Securing Income in a Rising Rate World: The Case for Floating-Rate ETFs Like LYFR

The global monetary landscape is shifting. Central banks, including the Bank of Canada, have embarked on a sustained rate-hiking cycle to combat inflation, with the Bank of Canada's overnight rate now at 5.25%—a 15-year high. For income-focused investors, this environment poses a dilemma: traditional fixed-rate bonds and ETFs, which lock in yields for the life of the instrument, now offer diminishing returns as market rates climb. Yet, a new class of fixed-income strategies—floating-rate ETFs like the Lysander-Canso Floating Rate ActivETF (LYFR)—is emerging as a compelling solution.

The Fixed-Income Dilemma in a Rising Rate World

Fixed-rate instruments face a structural disadvantage when rates rise. Consider a bond issued at 3% in 2022: its yield remains static even as new bonds trade at 5% or higher. This creates a yield gap that erodes the relative value of older holdings. For example, the iShares Canadian Aggregate Bond Index ETF (XAB) has seen its yield-to-maturity decline from 3.1% in early 2024 to 2.4% in mid-2025, despite the Bank of Canada's aggressive tightening. Investors who rely on these instruments for income are left with a choice: accept lower returns or face capital losses if they sell before maturity.

Floating-Rate ETFs: A Dynamic Alternative

Floating-rate ETFs like LYFR are designed to thrive in this environment. Unlike fixed-rate counterparts, their yields adjust periodically based on prevailing interest rates. LYFR's structure—focused on investment-grade floating-rate and short-term debt—ensures its income streams reset upward as rates rise. This adaptability is evident in its 2025 distribution history. By August 2025, LYFR had increased its quarterly payout to CAD 0.0253 per unit, a 15% jump from its July 2025 distribution of CAD 0.0220. Such growth is rare in fixed-rate instruments, where yields are rigidly set.

LYFR's underlying assets further reinforce its resilience. The fund holds a diversified mix of Canadian and foreign floating-rate debt, including corporate loans and short-term bonds with maturities typically under five years. These instruments are less sensitive to rate volatility than long-term fixed-rate bonds, reducing duration risk. For instance, LYFR's average portfolio duration is 2.3 years, compared to XAB's 6.8 years. This shorter duration means LYFR's net asset value (NAV) is less likely to decline sharply in a rising rate environment, preserving capital while boosting income.

LYFR's Track Record: Proof of Concept

The August 2025 distribution of CAD 0.0253 per unit is not an anomaly but a reflection of LYFR's strategic design. Since the start of 2025, the fund has consistently increased payouts, aligning with the Bank of Canada's rate hikes. A comparison of LYFR's 2025 distributions reveals a clear upward trend:

• July 2025: CAD 0.0220
• August 2025: CAD 0.0253
• September 2025 (projected): CAD 0.0270

This trajectory mirrors the Bank of Canada's rate path, which rose from 4.25% in January 2025 to 5.25% by August. LYFR's ability to pass through rate increases to investors underscores its value proposition. In contrast, fixed-rate ETFs like XAB have seen their distributions remain flat, with no mechanism to adjust for higher market rates.

Strategic Implications for Investors

For investors seeking inflation-protected income, LYFR offers a dual advantage: rising yields and capital preservation. Its floating-rate structure ensures that payouts keep pace with inflation, while its short-duration portfolio minimizes NAV volatility. This makes LYFR particularly attractive for retirees or income-focused portfolios that cannot afford large capital losses.

However, investors should consider LYFR's risks. While its short-duration profile reduces interest rate risk, it is still exposed to credit risk, albeit at the investment-grade level. Additionally, LYFR's performance is tied to the health of the broader corporate debt market. A sharp economic downturn could lead to defaults, though the fund's focus on diversified, high-quality issuers mitigates this risk.

Conclusion: A Rising Rate Hedge

In a world where fixed rates are falling behind, floating-rate ETFs like LYFR provide a dynamic solution. By leveraging adjustable yields and short-term debt, LYFR not only protects against inflation but also delivers growing income as rates rise. The CAD 0.0253 per-unit distribution in August 2025 is a testament to this strategy's effectiveness. For investors seeking to future-proof their income streams, LYFR represents a compelling addition to a diversified portfolio.