Getting to know fixed-income ETFs
Page 1 of 2
Jeffrey Hutton is a Morningstar contributor.
Exchange-traded funds (ETFs) are expected to get an extra shot in the arm in the coming weeks as investment services companies put the finishing touches on the country's first fixed-income ETFs.
Russell Investments director of ETFs Amanda Skelly says her company is hoping for the go ahead from ASIC to begin selling fixed-income ETFs. BlackRock Investments said last week it's readying fixed-income ETFs for the Australian market as well.
The companies are betting products that will track an underlying index or let buyers keep tabs on what bonds are bundled into the product will go a long way in demystifying debt trading, giving them a new defensive asset as European and US economic troubles roil markets.
Hybrid bond issues in recent months suggest there is appetite for debt. Retail investors, on the other hand, tend to stick with cash deposits.
Australian and New Zealand Banking Group (ANZ) last week expanded a $500-million hybrid bond sale to $1.5 billion on stronger-than-expected demand for the debt. Retail investors are expected to snap up $100 million to $200 million.
Trouble is, those sorts of transactions have hefty minimum investments of about $5000 and usually attract only the savviest of investors.
"There is a frenzy of interest in debt out there," Skelly says.
"Bonds are scary to lots of people. People really want to know a bond's creditworthiness."
Russell is betting that fixed-income ETFs can account for about $500 million of ETF investments by the end of the year. The total market is now valued at about $5 billion, after it was established in March 2009 following the nod from the Australian Securities Exchange (ASX) and ASIC.
BlackRock Investments says demand for exchange-traded products, including those that bundle equities to follow a benchmark, is accelerating.
The company said last week $34.1 billion flowed into exchange-traded products in January - a record for that month and more than double the amount in December.
Fixed-income products around the world attracted $9 billion in January 2012 - up from the previous monthly record of $6.7 billion set in January 2009, BlackRock says.
"Fixed-income ETFs provide a combination of accessibility and transparency for bond investors and offer better market access to debt securities with a low minimum investment," says Mark Oliver, managing director of iShares Australia.
Australian investors are still in the mood for defensive assets. Self-managed super funds (SMSFs) increased their holdings of cash and deposits to 27 per cent of assets as of 31 December 2011. That's up from 22 per cent a year earlier, according to SMSF administration provider Mulitport.
But is it possible that investor appetite for risk is growing? There are early trends that might curb demand for defensive assets.