ETFs

Four fixed income ETFs to put on watch within a rising interest rate environment

Wed 11 May 22, 5:35pm (AEST)
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Key Points

  • Is it time to have some bond exposure?
  • Corporate and government bonds can offer attractive returns, while dialling down equity risk to more comfortable levels

After an annus horribilis of a year for the S&P/ASX 200, up only 0.56% over 12-months and with the interest rate cycle now in turbocharge mode, investors may for the first time in a long time have cause to revisit fixed income and bonds as safer-haven alternatives to highly volatile equities.

While it’s clearly not without risk, the recent surge in longer-term interest rates, and the widening spread between corporate bonds and government bonds, means income investors can now look at better returns, while also [potentially] dialling down the equity risk to more comfortable levels.

Yield-plays

For retirees who need to generate income to live on, the expectation of the cash rate exceeding 3% for the first time in 12 years, represents pennies from heaven. Suddenly, the idea of achieving higher yields from fixed income going forward is no longer unrealistic.

Over the last decade, high yielding dividend stocks, like BHP (ASX: BHP),Fortescue Metals Group (ASX: FMG), Rio Tinto (ASX: RIO), Scentre (ASX: SCG) and Charter Hall Long Wale REIT (ASX: CLW), have been seen by many retirees as a high-risk surrogate for fixed income.

But with interest rates finally on the move, dividend yields from blue-chips on the S&P/ASX200 – pegged at around 5.2% plus franking credits for FY22 – are no longer the only income-plays in town.

While the 10-year government bond rate is now above 3% for first time in almost 10 years, funds offering income from any number of asset classes will progressively come to market over the next 24 months.

Bond exposure

One of the problems with locking in too much yield early within the interest rate cycle is the risk of leaving money on the table, after all, rates will be on the rise for the foreseeable future.

Given that interest rates are starting to climb, there’s never been a better time to put fixed income securities/bonds back on your watchlist.

One of the easiest ways to get exposure to Australian bonds are through products like BetaShares Global Government Bond 20+ Year ETF (ASX:GGOV), Vanguard International Credit Securities Index (Hedged) ETF (ASX:VCF),Australian Government Bond ETF (ASX: AGVT), and iShares Core Global Corporate Bond (AUD Hedged) ETF (ASX:IHCB).

BetaShares Global Government Bond 20+ Year ETF

Aims to invest in long-term maturity bonds issued by governments of G7 nations, hence of high credit quality.

All bonds in the fund have a remaining term to maturity of 20-plus years and are weighted according to their market value.

One unit of the fund (10/5/22) had a net asset value (NAV) of $18.57 and the total asset value under management (AUM) stands at approximately $6.15m with 320.5K outstanding units.

Management fee is 0.22% annually, and income is paid quarterly.

Vanguard Intnl Credit Securities Index (Hedged) ETF

Seeks to track returns of the Bloomberg Global Aggregate Corporate and Government-Related Scaled Index, hedged with the A$.

One unit of the fund (10/5/22) had a net asset value (NAV) of 39.53.

The fund invests in government-owned or guaranteed securities and predominantly rated BBB- or higher by Standard & Poor’s or equivalent ratings agency.

The fund has the highest exposure to the US securities (38.3%), followed by 8.6% in Canada.

Around 40% of the total bonds have a maturity period of 1 to 5 years, while 2.3% have a maturity period of over 30 years.

Management fee is 0.3% annually and the total AUM is $610.55m.

Australian Government Bond ETF

Aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of high-quality bonds issued by Australian federal and state governments, and with a component issued by supra-nationals and sovereign agencies.

The fund invests primarily in a portfolio of relatively ‘long duration’ Australian government bonds. Eligible bonds must be A$ denominated fixed-rate bonds and have a term to maturity of between 7 to 12 years.

One unit of the fund (10/5/22) had a net asset value (NAV) of $42.67, and management cost is 0.22%.

Distributions paid monthly.

iShares Core Global Corporate Bond (AUD Hedged) ETF

Tracks the performance of Bloomberg global aggregate corporate bond index, which is also hedged with the A$, hence no currency risk for investors.

The net asset value of one unit of the fund (10/5/22) is $97.35 while its management fee is 0.26% annually.

The fund’s highest exposure in the US with a 56.54% weighting, with the UK coming in second place with a 7.99% weighting.

Distributions are paid tri-annually.

Given that Investing in fixed income securities requires an intimate understanding of debt markets, it always pays to seek professional advice before investing.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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