Fixed income plays an important role for income generation, capital preservation and portfolio diversification. ETFs have democratised fixed income investing by making it easier, more liquid, and cheaper. Traditionally, fixed income investing required purchasing large minimum lot sizes, typically only accessible to large banks and institutions trading over-the-counter (OTC). ETFs eliminate these barriers, allowing individual investors to buy and sell fixed income securities conveniently on the share market.
Discover the asset class below or download our fixed income guide for a more in-depth look covering everything you may need to consider before investing.
Bonds are a common type of fixed income investment, representing debt issued by corporations or governments, to raise money or fund projects. When an investor purchases a bond, they are effectively lending money to the issuer with the expectation of receiving periodic interest payments and the return of the principal amount at the bond’s maturity.
Types of Bonds
Type of bond
Description
Relative Interest Rate
Government bonds
Also known as Treasury Bonds which is sovereign debt issued by the Australian federal government to support day-to-day operations and longer-term investments
Lowest given high credit rating
Semi-government bonds
Sovereign debt issued by regional governments from Australian states and territories
Slightly higher than government bonds
Corporate bonds
Debt issued by companies to raise money to finance business activities
Higher than government and semi-government given higher credit risk
Bond Payment Structures
Fixed rate bond – coupon rate remains constant throughout the life of the bond.
Floating rate bond – coupon rate fluctuates based on the current level of the benchmark index (such as the bank bill swap rate).
Indexed bond – coupon rate is linked to a specific metric such as inflation.
The Capital Structure
The capital structure refers to the mix of equity and debt on a company’s balance sheet. In the event of bankruptcy, the capital structure dictates the order of payment and who gets priority.
The Risk Spectrum
Fixed income typically has a different risk and return profile from other asset classes. Unlike property and shares, which can be more volatile and growth-oriented, fixed income investments generally offer more stability and predictability at the expense of higher potential returns, making them a valuable component of a diversified
portfolio.
Why Fixed Income?
Fixed income provides three main benefits for investors.
Income Regularity
Fixed income investments provide a predictable income stream through regular interest payments (usually monthly or quarterly), making them suitable for retirees and those seeking stable cash flow or passive income.
Diversification
By adding fixed income to an investment portfolio, investors can reduce their overall risk, as bonds generally behave differently from stocks and can act as a buffer during share market volatility.
Capital Preservation
Fixed income investments, particularly high-quality bonds, can help preserve investor’s money by returning the principal amount at maturity to investors (with interest along the way), giving them a more predictable outcome compared to stocks which could be more volatile.
Introducing BANK
BANK is an index-based ETF that invests in a diversified portfolio of Australian banking debt across the full capital structure excluding shares. It comprises fixed and floating-rate bonds, senior and subordinated debt (Tier 2 Capital), and hybrid securities (Additional Tier 1 Capital).
Attractive Yield
BANK pays monthly income and its index has historically offered higher yields than term deposits, government bonds and corporate bonds.
Convenient and Cost-Effective
A cost-effective package that holds three types or fixed income securities across the banking capital structure (senior bonds, subordinated bonds and hybrid securities) that can be used for income enhancement, capital preservation, and broader diversification.
Trusted Source of Income
Australian banks are known for being some of the most credible and robust financial institutions in the world. BANK is the only index based ETF offering exposure to the broader capital stack of Australia’s banks in one diversified solution.
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