Fixed income exchange traded funds (ETFs) combine the ease of stock trading with the diversification benefits of managed bond funds. We explore four key reasons why investors might consider fixed income ETFs as part of a well-balanced investment portfolio.
1. Role as Diversifier
Holding core fixed income investments, such as investment-grade credit or government bonds, in a well-balanced portfolio can help you navigate challenging market environments. The benefit of owning a diverse range of investments is that when one asset class falls in value (e.g. equities), other asset classes (e.g. fixed income) might increase in value and help offset the loss. Bonds also exhibit a different pattern of returns, as they generally fluctuate less than equities. But even if correlations change and bonds start to behave like stocks for a short period, their lower volatility helps reduce any dips in valuation across the broader investment portfolio.
2. Regular Source of Income
In the same way shareholders receive dividends, bond investors can also enjoy an income stream in the form of coupon payments. A predictable and regular cash flow, coupled with relative capital stability, mean that investors can manage their finances more effectively and comfortably meet spending needs – especially when compared to drawing income from assets that fluctuate more widely.
3. Range of Choice - Index to Active
A wide variety of fixed income ETFs, ranging from index tracking, smart beta, and active, is now available, with new products regularly introduced to the market. Index fixed income ETFs are favoured by investors seeking diversified, low-cost, low-turnover exposure, and these funds often reference a well-established index. Index management skill is often reflected in the quality of the ETF, such as how closely it replicates the underlying benchmark
Meanwhile, active fixed income ETFs might be favoured by investors seeking alpha, downside risk management or some other specialised portfolio style. That said, pure alpha is difficult to achieve. Therefore, active investments work well for those with the resources to perform due diligence and monitoring to ensure the portfolio fulfils its role, doesn’t drift from the stated objectives, and has continuity in the portfolio management team.
4. Ease of Implementation
ETFs enable investors to establish and liquidate very small or large positions readily. In smaller portfolios, ETFs provide diversification in a single trade, with the minimum size possibly as little as a single ETF share. This is compared to the larger minimums often required by managed funds or direct investments. At the other end of the spectrum, larger portfolios may benefit from the flexibility of transacting either in cash or in kind. Meanwhile, for all investors, the ability to buy and sell ETFs on the stock exchange adds a layer of liquidity not available when investing directly in bonds or managed funds. Trade volumes have been shown to increase during periods of market dislocation, meaning exposures change hands more readily when liquidity is needed the most.
ETFs are also seen as a preferred vehicle because of their high level of transparency. For most ETFs, information, including daily holdings, characteristics, NAV, and intraday pricing, is readily available to investors.
For all of the above reasons, investors have been increasingly turning to fixed income ETFs when building their investment portfolios. The growth and reach of the fixed income ETF market we have witnessed in recent years is likely to continue.
Bonds generally present less short-term risk and volatility than stocks, but contain interest rate risk (as interest rates rise, bond prices usually fall); issuer default risk; issuer credit risk; liquidity risk; and inflation risk. These effects are usually pronounced for longer-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss.
Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL" or "State Street Global Advisors, ASL"). Registered office: Level 14, 420 George Street, Sydney, NSW 2000, Australia · Telephone: 612 9240-7600 · Web: www.ssga.com.
State Street Global Advisors, ASL is the issuer of interests and the Responsible Entity for the ETFs which are Australian registered managed investment schemes quoted on the AQUA market of the ASX or listed on the ASX. This material is general information only and does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider the product disclosure document and target market determination, available at www.ssga.com/au, before deciding whether to acquire or continue to hold units in an ETF. This material should not be considered a solicitation to buy or sell a security. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETF's net asset value. ETFs typically invest by sampling an index, holding a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index. Investing involves risk including the risk of loss of principal. Diversification does not ensure a profit or guarantee against loss. Holdings and sectors shown are as of the date indicated and are subject to change. This information should not be considered a recommendation to invest in a particular sector or to buy or sell any security shown. It is not known whether the sectors or securities shown will be profitable in the future. Sector ETF products are also subject to sector risk and non-diversification risk, which generally results in greater price fluctuations than the overall market. SPDR®, Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC, Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC, ASX® is a registered trademark of the ASX Operations Pty Ltd, these trademarks have been licensed for use by S&P Dow Jones Indices LLC and sub-licensed for use to State Street Global Advisors, ASL. MSCI indexes are the exclusive property of MSCI Inc. (“MSCI”). MSCI and the MSCI index names are service mark(s) of MSCI or its affiliates and have been licensed for use for certain purposes by State Street. SPDR products are not sponsored, endorsed, sold or promoted by any of these entities and none of these entities bear any liability with respect to the ETFs or make any representation, warranty or condition regarding the advisability of buying, selling or holding units in the ETFs issued by State Street Global Advisors, ASL. State Street Global Advisors Trust Company (ARBN 619 273 817) is the trustee of, and the issuer of interests in, the SPDR® S&P 500® ETF Trust, an ETF registered with the United States Securities and Exchange Commission under the Investment Company Act of 1940 and principally listed and traded on NYSE Arca, Inc. under the symbol "SPY". State Street Global Advisors, ASL is the AQUA Product Issuer for the CHESS Depositary Interests (or "CDIs") which have been created over units in SPY and are quoted on the AQUA market of the ASX. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without State Street Global Advisors, ASL's express written consent.