch in November 2020, the ETF has maintained a monthly payout rhythm, with dividends ranging between CAD 0.01 and CAD 0.03. The current distribution sits squarely within this band, reflecting the fund's disciplined income strategy (see dividend history below).

This consistency is no accident. TERM tracks the FTSE Canada Short-Term Overall Bond Index, a portfolio of bonds with maturities of 1–5 years. By focusing on short-term debt, the ETF minimizes interest rate risk—critical as markets brace for potential hikes from the Bank of Canada.

Current Yield Environment: TERM vs. Short-Term Bond Benchmarks

The CAD 0.0281 dividend translates to an annualized yield of ~3.34%, surpassing the FTSE Canada Short-Term Overall Bond Index's 2.92% yield as of April 2025. This outperformance is driven by TERM's active management, which optimizes the portfolio's duration (currently 2.61 years) to balance income generation with capital preservation.

In contrast, long-term bond ETFs like the iShares DEX Long Bond Index Fund (XLB) have struggled in 2025, with yields compressed to 2.1% amid fears of rising rates. TERM's short-duration bias ensures it is less sensitive to rate fluctuations, making it a safer bet for reinvestment.

Why Rising Rates Favor TERM's Strategy

Central banks globally are shifting toward tighter monetary policies, with the Bank of Canada signaling potential hikes to combat inflation. In such an environment, short-term bonds thrive:

1. Reinvestment Advantage: As rates rise, the ETF's maturing bonds can be rolled into newer issues with higher yields. The May dividend is a prime example—capitalizing on a yield environment where short-term debt is resetting upward.
2. Capital Preservation: Short-term bonds experience smaller price swings than long-dated issues. TERM's duration of 2.61 years ensures limited exposure to the volatility seen in 10+ year bonds.
3. Tax Efficiency: All dividends from TERM qualify as “eligible dividends” for Canadian residents, unlocking enhanced tax credits.

Actionable Steps for Income Investors

1. Dollar-Cost Average Into TERM: Use the May 30 record date to initiate a position. Even small monthly investments can compound the 3.34% yield.
2. Enroll in the DRIP: The ETF's Dividend Reinvestment Plan (DRIP) allows automatic reinvestment of distributions, compounding returns tax-efficiently.
3. Pair with Inflation-Hedged Instruments: Combine TERM with inflation-linked bonds (e.g., XIB) to buffer against rising prices while maintaining liquidity.

Conclusion: A Rare Blend of Income and Safety

The CAD 0.0281 dividend is more than a payout—it's a signal of TERM's ability to navigate shifting rates while delivering reliable income. With short-term yields poised to rise and long-term bonds under pressure, this ETF offers a rare combination of yield, safety, and strategic flexibility.

For income-focused investors, now is the time to act. TERM's disciplined approach to short-term debt positions it to thrive in 2025's uncertain landscape. Don't let this opportunity slip—secure your position before the June 13 payout date.

Invest with intention. Invest with TERM.