In our last post, we looked at the new Cash ETFs opening up choice to investors. In this post, we stick to a similar space on the risk/return scale and look at some of the recent additions to the fixed interest space.
Unlike cash, the ETF options available to investors in the fixed interest space was already fairly broad, with investors able to invest in corporate bonds, government bonds, global bonds, emerging market bonds, etc. With 19 ETFs now available on the ASX focusing on this space, investors would be forgiven for thinking the choice paradox has made the decision of which fixed interest ETF to invest in all too difficult. The full list of fixed interest ETFs which now account for $1.9b of funds under management can be found in the ETF Watch Fund Database. Today we’ll focus on the new options in this space that have been launched in the last few months.
In a sector where traditional index tracking ETFs dominate, PLUS is one of the few options available in the growth popularity Smart Beta ETF type. PLUS was launched in May 2017 and invests in a portfolio of Australian corporate bonds. The bonds included in the fund are higher yielding bonds with credit rations from AAA to BB-. PLUS has an average portfolio maturity of four years, with a running yield of 4.41% and management costs of 0.32%pa. For fans of Vaneck, this is their first fixed interest focused ETF, and helps to round out their total offering.
Whilst the options available are plentiful to fixed interest investors, until now they have come with a fair amount capital risk. This is because they are primarily invested in ‘fixed’ interest investments, many with a maturity date of five years or more, fluctuations in the underlying cash rate set by the RBA will affect the capital value. A rise in interest rates will see capital value decrease, and vice versa. For investors seeking the certainty that fixed income investments come with, volatility in their capital is unlikely to be desired.
That changed with the launch of QPON which is a floating rate bond ETF, meaning the coupon or interest rate paid is tied to the current RBA cash rate. In his excellent article on the topic in the AFR, Chris Joye stated that a portfolio of floating rate bonds has one-sixth the volatility of a similar portfolio of 5 year bonds.
However, lower risk generally means lower return, and the current return of around 2.65% is less than the 3.5% - 4% currently being returned by the corporate bond ETFs on the ASX. Nevertheless, for those who wish to minimise volatility, QPON may find a place in your portfolio.
QPON follows the Solactive Australian Bank Senior Floating Rate Bond Index, which currently has 13 underlying investments. Management costs are 0.22%pa.
Just launched, Vaneck’s floating rate bond ETF (FLOT) has similar attributes to QPON. The fund follows the Bloomberg AusBond Credit FRN 0+ Yr Index. The Index includes around 200 Australian-issued Floating Rate Notes from over 80 issuers, meaning it has broader coverage than QPON. The current yield is 2.75%pa, similar to QPON and management costs are 0.22%pa.
There we have three new fixed income ETFs broadening out the fixed income ETF options to investors to 19. Tell us in the comments below which fixed interest ETFs you're invested in?