Are these the best ASX Bond ETFs in Australia? [2023] | Bet (2023)

FAQs

What is the best ETF to invest in Australia? ›

Bond ETFs offer many advantages over single bonds: Diversification. With an ETF, you can own hundreds, even thousands, of bonds in an index at a purchase price significantly less than what it would be to invest in each issue individually. It's institutional-style diversification at retail prices.

What types of bonds are there? Australian Government bonds: These are bonds issued by the federal government. Due to the lack of default risk, they are considered safer investments than corporate bonds and offer lower interest rates.

The S&P/ASX 200 Index is the benchmark institutional investable stock market index in Australia, comprising the 200 largest stocks by float-adjusted market capitalization.

When interest rates rise, bond prices go down in value. Most bonds pay a fixed coupon (i.e. interest payment) and if rates go up, the only way a fixed coupon can equate to a higher interest rate is if the investor pays less for the bond.

Price change of a bond etf if interest rates increase by 1%

A duration 2 ETF drops about 2% in value if interest rates move up by 1%. It would gain 2% if rates fell by 1%. A duration 6 ETF drops about 6% in value if interest rates move up by 1%. It would gain 6% if rates fell by 1%.

When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise. This is a fundamental principle of bond investing, which leaves investors exposed to interest rate risk—the risk that an investment's value will fluctuate due to changes in interest rates.

The Australia 10Y Government Bond has a 3.719% yield. 10 Years vs 2 Years bond spread is 11.4 bp. Yield Curve is flat in Long-Term vs Short-Term Maturities. Central Bank Rate is 3.85% (last modification in May 2023).

What is the outlook for Australian bonds? ›

The Australia 10 Years Government Bond Yield is expected to be 2.957% by the end of September 2023. It would mean a decrease of 43.8 bp, if compared to last quotation (3.395%, last update 13 May 2023 2:15 GMT+0). Forecasts are calculated with a trend following algorithm.

The reason prices tend to fall is because the income from existing fixed-rate bonds is relatively less attractive than newly issued higher yielding bonds. Based on bond market pricing as of June 20, investors anticipate the average cash rate in Australia over the next three years to be just over 3.5%.

High Yield Bond Funds typically give out a higher rate of return since they have a lower credit rating., Issuers will give out a higher rate of interest to compensate for the risk the investors are willing to take.

The largest Bond ETF is the Vanguard Total Bond Market ETF BND with $91.94B in assets.

The Vanguard Australian Shares Index ETF (VAS) now ranks as the largest ETF in Australia with a market cap of $11.8 billion as of the end of 2022. According to data published by BetaShares as part of its Australian ETF review for 2022, VAS received $2.6 billion of inflows last year, more than double any other ETF.

The most expensive offering (VanEck China New Economy ETF (ASX code: CNEW)) with a fee of 0.95% pa – starting to feel like active management fees – had negative 1 year returns of -19.72% and returned 8.02% pa over 3 years.

Nasdaq – The Nasdaq 100 Index is a modified capitalisation-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the Nasdaq. The index is denominated in US dollars (ASX code NDX).

The S&P/ASX 200 is designed to measure the performance of the 200 largest index-eligible stocks listed on the ASX by float-adjusted market capitalization. Representative, liquid, and tradable, it is widely considered Australia's preeminent benchmark index.

Is it worth investing in S&P 500 from Australia? ›

For Australians wanting to invest in the largest U.S. companies, there is no better way to do it than through the S&P 500. The S&P 500 index has been one of the best ways to invest and grow your wealth. Since its inception in 1957, the S&P 500 has averaged returns of about 10% per year.

If you plan to buy and sell frequently, bond ETFs are a good choice. For long-term, buy-and-hold investors, bond mutual funds, and bond ETFs can meet your needs, but it's best to do your research as to the holdings in each fund.

If your objective is to increase total return and "you have some flexibility in either how much you invest or when you can invest, it's better to buy bonds when interest rates are high and peaking." But for long-term bond fund investors, "rising interest rates can actually be a tailwind," Barrickman says.

Traders are now betting that global central bank tightening cycle will end soon, with cuts priced for the federal funds rate in 2023. If this narrative persists, we think yields will return to their recent lows. This means now could be a good time to buy bonds, particularly 2-year DM bonds, in the short to medium term.

Remember in certain recessionary scenarios, as yields fall, Bond ETF prices will rise. While the long term yield is known, short term returns can be higher than expected.

“The Federal Reserve raised rates more than they have in 40 years. That caused massive losses inside of bonds,” says Robert Gilliland, managing director at Concenture Wealth Management. “It's important to understand that bonds are generally secure, but not necessarily safe.”

For one thing, an investor's initial investment is at greater risk in an ETF than an individual bond. Since a bond ETF never matures, there isn't a guarantee the principal will be repaid in full. Furthermore, when interest rates rise, it tends to harm the price of the ETF, like an individual bond.

However, unlike individual bonds, most bond ETFs don't have a maturity date. And ETFs trade on an exchange, like stocks, so you can buy or sell them at any time during the trading day.

The Australia 5 Years Government Bond has a 3.472% yield (last update 28 May 2023 11:15 GMT+0).

Are bonds a good investment in 2023 Australia? ›

The outlook for fixed income has become much more positive. Following central bank moves in 2022 and 2023, bonds now offer more attractive yields than they have in several years. Importantly, higher yields mean greater potential returns for investors.

May 1, 2023. Series EE savings bonds issued May 2023 through October 2023 will earn an annual fixed rate of 2.50% and Series I savings bonds will earn a composite rate of 4.30%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond's 20-year original maturity.

The Outlook for Bonds in 2023

One factor in bonds' favor is that bond yields are now at a level that can help retirees seeking income support a 4% retirement withdrawal rate. Beyond this, both individual bonds and bond funds could benefit if interest rates stabilize or decline.

The Australia Government Bond 10Y is expected to trade at 3.50 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 3.82 in 12 months time.

Interest rate risk – the risk that a change in interest rates could reduce the market value of the bond. If interest rates rise, bonds offering lower coupon payment rates become less attractive investments. Credit risk – the risk that the issuer could default or go insolvent.

The Australia 10 Years Government Bond has a 3.716% yield (last update 28 May 2023 2:15 GMT+0). Yield changed +11.4 bp during last week, +43.6 bp during last month, +46.7 bp during last year.

One of those exchange-traded funds, believe it or not, is the most famous ETF of all, the SPDR S&P 500 ETF Trust (SPY). Launched on Jan. 22, 1993, SPY has risen 828.3% since its inception. The other is a close cousin, the SPDR S&P Midcap 400 ETF Trust (MDY), with a 1,131% gain since its launch in 1995.

What type of bond is best in recession? ›

Investment-grade corporate bonds and government bonds such as US Treasurys have historically delivered higher returns during recessions than high-yield corporate bonds.

The largest Global Ex-US ETF is the Vanguard Total International Stock ETF VXUS with $56.39B in assets.

In the U.S., government bonds are known as Treasuries and are by far the most active and liquid bond market today.

The exchange-traded fund (ETF) iShares S&P 500 ETF (ASX: IVV) could be one of the best ETF choices on the ASX for a long-term investment. There are some great reasons to consider the ETF at the moment, such as the fact that its share price is close to 10% lower than where it was in December 2021.

The difference between the two is that a managed fund is not listed on a stock exchange, whereas an ETF is and thereby enables greater trading flexibility, liquidity and intraday pricing. Your choice will come down to which type of investment vehicle best suits you.

Bonds (corporate or government) are generally viewed as a safer option. Government bonds, in particular, are considered low-risk investments and offer a fixed return or 'yield' based on their current trading price.

Do you pay tax on ETFs in Australia? ›

If Australian company taxes are already paid by the companies within an ETF, then investors don't need to pay those taxes again at the personal level. The corporate taxes paid are passed down to the Australian investor through tax credits (these are otherwise known as franking credits).

Experts agree that for most personal investors, a portfolio comprising 5 to 10 ETFs is perfect in terms of diversification. But the number of ETFs is not what you should be looking at. Rather, you should consider the number of different sources of risk you are getting with those ETFs.

Over the last three financial years it has achieved an average total return of 11.34% per annum. The next-highest diversified funds increase of 20.31% over 2020-21 was recorded by the Vanguard Diversified Growth Index ETF (VDGR).