30days
free
Newsletter

An Introduction to Fixed Income ETFs

As most of us know, the fixed income market is generally less liquid and transparent than equity markets. However, fixed income exchange traded funds (ETFs) can help bridge the gap between these asset classes. These ETFs cover a broad range of fixed income type securities. Some ETFs are issuer specific (i.e. corporate, government or semi-government Securities), coupon specific (i.e. fixed rate, floating rate, high yield or inflation indexed) or asset class specific (i.e. cash, bonds or credit).

 

As most bonds in the ETF are held until maturity, an active secondary market is typically less unavailable than other asset classes, especially for corporate bonds. This can lead to differences between the index return that is being benchmarked and the actual return of the ETF, known as tracking error. To avoid this issue, the ETF will usually encompass only a sufficient sample of bonds to represent the index which are generally most liquid. This is a key feature that differentiates fixed income ETFs from equity ETFs. While an equity ETF is generally composed of all stocks in the benchmark index, fixed income ETFs often hold only a portion of bonds (known as a basket of bonds) to avoid the liquidity problem.

 

Benefits

  • Diversification – access to a portfolio of bonds diversifying the risk associated with holding only a single bond.
  • Flexibility in Liquidity – as ETFs are traded on an exchange, buying and selling these products is relatively easier than trading in illiquid over-the-counter debt markets.
  • Transparency – ETFs are subject to the full disclosure requirements of exchange traded entities allowing investors to make better informed investment decisions.
  • Low Cost – management fees in ETFs are much lower than commissions on direct bond purchases. Additionally, there is no minimum investment level as there is with most direct bond investment.

 

The risks associated with fixed income ETFs are essentially the same for direct bond investment. This includes interest rate risk, credit/default risk, distribution risk and taxation differences with other asset classes.

 

The ETF payment structure usually depends on the benchmark it is tracking but for fixed income ETFs, interest is usually paid out through a monthly dividend and capital gains are paid out through an annual dividend. This payment structure can change subject to the underlying nature of the ETF. For example, Inflation ETFs pay interest equating to the Consumer Price Index plus an additional margin. It is important that investors understand the payment structure of the ETF that are considering investing in and the associated fees attached to the product. This is usually found in the product disclosure statement of the corresponding ETF which outlines its investment objectives, strategies, risks and costs. It is also important to ensure that the ETF is following the specified strategy.

 

No ASX-Listed Fixed Income ETFs employ leverage as part of their investment strategy.

Issuer ASX Code Name Benchmark Weighting
BetaShares AAA

BetaShares Australian High Interest Cash ETF

 

Australian Cash Single Asset
BlackRock IAF

iShares UBS Composite Bond ETF

 

Bloomberg AusBond Composite Index Market Capitalisation
BlackRock IHCB iShares Global Corporate Bond ETF (AUD Hedged) Barclays Global Aggregate Corporate Bond Index Market Capitalisation
BlackRock IHHY

iShares Global High Yield Bond ETF

(AUD Hedged)

Markit iBoxx Global Developed markets Liquid High Yield Capped Index Market Capitalisation
BlackRock IHEB iShares JP Morgan USD Emerging Markets Bond ETF (AUD Hedged) JP Morgan EMBI Global Core Index Market Capitalisation
BlackRock ILB

iShares UBS Government Inflation ETF

 

Bloomberg AusBond Inflation Government Index Market Capitalisation
BlackRock IGB

iShares UBS Treasury ETF

 

Bloomberg AusBond Treasury Index Market Capitalisation
Russell Investments RGB

Russell Australia Government Bond ETF

 

Australian Government Bonds Equal
Russell Investments RCB

Russell Australian Select Corporate Bond ETF

 

Australian Corporate Bonds Equal
Russell Investments RSM

Russell Australian Semi-Government Bond ETF

 

Australian Semi-Government Bonds Equal
State Street BOND

SDPR S&P/ASX Australian Bond Fund

 

S&P/ASX Australian Fixed Income Index Multi Factor
State Street GOVT

SPDR S&P/ASX Australian Government Bond Fund

 

S&P/ASX Bond Index Multi Factor
Vanguard VAF

Vanguard Australian Fixed Interest Index

 

Bloomberg AusBond Composite Index Market Capitalisation
Vanguard VGB

Vanguard Australian Government Bond Index ETF

 

Bloomberg AusBond Government Index Market Capitalisation
Vanguard VIF Vanguard International Fixed Interest Index ETF (Hedged) Barclays Global Treasury Index Market Capitalisation
Vanguard VCF Vanguard International Credit Securities Index ETF (Hedged) Barclays Global Aggregate Government related and Corporate Index Market Capitalisation