GOLD WIN­NER ISHARES In volatile times, an in­dex-track­ing bond fund can help steady the nerves

Money Magazine Australia - - INVESTING ETFs -

The win­ner, the iShares Core Com­pos­ite Bond ETF, in­vests in qual­ity AAA and AA Aus­tralian gov­ern­ment and semi-gov­ern­ment bonds.

It fol­lows the Bloomberg AusBond Com­pos­ite 0+ Year in­dex, with roughly 73% in AAA-rated se­cu­ri­ties, 19% in AA bonds, 5% in A bonds, 2% in BBB and 1% not rated.

The ETF holds 51% in trea­sury bonds, 37% in gov­ern­ment-re­lated bonds, 11% in cor­po­rate bonds and 1% in cov­ered bonds.

The bonds have a range of ma­tu­ri­ties with the big­gest hold­ing (22%) be­ing seven to 10 years fol­lowed by three to five years (20%). The ETF charges an in­vest­ment man­age­ment fee of 0.20%pa.

Re­turns from gov­ern­ment bonds have been lack­lus­tre over three years but the past year has seen them re­turn more than dou­ble the cash rate.

The sec­ond placeget­ter, Van­guard Aus­tralian Fixed In­ter­est In­dex, is sim­i­lar to the win­ner as it fol­lows the same bench­mark and charges the same fee. Not sur­pris­ingly, the re­turns are com­pa­ra­ble too.

Re­turns from gov­ern­ment bonds have been low over the past year com­pared with re­turns from lo­cal and global shares but in­vestors typ­i­cally hold fixed-in­ter­est se­cu­ri­ties for de­fen­sive rea­sons and to di­ver­sify their risk in times of fall­ing share­mar­kets.

The ideal in­vest­ment time hori­zon for both ex­change traded funds is a medium term of three to five years.

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