HSBC Mortgage Fund

Analysis: Like most mortgage funds, this one is pretty simple. It invests in residential first mortgages on property that is located in Canada. Mortgage funds can be a great alternative to money market or short term bond funds, as they provide a regular yield and are typically very stable. This fund is no exception.

It is conservatively positioned, with 80% of the portfolio is invested in mortgages, 14% in cash with the balance in bonds. It has an average term to maturity of 1.8 years. This will help protect to the downside when interest rates begin to move higher. It can invest up to 30% outside of Canada, but has not taken advantage of that option as 97% is currently invested in Canada.

The biggest drawback to this, and a lot of mortgage funds, is its MER. It has an MER of 1.54%, which is low by relative standards, but is quite significant given that the yield on the DEX Residential Mortgage Index stood at 3.95% on September 30. Backing out the MER from the current yield, and it’s not unreasonable to expect a return of about 2.4% on the fund going forward.

The managers expect that the Bank of Canada will remain on the sidelines for the next few quarters and they believe that longer term yields will begin to drift higher. To protect against this, they intend to keep the fund’s interest rate exposure below that of the benchmark in the near term.

All things considered, this is not a bad mortgage fund given its low volatility and relatively low cost (compared to other mortgage and short term bond funds). But we would still favour the TD Mortgage Fund for those looking for pure mortgage exposure or the PH&N Short Term Bond & Mortgage Fund for those looking for just a good short term parking spot.