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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.

 

LONSEC STRONGLY RECOMMENDS THAT ALL OF THE ABOVE INFORMATION BE READ IN CONJUNCTION WITH THE RELEVANT PRODUCT DISCLOSURE STATEMENT.

Important Notice: Issued by Lonsec Research Pty Ltd ABN 11 151 658 561 AFSL 421 445 (Lonsec). Lonsec receives a fee from the fund manager or financial product issuer(s) for researching the financial product(s), using objective criteria and for services including research subscriptions. Lonsec’s fee is not linked to the rating(s) outcome. Lonsec Investment Solutions Pty Ltd ABN 95 608 837 583 CAR (CAR: 001236821) of Lonsec receives fees under separate arrangement for providing investment consulting advice to clients, which includes model portfolios, approved product lists and other financial advice and may receive fees from this fund manager or financial product issuer for providing investment consulting services. Refer to the Conflicts of Interest Policy at: https://www.lonsec.com.au/aspx/IndexedDocs/general/LonsecResearchConflictsofInterestPolicy.pdf  Lonsec does not hold the financial product(s) referred to in this document. Lonsec’s representatives and/or their associates may hold the financial product(s) referred to in this document, but details of these holdings are not known to the Analyst(s).
Warnings: In line with industry practice returns may be estimated, to access verified returns please refer to the product provider. Past performance is not a reliable indicator of future performance. Any advice is General Advice based on the investment merits of the financial product(s) alone, without considering the investment objectives, financial situation and particular needs of any particular person. It is not a recommendation to purchase, redeem or sell the relevant financial product(s). Before making an investment decision the reader must consider his or her financial circumstances or seek personal financial advice on its appropriateness. Read the Product Disclosure Statement for each financial product before making any decision about whether to acquire a financial product. Lonsec’s research process relies upon the participation of the fund manager or financial product issuer(s). Should the fund manager or financial product issuer(s) no longer participate in Lonsec’s research process, Lonsec reserves the right to withdraw the document at any time and discontinue future coverage. The product rated in this publication may have related financial products or be associated with other financial products and platforms. The rating may only be applied to the financial product outlined in this publication at first instance, seek professional advice before you make an investment decision on related or associated financial products and platforms. You should be aware that the mandate, fees, underlying investments, the issuers of the related and associated financial products and platforms may be different from the financial product specified in this publication.
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