Investors looking for a better yield than those offered on term deposits or government bonds now have the opportunity to invest in high-yield corporate bonds, following the launch a new exchange traded fund.
Fund manager VanEck Australia has launched a fund that will pay returns generated from a portfolio of Australian corporate bonds.
The VanEck Vectors Australian Corporate Bond Plus ETF will track the Markit iBoxx AUD Corporates Yield Plus Index. The Markit index is a so-called “smart beta” index, which means that it has been modified to enhance the yield and liquidity of the portfolio.
Markit has taken the universe of corporate bonds issued in Australia and selected the top 50 per cent highest yielding issuers. It has also applied liquidity, maturity and credit quality filters, with no more than 20 per cent of the securities in the portfolio below investment grade.
The index produced a return of 5.91 per cent over the 12 months to the end of March, compared with a return of 2.09 per cent for Bloomberg’s AusBond Composite Index (a broader index that includes government bonds) over the same period.
The Markit index has produced an average return of 6.24 per cent a year over the three years to the end of March, compared with an average return of 4.97 per cent a year for the Bloomberg AusBond Index over the same period.
Arian Neiron, the managing director of VanEck Australia, says the launch of a smart beta Australian fixed income ETF is a new investment opportunity. Corporate bonds are usually sold to institutional investors, with very few avenues for private investors to gain access.
“In the current low interest environment, finding liquid defensive high yield has been a considerable challenge for investors,” Neiron says.
The current portfolio has 120 bonds from 80 corporate issuers. Fifty-six per cent of the issuers are Australian companies and the rest are foreign companies that have issued bonds in Australian dollars (so-called kangaroo bonds).
Neiron says one of the portfolio’s strengths is its diversification. US issuers include Goldman Sachs, Credit Suisse and Intel Corp.
Australian banks are the biggest local corporate bond issuers and some investors may be concerned that an investment in the fund might increase their exposure to the banking sector.
Neiron says this is not a concern. The only big local bank bond issuers in the portfolio are Commonwealth Bank (with a 1.7 per cent portfolio weighting) and ANZ (with a 1.5 per cent weighting). “This fund is a diversifier,” he says.
VanEck has not set a listing date for the fund, which will have an Australian Securities Exchange code of PLUS.