Unlocking High-Yield Potential: The Mackenzie US High Yield Bond ETF's Dividend Strategy in a Rising Rate World

On May 26, 2025, Mackenzie Investments announced a May 2025 distribution of CAD 0.40061 per unit for its US High Yield Bond Index ETF (CAD-Hedged, ticker QHY). This marks the latest installment in the fund's monthly payout schedule, delivering a 5.92% dividend yield at current prices. For income-focused investors, this announcement raises critical questions: Is this yield sustainable in a rising rate environment? How does the fund's portfolio composition support—or undermine—its distribution strategy? And what risks lurk beneath the surface of this seemingly attractive payout?

Portfolio Composition: A Conservative Core with Hidden Leverage

The fund's holdings, as of May 20, 2025, reveal a highly liquid structure, with 84.2% of assets concentrated in the top 10 holdings. The largest positions are in US Treasury Bills (61.13% and 21.50% of assets), complemented by cash reserves (15.73%) and Canadian government bonds (0.51%). While this conservative mix aims to mitigate volatility, the ETF also holds synthetic instruments tied to US high-yield equities, such as TRS Rec Hyg US Equity Pay Obligation Floating Rate notes.

This portfolio strategy creates a paradox: the ETF's safety-first approach (via Treasuries and cash) contrasts with its pursuit of high yield through leveraged exposure to riskier corporate debt. In a rising rate environment, the fixed-income-heavy core may buffer against price declines, but the synthetic instruments—often linked to floating-rate notes—could amplify returns if rates continue climbing.

Dividend Sustainability: Yield vs. NAV Resilience

The May 2025 distribution of CAD 0.40061 translates to an annualized payout of CAD 4.807 per unit, assuming consistent monthly disbursements. At the fund's current NAV of CAD 84.12, this equates to a 5.7% yield, closely aligning with the stated 5.92% figure. However, sustainability hinges on two factors:

1. NAV Stability: The ETF's NAV has fluctuated within a 52-week range of CAD 77.34 to CAD 86.50, suggesting limited downside risk. Yet, the recent dip to CAD 84.12 from a previous close of CAD 81.49 (May 26 data) hints at sensitivity to broader market headwinds.

2. Leverage and Costs: The fund's use of derivatives and hedging instruments incurs management fees (0.35% as stated in the prospectus) and transaction costs. These expenses could erode NAV over time, especially if distributions exceed net investment income.

Risks: The Dark Side of High Distributions

While the dividend yield is enticing, three critical risks demand scrutiny:

• Interest Rate Sensitivity: High-yield bonds typically underperform in rising rate environments. If the Fed continues hiking rates, the ETF's corporate debt holdings could face price declines, pressuring NAV and potentially forcing reduced distributions.

• Capital Erosion: The fund's heavy reliance on synthetic instruments means returns depend on both bond yields and equity-linked exposures. A prolonged downturn in either market could deplete NAV, undermining the sustainability of high payouts.

• Tax Implications: Distributions may include capital gains or returns of capital, which reduce the adjusted cost base and trigger tax liabilities. Investors must account for these in their total return calculations.

The Investment Thesis: High-Yield Income with Caveats

The Mackenzie US High Yield Bond ETF (QHY) offers a compelling yield in an era of historically low interest rates. Its CAD-hedged structure shields Canadian investors from US dollar volatility, while the Treasury-heavy portfolio provides a safety net. However, this fund is not a "set-and-forget" investment.

Bull Case:
- Rising rates boost yields on floating-rate notes.
- Treasury holdings stabilize NAV during market turbulence.
- Monthly distributions provide steady income for retirees or income-focused portfolios.

Bear Case:
- Prolonged rate hikes erode bond prices, squeezing NAV.
- Synthetic instruments amplify losses in equity market downturns.
- Management fees eat into returns over time.

Final Verdict: Proceed with Caution

The CAD 0.4006 dividend makes QHY an attractive option for income seekers, but investors must recognize the trade-offs. This ETF is best suited for portfolios with a high risk tolerance, diversified across equity and fixed-income assets. For those willing to accept volatility, the 5.92% yield offers a hedge against inflation and low bond yields.

Action Items:
1. Monitor the Fed's rate decisions and their impact on high-yield bond spreads.
2. Track QHY's NAV performance against its benchmark index.
3. Review tax implications before reinvesting distributions.

In a rising rate world, high yield comes at a price. QHY delivers on income but demands vigilance—investors must decide whether the rewards outweigh the risks.