Four Fixed Income ETFs That Earned Over 5% Last Year

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Despite very low interest rates and volatile markets, there were still four fixed income ETFs that returned over 5% in the 12 months to 30 June 2020. Surprisingly, there were 12 funds that earned over 4% over the year.

All four funds had global exposure and three of the four exposure to government securities. Interestingly, three hedged the Australian dollar, reducing currency risk.

Four Fixed Income ETFs

1 year

3 year

5 year

Since inception

Fees

Fund size ($m)

IHCB

5.78% 4.88% N/A 5.37% 0.26% $289.80

VEFI

5.39% N/A N/A 7.85% 0.28% $911.30

VIF

5.14% 4.73% N/A 4.52% 0.20% $510.00

VBND

5.11% N/A N/A 4.80% 0.20% $152.70

Note: As at 30 June 2020.
Returns consist of income and changes in unit price.

Top of the list was the iShares Core Global Corporate Bond (AUD Hedged) ETF (IHCB), with a 5.78% return. This fund is a global, investment grade corporate bond fund with 55% of holdings in US companies and 50% of holdings in the ‘BBB’ credit range. The fund has a high average term to maturity of 9.67 years and just over 25% of investments mature in 10 years or more.

The other three funds to make the list were all Vanguard funds.

In a win for ethically-minded investors, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (VEFI) returned 5.39%. The fund is a little over a year old but invests in high quality, income generating securities issued by governments, government-owned entities, government-guaranteed entities, investment-grade corporate issues and securitised assets from around the world. The fund excludes securities associated with fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment.

[Related Reading: Three Different Types of Bonds and How They Work in Different Economic Climates]

This is a very high credit quality fund, with the weighted average credit rating of AA-, based on circa 68% of holdings to Treasury and Government related securities. In terms of geographical distribution, the US has a 42% allocation, followed by Japan at 10.8% and France, 6.5% – as at 30 June 2020.

The fund requires a minimum investment of $500,000 but there is no minimum for those that invest via a platform.

The Vanguard International Fixed Interest Index (Hedged) ETF (VIF) provides exposure to very high quality, low-risk securities issued by governments from around the world. It invests in long-dated fixed rate bonds that outperform in ‘risk off’ markets. Strong performance in the last year is no guarantee of future performance. Considering the ETF’s current yield to maturity is a low 0.35% and running yield 1.60%, it is unlikely the fund will do as well in the coming 12 months.

When investing in ETFs, it’s important to look at expected future rates of return.

Yield to maturity shows the expected yield if you invest and hold the fund until each bond in it matures. A low yield to maturity such as that in VIF gives you an idea of expected future returns. It is not absolute though. If interest rates decline further, or demand for government bonds surges, the fund can still outperform in coming years.

[Related Reading: Government Bond Basics]

There can also be a return component from hedging, contributing to overall returns.

Vanguard funds split performance between the ‘Distribution’ and ‘Growth’. VIF’s performance was split 3.67% distribution and 1.47% growth.

Like VEFI, the Vanguard Global Aggregate Bond Index (Hedged) ETF (VBND) invests in a range of securities from governments, corporations and securitised assets from around the world, but doesn’t have the ethical overlay. The fund predominantly invests in government and government-related bonds with a 24% allocation to corporate bonds. Eight of the top 10 issuers are governments and represent a high 49.2% of the total underlying ETF.

Yet, VBND has a diverse exposure to 2,327 bond issuers and 9,075 bonds. It is also of a very high AA- credit quality and long average term to maturity.

VBND top 10 bond issuers

1. United States Treasury
2. Japan (Government Of)
3. Federal National Mortgage Association
4. France (Republic Of)
5. Germany (Federal Republic Of)
6. Italy (Republic Of)
7. Government National Mortgage Association li
8. United Kingdom Of Great Britain and Northern Ireland (Government)
9. Spain (Kingdom Of)
10. Korea (Republic Of)
The top 10 issuers represent 49.2% of the total underlying ETF.

Source: Vanguard

To find out more about the ETFs, use our ETF Finder, which also provides links to more information on the issuer’s websites.

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Elizabeth Moran
Elizabeth is a nationally-recognised independent expert on fixed income. She has more than 25 years experience in banking and financial institutions in Australia and the UK and has been published in every major Australian newspaper and investment website. Prior to becoming an independent commentator in 2019 she spent more than 10 years as the head of education and research at fixed income broker FIIG Securities. Prior to joining FIIG, Elizabeth worked as an Editor/Analyst for Rapid Ratings a quantitative credit rating agency. She also spent five years in London, three working as a credit rating analyst for NatWest Markets.

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