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- The latest inflation data of March 2022 shows Australia’s inflation surged 5.1% on a yearly basis.
- To curb inflation, central banks often increase interest rates to restrict money supply, which eventually benefits bond investors.
- Investing in fixed income securities requires investors to have a deep understanding of the intricacies of the debt market.
Investing in debt or fixed income securities is not much popular among retail investors but the global debt market is considered to be even larger than the stock market. While equities represent a highly volatile asset class and have a non-linear return profile, debt securities are comparatively significantly more stable with their return profile.
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The latest inflation data of March 2022 shows an inflation surged 5.1% on a yearly basis, breaching the upper end of the RBA’s target of 2-3%. To curb inflation, many economies around the world, including the US, have started to increase interest rates, and many analysts are expecting the RBA to follow the same path in the upcoming monetary policy meetings.
If that happens, investing in fixed income securities becomes a lucrative option for investors as interest rates start to climb. In that vein, let us have a look at three ASX fixed income ETFs that investors have on their watchlist.
This ETF from BetaShares aims to invest in long-term maturity bonds issued by governments of G7 nations. All bonds in the fund have a remaining term to maturity of more than 20 years and are weighed according to their market value. These bonds issued by G7 nations are of very high credit quality.
One unit of the fund has a net asset value (NAV) of AU$19.33 and the total asset value under management stands at approximately AU$6.15 million with 320.5K outstanding units. It charges a management fee of 0.22% per annum and has delivered a negative return of 5.5% in the last three years ended 31 March 2022.
Vanguard also has many ETFs focused on investor seeking fixed return from debt securities. VCF seeks to track returns of the Bloomberg Global Aggregate Corporate and Government-Related Scaled Index, hedged with the Australian dollar. The fund invests in government-owned or guaranteed securities and predominantly rated BBB- or higher by Standard & Poor’s or equivalent ratings agency.
The fund has the highest exposure to the US securities (38.3%), followed by 8.6% in Canada. Almost 40% of the total bonds have a maturity period of 1 to 5 years while 2.3% bonds have a maturity period of over 30 years. The management fee is 0.3% per annum and the total AUM of the fund of this beta shares ETF is $610.55 million.
The last name on the list is IHCB from iShares. It tracks the performance of Bloomberg global aggregate corporate bond index, which is also hedged with the Australian dollar, that means there is no currency risk for investors.
In the last five years, the fund has delivered a return of 2.3%, while in the last one year, it has offered a -4.84% return. The net asset value of one unit of the fund is AU$97.49 while its management fee is 0.26% per annum. Similar to other bond ETFs, this fund also has the highest exposure in the United states with 56.54% weightage, while the United kingdom comes at the second place with a 7.99% weightage.
Investing in fixed income securities requires a deep understanding of the intricacies of the debt market. For example, it is difficult for an average retail investor to understand the credit ratings given by credit rating agencies or other factors of a bond such as duration, convexity, etc.
Therefore, investing via an ETF is a better option as it is a professionally managed portfolio by a fund manager which helps investors to invest in the bond market without having the required skillset.
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