What is it? Two asset management companies, BlackRock Investment Management and Russell Investments, have announced plans to list fixed-income exchange-traded funds (ETFs) on the Australian Securities Exchange. ETFs have been sold on the ASX since 2001 but most of those on issue are equity ETFs - none on fixed-income investments..
Recently, the ASX changed its listing rules to allow for the trading of fixed-income investment products.
BlackRock is launching three fixed-income ETFs - iShares UBS Composite Bond Index Fund, iShares Treasury Index Fund and iShares Government Inflation Index Fund.
Russell is also launching three fixed-income ETFs - Russell Australian Government Bond ETF, Russell Australian Semi-Government Bond ETF and Russell Australian Select Corporate Bond ETF.
How it works? An ETF is a registered managed investment scheme, like a managed fund. What makes it different is that it is traded on the ASX. Most ETFs are passive funds, which means they track the performance of an index, such as the S&P/ASX 200. Both BlackRock and Russell are launching passive fixed-income funds.
BlackRock's funds will track bond-market indices, compiled by the investment bank UBS, which are the most widely quoted fixed-income indices in the Australian market. Russell's ETFs will track indices called DBIQ compiled by Deutsche Bank.
Index replication is done physically, which means the asset manager holds a basket of fixed-income securities that will provide a return that closely matches the index return.
Interest paid by bond issuers will be passed through to ETF investors. Russell is offering the alternative of a dividend reinvestment plan.
Pros ETFs are cheap. The managing director of iShares Australia, Mark Oliver, says the management fee for its Composite Bond Index Fund is 0.24 per cent of funds invested that is a $24 annual fee on a $10,000 investment. The fee for the other two iShares funds is 0.26 per cent of funds invested.
Russell will charge 0.24 per cent for its Australian Government Bond ETF and 0.28 per cent for the Australian Select Corporate Bond ETF.
The other cost is brokerage. Online brokers will charge the same rate for the purchase or sale of a fixed-income ETF as they do for any other ASX-listed security - $15 to $30 a trade.
Ease of access and liquidity are other benefits of ETFs. Oliver says investors can get into the bond market with the purchase of a single $100 ETF share. They can follow the pricing of their ETFs on the ASX or a broker website through the day and can trade whenever they wish.
Cons Fixed-income ETFs are an unknown quantity in the Australian market and this raises a couple of questions.
The main one is what level of tracking error investors can expect. ETF managers try to replicate the performance of an index by holding a representative basket of securities they do not hold all the securities in the index.
There will always be some variance from the index return, which is known as tracking error.
Some bond-market securities are already tightly held by financial institutions and institutional investors and this may create liquidity issues. Investors contemplating an investment in a fixed-income ETF may want to see what the tracking error figures look like before committing their money.
Another question relates to the transparency of the investments. Investors in an equity ETF can get a lot of information about the S&P/ASX 200 and other equity indices from the Standard & Poor's and ASX websites.
They can find out what stocks are in the indices, how their compositions change, their trading performance and volatility.
The fixed-income index providers being used by iShares and Russell - UBS and DBIQ - have no track record in providing accessible and comprehensible index information to private investors.
Fixed-income exchange-traded funds
JOHN KAVANAGH EXAMINES THE PROS
AND CONS OF THE LATEST ETFs.
Frequently Asked Questions about this Article…
What are fixed-income ETFs on the ASX and how are they different from equity ETFs?
Fixed-income ETFs listed on the ASX are exchange-traded funds that hold bonds and other debt securities and trade like shares on the exchange. Unlike most ASX ETFs to date (which are equity-focused), these funds track bond-market indices and pass interest paid by issuers through to investors. They are structured as registered managed investment schemes but trade intra-day on the ASX like equity ETFs.
Which companies are launching fixed-income ETFs in Australia?
The article says two asset managers are launching fixed-income ETFs on the ASX: BlackRock (through its iShares brand) and Russell Investments. BlackRock/iShares is launching three bond ETFs and Russell is also launching three Australian-focused fixed-income ETFs.
Which specific fixed-income ETFs and bond indexes will be available?
BlackRock/iShares will launch iShares UBS Composite Bond Index Fund, iShares Treasury Index Fund and iShares Government Inflation Index Fund, tracking UBS-compiled bond indices. Russell Investments is launching Russell Australian Government Bond ETF, Russell Australian Semi‑Government Bond ETF and Russell Australian Select Corporate Bond ETF, tracking DBIQ indices compiled by Deutsche Bank.
How do these fixed-income ETFs replicate bond indexes?
Both managers will use passive, physical index replication. That means the ETF manager holds a representative basket of actual fixed‑income securities so the fund return closely matches the tracked index, rather than using synthetic or derivatives-based replication.
What fees and trading costs should everyday investors expect for fixed-income ETFs?
Management fees mentioned in the article: iShares' Composite Bond Index Fund charges 0.24% pa and its other two iShares bond funds charge 0.26% pa. Russell will charge 0.24% pa for its Australian Government Bond ETF and 0.28% pa for its Select Corporate Bond ETF. In addition, ordinary brokerage applies when buying or selling on the ASX—online brokers typically charge about $15 to $30 per trade.
How can I buy these fixed-income ETFs and is there a minimum investment?
You buy fixed‑income ETFs on the ASX through a broker just like any listed security. The article notes you can get into the bond market by buying a single ETF share — an example given is a $100 ETF share — and you can trade during market hours and follow pricing on the ASX or your broker's website.
What are the main benefits of investing in ASX-listed fixed-income ETFs?
The article highlights several benefits for everyday investors: typically low management fees compared with many active funds, ease of access to the bond market via a single ASX trade, intra-day liquidity and pricing transparency on the exchange, and the ability to receive interest paid by bond issuers (with Russell offering an optional dividend reinvestment plan).
What risks or downsides should investors consider before buying fixed-income ETFs?
Key concerns raised in the article include tracking error (the ETF's return can vary from the index because managers hold a representative — not complete — basket of securities), potential liquidity issues in some bond-market securities that are tightly held by institutions, and less transparency about the underlying fixed-income indices (UBS and DBIQ/Deutsche Bank indices used by these ETFs may not provide the same accessible index detail to private investors as equity index providers).
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