Two ETFs offering access to the rising US bond market

By Market Index
Fri 15 Jul 22, 1:50pm (AEDT)
US T bonds

Key Points

  • ETFs are one way local investors can access to the rising US bond market
  • US Treasury Bond (currently hedged) ETF (ASX: USTB)
  • US$ High Yield Bond (Currency Hedged) ETF (ASX: USHY)

While fixed income investors can take some comfort from Australian Government 10-year bonds having moved beyond 4%, up from 2.6% this time last year, those looking to up ante may wish to tap into more attractively priced US bond yields.

Underpinning the US bonds were recent revelations that broad-based inflation was nudging double-digits, having hit a four-decade high of 9.1% in June.

By comparison, Australia inflation rate is currently sitting at roughly half the US rate, just above 5% and best guesses suggest it will peak somewhere between 6% and 7.2% during the second half of 2022.

Attractive returns are re-emerging

While investors bailed on fixed income early this year as interest rates started to rise, attractive rates of return are reappearing within this beaten-up asset class.

On the Back of the Federal Reserve’s (The Fed's) interest rates hikes, 10-year Treasury yields are now expected reach 3.8% by the end of the second quarter of 2023.

One of the many ways to invest in fixed income is through ETFs. Here are two that invest in US-denominated bonds worth considering.

US Treasury Bond (currently hedged) ETF (ASX: USTB)

The ETF is exclusively invested in US government bonds (aka Treasuries) and as of 5 July offered Australian retail investors a first pure-play exposure to US Treasuries, which are some of the most liquid and closely followed investments globally.

The fund gains its exposure to the index by investing all of its assets in the Xtrackers II US Treasuries UCITS ETF, which is managed by DWS Group, a leading global asset manager with over EUR902bn in AUM.

Passively managed, the fund aims to track the iBoxx $Treasuries Index (AUD Hedged) which is an index specifically for the new fund.

The return of the iBoxx $ Treasuries Index (AUD Hedged) for the six months to the end of June is -4.1% and 2.9% over five years.

The ETF holds around 270 securities, has a 3% yield and a duration of 6.5 years, which by default has reasonably high exposure to interest rate risk.

  • Management Costs (% p.a): 0.30

  • Distribution Frequency: Quarterly

  • Currency Hedged: Yes

  • Domicile: Australia

  • Legal Form: Managed Investment Scheme

  • SMSF Eligible: Yes

US$ High Yield Bond (Currency Hedged) ETF (ASX: USHY)

As you might expect, this ETF (available from 1 July) is a much higher risk investment which expects to achieve much higher returns by tracking a diversified basket of high yield US$ bonds issued by global companies.

High yield bonds – which can pay higher coupons than investment grade bonds – are those rated sub-investment grade (BB and lower).

USHY tracks the Solactive US$ High Yield Corporates Total Market Hedged to A$ Index, which year-to-date has returned -9.7%, and 2.9% over the past five years.

The current yield on the portfolio is 8.4% and the duration is 4.3 years, hence a reasonable level of interest rate risk.

While the sector has greater exposure to inflation, and hence greater exposure to consumer cyclical sector, investors should note high-grade high yield bonds can be found in the BB range.

Any material credit rating upgrade could push bond prices higher, and in so doing boost EFT returns.

The fund has 1,204 holdings, and an 84% exposure to US Companies.

The top five issuers include Ford Motor Company (2.6%), CCO Holdings (2.3%), Centene Corp (1.5%), Tenent Healthcare (1.4%) and CSC Holdings (1.2%).

  • Management Costs (% p.a): 0.55

  • Distribution Frequency: Quarterly

  • Currency Hedged: Yes

  • Domicile: Australia

  • Legal Form: Managed Investment Scheme

  • SMSF Eligible: Yes

  • NAV:10.1423


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