What is a fixed income ETF?

What is a fixed income ETF?

Published on 01 Oct 2020

An Exchange-Traded Fund (ETF) is a managed fund that you can buy or sell on an exchange, such as the Australian Securities Exchange (ASX).

Different funds invest and specialise in a variety of different underlying assets. These can include:

  • Australian shares
  • international shares
  • foreign currencies
  • specific resources and commodities or:

A fixed income ETF is one that invests solely in fixed income assets such as bonds and cash.

The first ETF was listed on the ASX in 2001, but it wasn’t until 2012 that the first fixed-income ETF was launched.

What are bonds?

A bond is a debt security. Organisations issue bonds to borrow money from investors for a specific period of time.

The buyer of the bond is lending money to the issuer, which is typically a government, a government-owned enterprise, or company.

The seller (issuer) promises to pay you a specified rate of interest during the life of the bond and to repay the sum you lent them, when it "matures," or becomes due.

Bonds can be broadly divided into two categories – government-issued bonds or corporate bonds.

Government Bonds

Government-issued bonds are issued by State and Federal Governments. Bonds issued by the Australian Government help to fund its operations and pay for major government projects. Government bonds typically have the lowest risk of any investment because they can raise taxes to make interest payments.

Because they are low risk, they also have very low returns. State governments and statutory bodies are generally viewed as having slightly higher risk (although still very low) so they pay slightly higher interest.

Corporate Bonds

Corporate bonds are issued by large companies, who use bonds to raise capital, along with other methods such as issuing shares.

The types of companies that issue bonds include large banks and mining companies. These bonds are significantly higher risk than government bonds because of the potential that they could go broke and default on their repayments. For this reason, they pay significantly more interest than government bonds.

Pros and Cons of fixed-income ETFs

Pros of fixed income ETFs

  • Diversification – When you buy shares in an ETF you get access to a basket of hundreds of different bonds in a single trade, reducing your exposure to any one company or government.
  • Access to markets – ETF can invest in bonds that individual investors may not be able to access. For instance, the smallest trading size for many corporate bonds is more than $500,000, for a single type of bond. This is prohibitively expensive for most private investors.
  • Liquidity – you can buy and sell ETFs almost instantly whenever the ASX is open.


Cons of Fixed income ETFs

  • Market or sector risk – ETFs will let you diversify more than buying individual bonds, but the whole sector the ETF invests in could fall in value. You are not just exposed to the risk from the bonds but also to the possibility that the stock market could drop.
  •  Currency risk – fluctuations in currency values could affect the value of the ETF if it buys overseas assets. This can be hedged but that is an added cost for the fund.
  • Liquidity risk – some ETFs invest in assets that are not liquid, such as debt issued in less developed countries. These can be difficult to sell.

How to buy units in an ETF

You can buy units in an ETF the same way you would buy any shares on the stockmarket - through a stock broker. You will have to pay brokerage fees if you buy units in an ETF.

Who regulates fixed income ETFs?

ETFs are regulated by the Australian Securities and Investments Commission (ASIC).

How should I get information about a PDF?

Check the Product Disclosure Statement (PDS) before you invest.

This will include information on:

  • what index, sector or asset the ETF returns aims to replicate
  • management fees and costs
  • the risks of the investment
  • the complaints handling procedure

You can also check recent market announcements for new information on an ETF. These are freely available on the ASX website.

Alternatives to fixed-income ETFs

Investors looking for stable monthly income, might consider a Residential Mortgage-Backed Securities (RMBS) fund.

Like fixed income ETFs, an RMBS fund gives you access to an asset class that is usually only available to institutional investors.

RMBS are bonds that receive regular income from the mortgage repayments of Australian homeowners.

The bonds are made up of thousands of home loans with a combined value of hundreds of millions of dollars, so you aren’t exposed to a single company or Government defaulting.

Firstmac’s Investment Fund High Livez gives ordinary investors access to the RMBS market.

Unlike a listed ETF, the fund does not trade on the exchange, so investment is by application rather than through buying shares, and you have a window to exit your investment once per month, rather than selling whenever the market is open.

Invest as little as $10,000 with zero entry and exit fees.

Learn more about High Livez here.

What is a fixed income ETF?

What is a fixed income ETF?

Published on 01 Oct 2020

An Exchange-Traded Fund (ETF) is a managed fund that you can buy or sell on an exchange, such as the Australian Securities Exchange (ASX).

Different funds invest and specialise in a variety of different underlying assets. These can include:

  • Australian shares
  • international shares
  • foreign currencies
  • specific resources and commodities or:

A fixed income ETF is one that invests solely in fixed income assets such as bonds and cash.

The first ETF was listed on the ASX in 2001, but it wasn’t until 2012 that the first fixed-income ETF was launched.

What are bonds?

A bond is a debt security. Organisations issue bonds to borrow money from investors for a specific period of time.

The buyer of the bond is lending money to the issuer, which is typically a government, a government-owned enterprise, or company.

The seller (issuer) promises to pay you a specified rate of interest during the life of the bond and to repay the sum you lent them, when it "matures," or becomes due.

Bonds can be broadly divided into two categories – government-issued bonds or corporate bonds.

Government Bonds

Government-issued bonds are issued by State and Federal Governments. Bonds issued by the Australian Government help to fund its operations and pay for major government projects. Government bonds typically have the lowest risk of any investment because they can raise taxes to make interest payments.

Because they are low risk, they also have very low returns. State governments and statutory bodies are generally viewed as having slightly higher risk (although still very low) so they pay slightly higher interest.

Corporate Bonds

Corporate bonds are issued by large companies, who use bonds to raise capital, along with other methods such as issuing shares.

The types of companies that issue bonds include large banks and mining companies. These bonds are significantly higher risk than government bonds because of the potential that they could go broke and default on their repayments. For this reason, they pay significantly more interest than government bonds.

Pros and Cons of fixed-income ETFs

Pros of fixed income ETFs

  • Diversification – When you buy shares in an ETF you get access to a basket of hundreds of different bonds in a single trade, reducing your exposure to any one company or government.
  • Access to markets – ETF can invest in bonds that individual investors may not be able to access. For instance, the smallest trading size for many corporate bonds is more than $500,000, for a single type of bond. This is prohibitively expensive for most private investors.
  • Liquidity – you can buy and sell ETFs almost instantly whenever the ASX is open.


Cons of Fixed income ETFs

  • Market or sector risk – ETFs will let you diversify more than buying individual bonds, but the whole sector the ETF invests in could fall in value. You are not just exposed to the risk from the bonds but also to the possibility that the stock market could drop.
  •  Currency risk – fluctuations in currency values could affect the value of the ETF if it buys overseas assets. This can be hedged but that is an added cost for the fund.
  • Liquidity risk – some ETFs invest in assets that are not liquid, such as debt issued in less developed countries. These can be difficult to sell.

How to buy units in an ETF

You can buy units in an ETF the same way you would buy any shares on the stockmarket - through a stock broker. You will have to pay brokerage fees if you buy units in an ETF.

Who regulates fixed income ETFs?

ETFs are regulated by the Australian Securities and Investments Commission (ASIC).

How should I get information about a PDF?

Check the Product Disclosure Statement (PDS) before you invest.

This will include information on:

  • what index, sector or asset the ETF returns aims to replicate
  • management fees and costs
  • the risks of the investment
  • the complaints handling procedure

You can also check recent market announcements for new information on an ETF. These are freely available on the ASX website.

Alternatives to fixed-income ETFs

Investors looking for stable monthly income, might consider a Residential Mortgage-Backed Securities (RMBS) fund.

Like fixed income ETFs, an RMBS fund gives you access to an asset class that is usually only available to institutional investors.

RMBS are bonds that receive regular income from the mortgage repayments of Australian homeowners.

The bonds are made up of thousands of home loans with a combined value of hundreds of millions of dollars, so you aren’t exposed to a single company or Government defaulting.

Firstmac’s Investment Fund High Livez gives ordinary investors access to the RMBS market.

Unlike a listed ETF, the fund does not trade on the exchange, so investment is by application rather than through buying shares, and you have a window to exit your investment once per month, rather than selling whenever the market is open.

Invest as little as $10,000 with zero entry and exit fees.

Learn more about High Livez here.

What is a fixed income ETF?

What is a fixed income ETF?

Published on 01 Oct 2020

An Exchange-Traded Fund (ETF) is a managed fund that you can buy or sell on an exchange, such as the Australian Securities Exchange (ASX).

Different funds invest and specialise in a variety of different underlying assets. These can include:

  • Australian shares
  • international shares
  • foreign currencies
  • specific resources and commodities or:

A fixed income ETF is one that invests solely in fixed income assets such as bonds and cash.

The first ETF was listed on the ASX in 2001, but it wasn’t until 2012 that the first fixed-income ETF was launched.

What are bonds?

A bond is a debt security. Organisations issue bonds to borrow money from investors for a specific period of time.

The buyer of the bond is lending money to the issuer, which is typically a government, a government-owned enterprise, or company.

The seller (issuer) promises to pay you a specified rate of interest during the life of the bond and to repay the sum you lent them, when it "matures," or becomes due.

Bonds can be broadly divided into two categories – government-issued bonds or corporate bonds.

Government Bonds

Government-issued bonds are issued by State and Federal Governments. Bonds issued by the Australian Government help to fund its operations and pay for major government projects. Government bonds typically have the lowest risk of any investment because they can raise taxes to make interest payments.

Because they are low risk, they also have very low returns. State governments and statutory bodies are generally viewed as having slightly higher risk (although still very low) so they pay slightly higher interest.

Corporate Bonds

Corporate bonds are issued by large companies, who use bonds to raise capital, along with other methods such as issuing shares.

The types of companies that issue bonds include large banks and mining companies. These bonds are significantly higher risk than government bonds because of the potential that they could go broke and default on their repayments. For this reason, they pay significantly more interest than government bonds.

Pros and Cons of fixed-income ETFs

Pros of fixed income ETFs

  • Diversification – When you buy shares in an ETF you get access to a basket of hundreds of different bonds in a single trade, reducing your exposure to any one company or government.
  • Access to markets – ETF can invest in bonds that individual investors may not be able to access. For instance, the smallest trading size for many corporate bonds is more than $500,000, for a single type of bond. This is prohibitively expensive for most private investors.
  • Liquidity – you can buy and sell ETFs almost instantly whenever the ASX is open.


Cons of Fixed income ETFs

  • Market or sector risk – ETFs will let you diversify more than buying individual bonds, but the whole sector the ETF invests in could fall in value. You are not just exposed to the risk from the bonds but also to the possibility that the stock market could drop.
  •  Currency risk – fluctuations in currency values could affect the value of the ETF if it buys overseas assets. This can be hedged but that is an added cost for the fund.
  • Liquidity risk – some ETFs invest in assets that are not liquid, such as debt issued in less developed countries. These can be difficult to sell.

How to buy units in an ETF

You can buy units in an ETF the same way you would buy any shares on the stockmarket - through a stock broker. You will have to pay brokerage fees if you buy units in an ETF.

Who regulates fixed income ETFs?

ETFs are regulated by the Australian Securities and Investments Commission (ASIC).

How should I get information about a PDF?

Check the Product Disclosure Statement (PDS) before you invest.

This will include information on:

  • what index, sector or asset the ETF returns aims to replicate
  • management fees and costs
  • the risks of the investment
  • the complaints handling procedure

You can also check recent market announcements for new information on an ETF. These are freely available on the ASX website.

Alternatives to fixed-income ETFs

Investors looking for stable monthly income, might consider a Residential Mortgage-Backed Securities (RMBS) fund.

Like fixed income ETFs, an RMBS fund gives you access to an asset class that is usually only available to institutional investors.

RMBS are bonds that receive regular income from the mortgage repayments of Australian homeowners.

The bonds are made up of thousands of home loans with a combined value of hundreds of millions of dollars, so you aren’t exposed to a single company or Government defaulting.

Firstmac’s Investment Fund High Livez gives ordinary investors access to the RMBS market.

Unlike a listed ETF, the fund does not trade on the exchange, so investment is by application rather than through buying shares, and you have a window to exit your investment once per month, rather than selling whenever the market is open.

Invest as little as $10,000 with zero entry and exit fees.

Learn more about High Livez here.