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Investment Ideas: Top performing fixed income ETFs

Investing is not just all about shares, especially for those investors and SMSF trustees who may be close to, or already in the retirement phase. For the majority of these investors, it is prudent to run a diversified portfolio with a mix of asset classes that enable them to access the growth potential of growth assets such as equities, along with the stability of fixed income assets.

Fixed income acts as a diversifier to equities, generally providing protection in periods where equity markets are selling off. It is also a source of income, as bond issuers pay regular coupon payments to bond holders, assuming that the issuer does not default. One of the main ways to access the bond market is by way of managed bond funds, or bond ETFs (exchange traded funds). Providing research on these products is one of Lonsec’s key strengths.

But what about rising bond yields ?

A conundrum for bond market investors in the past few months has been the rising trend in the benchmark 10 year bond yields, both in Australia and major international markets such as the US, as the ‘reflation trade’ kicked into gear in early November 2020. Remember, when bond yields go up, the price of bonds goes down.

So lets see how this has played out with the bond ETFs listed on the ASX.

Fixed Income ETFs : the top performers for the past year

The screenshot of the table below is what our members can see when they go into the ETFs table within the Members Research section, select ‘Fixed Interest’ in the asset class filter, and then click on the Return 1YR% column (thereby listing them from best to worst performers). There are 40 results, but we are just showing the top 8 here.

The standouts

There are a few things that jump out here. Firstly, most of the ETFs on this list invest in corporate bonds / credit, which tend to do a bit better in a reflationary period than Government bonds. Secondly, the top two performing ETFs are both ones that do not just rely on the direction of bond yields to obtain their return. They are actively managed ETFs which run very specific strategies to extract returns from that market. Note also the columns on the right titled Volatility, which shows that this has been achieved with still fairly low levels of volatility.

In fact, it is interesting to note that the top performer on this list is the ‘ETF version’ of the Ardea Real Outcome Bond Fund. This is a fixed income managed fund (that has a longer performance history) that we highlighted in ‘Investment Ideas’ for our members back in mid December – for this very reason of rising bond yields.

To provide some some sort of benchmark reference point to the fixed income indices, the Vanguard Australian Fixed Interest Index ETF returned 1.52% for the year, and the Vanguard International Fixed Interest Index ETF returned 2.24% for the year.

More information on all these ETFs are available via the Product Profile and Viewpoint Reports within the live table in the Members research area.



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