The 2.9% Yield That Turns Market Crashes Into Buying Opportunities

When markets crash, most assets fall in tandem. Even the so-called safe havens like put options, long volatility products, often carry what’s known as negative carry: you’re paying to hold them in hopes they’ll spike during a crisis. One rare exception could be the BMO Long Federal Bond Index ETF (TSX: ZFL).

This fund struggled in 2022 as interest rates spiked, but it was one of the few assets that went green during the COVID crash in March 2020. ZFL remains one of the most accessible market crash hedges available, and it pays you a steady yield while you wait.

What ZFL Owns and Why It Matters

ZFL tracks the FTSE TMX Canada Long Term Federal Bond Index, which includes bonds with maturities greater than 10 years. These aren’t just any bonds, though. They’re typically issued or backed by the Government of Canada or its AAA-rated agencies, making them among the safest credit exposures you can find.

The ETF’s current portfolio is heavily weighted toward very long-term maturities. About 10.7% of its holdings mature in 10 to 15 years, 6.1% in 15 to 20 years, 12.9% in 20 to 25 years, 36.8% in 25 to 30 years, and 33.6% beyond 30 years. This extreme interest rate sensitivity is what gives ZFL its power in a downturn.

How ZFL Can Deliver in a Market Crash

The secret weapon here is ZFL’s duration, which currently sits at 17.2 years. Duration measures how sensitive a bond’s price is to changes in interest rates. A crash typically drives investors into safe assets, which pushes long-term interest rates down.

Because long bonds like those in ZFL move inversely to rates, a fall in yields during a panic could send ZFL’s price soaring. We saw this in March 2020. As equities collapsed and central banks cut rates aggressively, long-dated government bonds rallied. ZFL was one of the few ETFs in Canada with a positive return that month.

What If the Market Doesn’t Crash?

ZFL isn’t just a doomsday tool. Even in normal conditions, it serves a role as a diversifier in a balanced portfolio. It doesn’t move in sync with equities, making it useful for smoothing out volatility if you rebalance your portfolio.

The ETF pays a 2.9% yield, distributed monthly, and only charges a 0.22% expense ratio. While long bonds do come with interest rate risk, holding ZFL in a registered account or as a complement to equity-heavy portfolios can add some much-needed ballast.

Bottom line: ZFL is a rare tool that not only acts as a shock absorber when the market breaks, but also provides income while doing it.