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.
|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|