Defend Your Portfolio
The bond market does not always get as much attention as it’s equity counterpart, largely due to the perception that it offers comparatively lower yields. Yet even though the opportunities for soaring returns may be limited, bonds play an important role in balancing investment portfolios.
A Vast Universe of Opportunities
For many investors, the key role of bonds is to dampen overall risk and act as ballast during times of heightened market volatility:
ut at an impressive $102.8 trillion , the global bond market offers investors a wide range of investment opportunities beyond simply mitigating overall portfolio risk1. While all bonds share similar characteristics – a fixed maturity date, repayment of the principal amount at maturity, and regular coupon payments – different types of bonds can play different roles in a portfolio.
Track record in managing indexed fixed income strategies
Amount in fixed income assets
Fixed income index strategies
Bonds in Australia can largely be split into two broad issuer categories:
Government bonds. In general, bonds issued by the Commonwealth government/government sponsored entities are regarded as low risk as the probability of default is very small. This is because the government can always use taxes to raise revenue to repay debt. As a result, these bonds are viewed as more secure and liquid, and hence offer lower yields compared to corporate bonds.
Corporate bonds. On the other hand, issuers such as banks and corporations cannot raise taxes and therefore their probability of default is higher. But the higher an issuer’s credit risk, the higher the yield the issuer must offer to attract investors. This issuer category can include bonds that are investment-grade rated (for companies with relatively strong balance sheets) and bonds that are below investment-grade rated also known as high yield bonds (for companies with relatively weak balance sheets, hence offering higher yields).
Constructing a bond portfolio requires careful consideration. In order to build a well-diversified and high-quality portfolio for your clients, you need to think beyond a broad fixed income benchmark:
Diversification. To create a diversified core fixed income portfolio, investors should have exposure to a wide variety of issuer types and maturities. Aside from big banks and the government, which dominate the Australian debt market, investors should consider including bonds issued by corporations, state governments and foreign institutions as well as Australian government-backed corporate debt and kangaroo bond issues. However, while this increases yield diversification, it also adds risk from lower-rated credits.
Quality. The risk of default is always an investor concern, but it can be mitigated by focusing on investment grade-rated bonds, which tend to have stronger balance sheets and are able to withstand economic downturns. The S&P/ASX Australian Fixed Interest Index and S&P/ASX Government Bond Index include only issuers with a minimum BBB rating. The indices also only include bonds that have maturity of longer than or equal to one year and pay a fixed rate. Bonds secured by mortgages, with the exception of covered bonds, are excluded. This deliberate screening methodology helps reduce the risk of default and enables the portfolio to deliver a steady income stream for investors.
Debt markets have typically been expensive and hard to access for retail investors, requiring a high minimum investment. Investors will find fixed income ETFs as convenient investment vehicles, offering easy execution at a fraction of the cost of fixed income managed funds.
Traded on the ASX like a share and with a transparent investment process, investors know exactly what they hold and can choose ETFs that align closely with their risk/return profile.
Fixed income ETFs offer liquidity that may be hard to come by when directly investing in bonds or managed funds — ETF investors can sell or buy shares on the ASX at any time during the trading day, with price certainty.
ETFs can also offer investors diversification and quality, depending on their underlying index. Index methodologies can screen for high quality issuers, so investors don’t have to do it on their own. ETFs also further narrow down the index holdings to a manageable number of holdings to keep costs under control. For example, the SPDR® S&P®/ASX Australian Bond Fund, which tracks the 450+ constituent S&P/ASX Australian Fixed Interest Index, only holds 146 constituents.
Recognised as an industry pioneer, we created the first US-listed ETF in 1993 and the first Australia-listed ETFs in 2001. Since then, we have developed a range of ETFs that provide Australian investors with the flexibility to select investments that are aligned to their investment strategy.
Each new member of the SPDR ETF family reflects our intimate knowledge of the ETF market and over 40 years of indexing experience.
As with our first ETF, all out ETFs are physically backed to closely replicate the performance of each index.
ETFs: a low cost, Simple, and Tax Efficient Investment for SMSFs
Typically structured like managed funds, but listed and traded on an exchange like stocks, ETFs are flexible trading and investment vehicles that can be used to help the Self-Managed Superannuation Fund investor satisfy several critical investment needs.
1 Source: BIS as of Q4 2018; http://stats.bis.org/statx/srs/table/c1
2 State Street Global Advisors, as at 30 June 2019.