Interest Income Portfolio - Portfolio Adjustment

We have made some adjustments to the Interest Income Portfolio

By InvestSMART · 15 Mar 2018

By InvestSMART ·
15 Mar 2018 · 3 min read

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The objective of the InvestSMART Interest Income Portfolio is to provide returns in line with the Bloomberg AusBond Composite 0 Yr Total Return Index. The portfolio is suitable to investors with a more conservative risk appetite, or for use in forming the defensive portion of a diversified portfolio.

ETFs allow investors to construct diversified portfolios at a lower cost, and as the Australian ETF market continues to develop the number of options available to investors to tailor their portfolios to meet their objectives continues to grow.

As a category, Fixed Income focused ETFs have grown strongly with FUM increasing close to 50% and the number of products on market going from 17 to 25 in the 12 months to December 2017. As a result, the opportunity for us to adjust our portfolio to better achieve returns in line with our objectives while also reducing costs has improved.

Changes

Removal of BetaShares High Interest Cash ETF (ASX: AAA). The yield on AAA has gradually declined since the establishment of the Interest Income portfolio now sitting at around 2%. As such, we will reinvest this cash allocation into higher yielding fixed interest securities.

Removal of the Macquarie Income Opportunities Fund (MAQ0277AU). Where appropriate, we continually aim to reduce costs within our portfolios. During 2017, two floating rate funds were listed, FLOT which we currently hold and BetaShares Australian Bank Senior Floating Rate Bond ETF (ASX: QPON). Removing MAQ0277AU and reinvesting across these two securities for our floating rate exposure will see the weighted average indirect cost ratio (ICR) of the portfolio reduced to 22bp.

Replacement of iShares Core Composite Bond ETF (ASX: IAF) with three separate ETFs. IAF is comprised of Treasuries, Government Bonds & Corporate Bonds. By selling IAF and reinvesting the proceeds across three separate ETFs, we are able to maintain our fixed interest exposure while also improving the level of control we have over our weighting to each sector. The three new ETFs are:

Vanguard Australian Corporate Fixed Interest ETF (ASX: VACF)
iShares Treasury ETF (ASX: IGB)
Vanguard Australian Government Bond ETF (ASX: VGB)

Outcomes

Overall, the key benefits that arise from these changes include:

Reduction in ICR
Greater alignment to our benchmark
Improved credit profile
Greater control over individual sector allocations

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Frequently Asked Questions about this Article…

What is the objective of the InvestSMART Interest Income Portfolio?

The objective of the InvestSMART Interest Income Portfolio is to provide returns in line with the Bloomberg AusBond Composite 0 Yr Total Return Index, making it suitable for conservative investors or as a defensive component in a diversified portfolio.

How do ETFs help investors in building diversified portfolios?

ETFs allow investors to construct diversified portfolios at a lower cost. As the Australian ETF market grows, investors have more options to tailor their portfolios to meet specific objectives.

Why was the BetaShares High Interest Cash ETF removed from the portfolio?

The BetaShares High Interest Cash ETF was removed because its yield had gradually declined to around 2%. The cash allocation will be reinvested into higher yielding fixed interest securities.

What changes were made to the floating rate exposure in the portfolio?

The Macquarie Income Opportunities Fund was removed, and the portfolio's floating rate exposure was adjusted by reinvesting in FLOT and BetaShares Australian Bank Senior Floating Rate Bond ETF, reducing the portfolio's weighted average indirect cost ratio.

Why was the iShares Core Composite Bond ETF replaced with three separate ETFs?

The iShares Core Composite Bond ETF was replaced to maintain fixed interest exposure while improving control over sector weightings. The proceeds were reinvested in Vanguard Australian Corporate Fixed Interest ETF, iShares Treasury ETF, and Vanguard Australian Government Bond ETF.

What are the benefits of the recent portfolio adjustments?

The key benefits of the portfolio adjustments include a reduction in the indirect cost ratio, greater alignment with the benchmark, an improved credit profile, and better control over individual sector allocations.

How has the fixed income ETF market changed recently?

The fixed income ETF market has grown significantly, with funds under management increasing by nearly 50% and the number of products on the market rising from 17 to 25 in the 12 months to December 2017.

What are the new ETFs included in the portfolio for fixed interest exposure?

The new ETFs included for fixed interest exposure are the Vanguard Australian Corporate Fixed Interest ETF, iShares Treasury ETF, and Vanguard Australian Government Bond ETF.