2 gold rated bond ETFs
Both of these offerings received the highest rating from our analysts.
iShares Core Composite Bond ETF (ASX: IAF)
The iShares Australian Bond Index strategy is a strong choice for gaining passive exposure to the Australian fixed-interest market, which is well represented by the tracking benchmark, Bloomberg AusBond Composite 0+ Index. The low fee structure, combined with iShares’ proven indexing capabilities, only increases its attractiveness.
Portfolio manager Craig Vardy and the supporting team have reliably replicated the underlying benchmark characteristics with a narrow tracking error. Historically, strategy’s returns have carried higher sensitivity to interest-rate changes owing to the portfolio’s (and its benchmark’s) higher duration relative to the average category peer. The higher duration can be attributed to the substantial allocation to long-term government and semigovernment bonds, which accounted for more than three-fourths of the total exposure as of June 30, 2025. The remainder of the portfolio mostly consists of corporate bonds and supranational securities. Thus, credit risk has remained fairly modest. In general, active managers possess the flexibility to adjust to interest-rate changes, whereas passive investments are bound to the benchmark with minimal control over their risk profile. For instance, the period of rising interest rates through 2021 and 2022 was favorable for active managers to showcase their abilities. However, over the long term, few have been able to beat the benchmark consistently.
The fund is expected to provide a defensive buffer over time while closely matching the index before fees. A high-duration portfolio aided the fund over the continued decline of interest rates over much of the past decade through to 2021 relative to the broader category cohort. Also, high exposure to government securities in lieu of lower credit exposure enabled it to outperform its peers during stressful periods such as the first quarter of 2020. We have conviction in the fund’s ability to outperform the Morningstar Category average through longer time horizons. This remains a great investment for investors seeking reliable domestic fixed-interest exposure at a low cost.
Investment process
The strategy aims to track the Bloomberg AusBond Composite 0+ Index with a tracking error of 0.05% per year or less (before fees). BlackRock is typically able to achieve full replication of the government-bond component in the portfolio because of ample liquidity and breadth. To alleviate liquidity challenges, the firm uses stratified sampling to acquire corporate and supranational exposures; it’s an industry-standard approach, but one in which iShares excels thanks to its sophisticated global trading systems and experienced team. When the team can’t buy all the bonds in the index at a reasonable price, it will instead buy a basket of bonds that has similar credit and duration risks within allowable tolerance ranges. Securities lending is less likely to be a source of additional returns going forward, given improved bond supplies, reducing the offset on performance drag from factors like fees and trading costs. However, iShares’ strong scale and global platform help ensure efficient trading, which is crucial in index fund management. It’s worth noting that Bloomberg’s index assumes distributions earn no interest, whereas iShares may accrue interest on its distribution cash balances. This may cause some tracking error, but ultimately it is a positive tailwind.
Vanguard Australian Fixed Interest ETF (ASX: VAF)
Vanguard Australian Fixed Income is an outstanding choice that provides diversified Australian bond exposure at a competitive price. The underlying Bloomberg AusBond Composite 0+ Yr Index is representative of the overall opportunity set, and the team at Vanguard has reliably replicated its characteristics with a narrow tracking error.
Historically, the fund’s returns have had increased sensitivity to interest-rate changes owing to the portfolio’s higher duration relative to its average Morningstar Category peer. The higher duration can be attributed to the substantial allocation to long-term government and government-related bonds; they accounted for around 90% of the total exposure as of July 31, 2025. The remainder of the portfolio mostly consists of corporate bonds, so credit risk is modest. Active managers possess the flexibility to adjust to interest-rate and yield-curve changes and corporate spread dynamics, whereas passive investments are bound to the benchmark with minimal control over their risk profiles. These features theoretically give active managers an advantage, although the added efficiency of government bond markets is a hurdle. That said, while results have been more favorable across the 2021-24 period, given increased bond market volatility, few active peers have been able to beat the benchmark consistently.
We have conviction in Vanguard’s ability to outperform the category average over longer time horizons. Considering its investment merits and cost efficiency, this strategy is one of our top picks within the Australia fixed-income space.
Investment process
We retain an Above Average Process rating. The portfolio mirrors the risk profile (duration, credit quality, and sector exposure) of the Bloomberg AusBond Composite 0+ Yr Index, with an emphasis on keeping tracking error and transaction costs low. Vanguard matches the primary risk factors of the benchmark by employing a stratified sampling method, through which active, systematic decisions are utilized to minimize tracking difference and target quasi-outperformance in replication.
On the back of detailed research and a capable trading and dealing desk, the team aims to project upgrade, downgrade, and issuance events ahead of time and exploit minor relative value opportunities. Total modified duration and issuer weightings do not exceed plus or minus 0.025 years and plus or minus 1% of the benchmark, respectively. These allowances help mitigate high transaction costs associated with accessing low-liquidity issues. The strategy is constructed as one share class of the broader pool of money Vanguard manages in this strategy. The larger asset base gives the firm the benefit of scale, which reduces vendor fees, improves liquidity, enables better operational infrastructure, and results in further cost efficiencies. Vanguard uses BlackRock’s Aladdin portfolio management tool to manage the index tracking process end to end, including trading and risk assessment and monitoring.
As of July 31, 2025, the Bloomberg AusBond Composite 0+ Yr Index was majority-composed of government Treasury bonds (48%), semi and agency bonds (44%), and corporate bonds (8%). The fund invests in high-quality bonds, with AAA rated debt constituting 68% of the benchmark’s quality exposure. Banks and other financials firms issue most of the credit in the index, followed by industrials. The fund’s duration increased over several years to late 2020 as yields fell to historic lows. Since then, yields have risen and duration has fallen to 4.9 years from 6 years. Duration remained above the category average over this period, in part a result of commonwealth government bonds being issued at longer tenures; however, the quantum of difference has reduced. This characteristic means the fund faces greater interest-rate risk compared with active managers in the category. Credit risk, on the other hand, remains low.
