Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

5 reasons to like fixed-interest ETFs

Kongkon Gogoi  |  01 Jun 2021Text size  Decrease  Increase  |  
Email to Friend

This is a snippet from Morningstar's latest ETFInvestor. Premium subscribers can view the report here.

Fixed interest as an asset class is becoming a much more regular part of the discourse on Australian ETFs. While the discussions on ETFs have predominantly revolved around the equity investments, the significance of fixed interest instruments has started to make itself felt, as investors become savvier and gravitate towards balanced portfolios with optimised allocations.

We believe fixed Interest ETFs offer several advantages over direct-bond investing.

Fixed income ETPs trading in Australia (Morningstar analyst coverage)

Morningstar Analyst Rating on Fixed Income ETPs

Source: Morningstar Direct, Morningstar Research. Data as of 1 June 2021.

Why fixed interest ETFs?

Investing Compass
Listen to Morningstar Australia's Investing Compass podcast
Take a deep dive into investing concepts, with practical explanations to help you invest confidently.
Investing Compass

1. Diversification and accessibility

Investing in fixed interest ETFs is a more efficient and convenient way to minimize idiosyncratic risks of a portfolio arising out of holdings a select few issues. With the option to achieve a well-diversified portfolio, investors are not only able to protect their principal better but also smoothen out their returns and optimize their risk exposure. It’s much easier for an investor to get a diversified portfolio of bonds via an ETF than it is to build a similar exposure by themselves. This is especially true while constructing a global bond exposure, or when allocating exposures across multiple sectors like government bonds, corporate bonds and securitised assets.

2. Active secondary market

The accessibility benefits go hand-in-hand with the transaction of ETF securities in the secondary markets. Compared with an individual bond portfolio consisting of similar underlying instruments, an ETF portfolio tends to have significantly higher liquidity since the units can be easily traded in the secondary markets with comfortably manageable ticket sizes. This further results in a superior level of transparency, ease of transaction and efficient price discovery. As the participation in fixed Interest ETFs has increased and market makers have optimised their operations, bid-ask spreads have declined – making the ETF route even more attractive.

3. Clear mandates and disclosures

The open-ended nature of ETF investments requires lesser supervision from an investor since the proceeds of the maturing securities are reinvested into the fund without any direct action required from the investor. ETFs are run according to a set of stated objectives and mandates which help investors identify the role of the investments in their total portfolio. Also, fund disclosures can provide clarity over the nature of the risks contained in a fixed interest ETF, such as credit exposure, duration and maturity profile. This control is particular advantageous when rebalancing one’s total portfolio via partial/full redemptions, made easy by the existence of liquid secondary markets.

4. Regular income stream

Since the portfolio of an ETF consists of a multitude of different securities, and hence different maturity and coupon payment dates, the ETF can provide a much smoother flow of income distributions compared to standalone bond investments.

5. Fees

Not only from the view of simplifying portfolio construction amid the mounting pressure to deliver yield with optimum diversification, fixed income ETFs also present a compelling case for lowering overall portfolio costs. Compared to an average equivalent unlisted strategy, the ETFs are more appealing with fees less than half of the former.

Australia fees under the microscope

Australia Fees Under the Microscope

Source: Morningstar Direct, Morningstar Research. Data as of March 31, 2021.

is a Senior Manager Research Analyst for Morningstar.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend