There are several key benefits to adding bond exposure to your portfolio, and the BetaShares Legg Mason Australian Bond Fund (ASX: BNDS) could be one way to achieve these benefits.
What Are ETFs?
Exchange-traded funds, or ETFs, are investment funds that are listed on a securities exchange and provide exposure to a range of shares or assets with a single purchase.
The Rask Finance video below explains ETFs in more detail:
BNDS Australian Bond Fund
The BetaShares Legg Mason Australian Bond Fund is a collaboration between BetaShares and US fund manager Legg Mason.
The ETF, with a current market capitalisation of $104 million, is an actively managed fund that aims to outperform the Bloomberg AusBond Composite Index over a rolling three-year period. The fund aims to achieve this by investing in a mix of government bonds, corporate bonds and other fixed interest securities.
Currently, around 42% of the fund is allocated to corporate bonds, and roughly 20% is allocated to commonwealth government bonds and semi-government bonds respectively.
Bonds can be a good addition to a portfolio because of the regular income they provide (monthly in the case of BNDS) and can also be an effective way of diversifying a share portfolio as bond prices and share prices tend to move inversely. Typically, bonds are classed as a defensive asset.
Keeping this in mind, we can look at the running yield, which is 3.25% per year. This figure is the expected income from investing now at the market price. Over the last six months, the fund has returned 7.48% with the help of two interest rate cuts.
Fees And Risks
The BNDS fund has a management fee of 0.42% per year, which seems relatively low for an actively managed fund. However, given the return is also on the lower side, this fee could have a large impact on returns.
Bonds also come with interest rate risk, as prices are directly impacted by interest rate cuts or rises. There is also a risk of default, particularly on the corporate bonds. However, with an average credit rating of AA, default seems unlikely for most of the bonds in this portfolio.
My Take
I’m looking at possibly diversifying with bonds, so I’ll be looking at more bond ETFs in the coming weeks. This fund seems like a reasonable option for diversification and regular income, even if the fees are somewhat high. If you’re only looking for diversification benefits though, it’s possible that a passive fund with lower fees could provide a more compelling option.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
