What are fixed income ETFs?
Fixed-income ETFs generally allow you to invest in a number of different types of bonds, and typically aim to track the performance of an index. Similar in structure to a traditional managed fund, an ETF is an investment fund that is bought and sold on a stock exchange just like any share.
How do fixed income investments work?
Fixed income covers several types of investments, including bonds and floating rate notes.
All these products expect to pay a regular income stream. Some pay a fixed rate of interest; others pay a floating rate. A fixed income investment can also provide a capital return (gain or loss), as its price is not fixed. Typically, however, the price of most fixed income investments will vary less than the price of most shares.
Bonds explained
A bond is a fixed income investment product that is issued by corporations or governments to raise funds to finance projects and operations.
When you invest in a bond, you are essentially lending money to the bond issuer. The bond issuer pays you interest (coupons) on a pre-determined schedule, typically quarterly or every six months. Some bonds pay a fixed rate of interest, others pay floating.
A bond is issued with a ‘face value’ (e.g. $100) and term to maturity (e.g. 10 years). The bond issuer promises to pay the face value to the bondholder at the bond’s maturity. A bond’s market price prior to the maturity date can vary from its face value. The price will be affected by factors including changes in interest rates, the credit risk of the issuer, and the time to maturity.
The difference between fixed-rate and floating-rate bonds
A fixed rate investment pays a set rate of interest for the term of the investment. You know at the time you make the investment how much interest you will receive on each payment date. In the case of bonds, the interest payments are referred to as ‘coupons’.
A floating rate investment pays a rate of interest that varies in line with a benchmark interest rate. As interest rates change, the interest you receive also changes.
Why invest in fixed income ETFs?
- More regular and reliable income
- Fixed income securities generally provide investors with a steady stream of income, often at lower levels of risk than other assets such as shares or property
- Portfolio diversification
- Fixed income can provide diversification benefits for investors’ share portfolios – helping to reduce risk and provide defence for an investment portfolio during sharemarket declines
- Capital stability and preservation
- Upon maturity the holder of a bond typically expects to be repaid the face value of the bond. This makes bonds attractive to investors who require increased stability of capital.
How to invest in a fixed income ETF
Betashares offers several fixed income funds that provide a simple, accessible and cost-effective way to add fixed income exposure to your investment portfolio.
As with all Betashares funds, you can buy or sell units on the ASX using an online brokerage account or through a financial adviser. You can buy or sell units just like you’d buy or sell any share on the ASX.
Investing in cash with ETFs
Term deposits have traditionally been a way for investors to benefit from better interest rates that ‘at call’ bank accounts, however they usually mean locking cash away for a period of time with a financial institution. Depending on the term, this can be anywhere from one month to five years and accessing your cash from term deposits before the end of the term can sometimes be difficult and costly.
A cash ETF generally invests in deposit products and aims to track cash market indices. The ETF holds Australian dollars in bank accounts with several major banks in Australia and pays attractive income distributions.
Investing in a cash ETF is convenient for investors because you don’t have to setup an account with identification etc. at a financial institution. Rather, you can simply purchase the ETF on the ASX.
Benefits of investing in the Betashares Australian High Interest Cash ETF
- Simple access to cash returns
- AAA is structured simply and offers the benefits of an investment that is accessible daily (subject to the normal ASX settlement cycle), and regular income from attractive interest rates, paid monthly.
- Capital stability
- Cash is capital stable. Unlike fixed interest bonds and bond funds invested in fixed interest bonds, the capital value of a cash investment will not vary, regardless of changes in the interest rate environment.
Considerations in investing in cash ETFs
A meaningful cash position can provide a stable foundation to help manage periods of heightened market volatility. However, it is also important to consider two key factors:
- Ensuring a large allocation to cash doesn’t become a drag on performance; and
- Whether the position provides the necessary liquidity to take advantage of opportunities or to re-balance portfolios after significant market movements.
Betashares cash ETF
Betashares Guide to Fixed Income
Everything you need to know about Fixed Income, and why it should form part of a balanced portfolio.
