Virtually zero deposit rates are forcing me to look elsewhere. I’d like to achieve a return between 2-3% but do not want to risk capital, so am looking for an investment grade portfolio. I also need the funds to be fairly liquid as we’re going to need them when we start building.
Some of the high yield funds are attractive, over 5% looks amazing, but if I can’t get the funds when I need them, I might need to go cap in hand to the bank and I don’t want to do that either.
Other factors I’m conscious of include:
- Expectations of higher inflation, although I think the heat has gone out of the domestic market in the short term, with the likely longer term NSW lockdown. Other countries are also experiencing issues with vaccinations and lockdown and we’ve recently seen the 10 year government bond rate fall again to around 1.2% as at 26 July 2021.
- Government bond yields have been more volatile than I would have expected, and given they are lower now, I’m hesitant to invest in a fund with a high allocation to Commonwealth Government Bonds. Ideally, the funds should have no more than a 25% allocation.
- Fees, the lower the better especially in a passive investment.
- A fund with at least $100m in funds under management.
Here are two ETFs I’d be happy buying right now.
CRED aims to track the performance of an index (before fees and expenses) that provides exposure to a portfolio of senior, fixed-rate, investment grade Australian corporate bonds.
Up to 35 bonds are selected, and need to have more than $250m outstanding and a term to maturity of between 5.25 to 10.25 years.
Here’s what I like about CRED:
- Bonds chosen by expected returns rather than debt outstanding
- Monthly income payments
- Average credit rating is investment grade BBB+.
Here’s what’s not so good about CRED:
- Exposed to interest rate risk, if interest rates rise the value of fixed-rate investments will decline, this is measured by duration and fund duration is long at 6.88 years
- Small number of investments.
HBRD invests in an actively managed portfolio of hybrid securities overseen by a professional investment manager. If the hybrid market is assessed to be overvalued or to present a heightened risk of capital loss, the fund can allocate more of the portfolio to lower risk securities such as cash or bonds.
Here’s what I like about HBRD:
- Unique Australian fund that targets a specific segment of the market
- Actively managed portfolio that can outperform the index
- Has the capacity to earn franking credits
- Monthly distributions
- Floating rate interest payments which are good for investors concerned about inflation.
Here’s what’s not so good about HBRD:
- Doesn’t disclose credit rating profile
- Concentrated financial institution portfolio
- Higher fees including a performance fee if the fund’s returns exceed the benchmark.
CRED and HBRD side by side
These two funds are quite different.
CRED is an investment grade corporate bond portfolio where the corporate bonds all have a maturity date. A solid yield to maturity of 2.57%, given a BBB+ average credit rating (YTM is the return you would earn if you hold the portfolio until all the bonds mature).
While HBRD has a lower running yield – think of this as expected income for the next year – HBRD’s gross running yield is higher and includes franking credits and gives an indication of the expected current income from making an investment at market prices.
HBRD is a portfolio that consists of predominantly ASX listed bank hybrids. The fund doesn’t disclose the credit ratings but would likely be lower credit quality (higher risk but still investment grade) compared to CRED.
Neither has an allocation to government bonds, which I would usually want, especially if you only invest in one fixed income fund. But right now the prices of government bonds are too high (yields are too low).
Company balance sheets are typically in good shape with a low cost to borrow and bond markets extending terms providing financial stability to companies.
Both of these funds meet my investment hurdles.
|Yield to Maturity||2.57%|
|Gross Running Yield||3.53%|
|Performance Fee||N/A||15.5% above the benchmark|
Source: BetaShares website as at 30 June 2021
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