ASX share dividends aren’t the only way to generate investment income. The Russell Investments Australian Select Corporate Bond ETF
(ASX: RCB) could be another option to consider.
What Are ETFs?
Exchange-traded funds, or ASX ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with a single purchase.
This Rask Finance video explains ETFs:
Russell Corporate Bond ETF (RCB)
The Russell Corporate Bond ETF, or RCB ETF, aims to track the performance of the DBIQ 0-4-year Investment Grade Australian Corporate Bond Index by holding a small portfolio of corporate bonds and paying quarterly distributions.
Corporate bonds, aside from paying regular income, can also provide diversification benefits to a share portfolio because bond and share prices tend to move inversely to one another.
The RCB ETF currently holds a portfolio of ten bonds, but on closer inspection, there’s not much diversification. All of the bonds are issued by Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Australia and New Zealand Banking Group (ASX: ANZ).
The total return over the last five years has been 4.39% per year, and 5.56% per year over the last two years. The running yield, however, is currently 2.96% so future returns could be lower.
Fees & Risks
The RCB ETF charges a management fee of 0.28% per year. In general, bonds are exposed to interest rate risk and are sometimes relatively illiquid. In terms of the RCB ETF, there is concentration risk as there are only 10 bonds that originate from four issuers (all banks).
While this isn’t a risk, per se, an investor has to consider whether they may be better off just buying shares in the big four banks. This may be a riskier investment than a bond ETF like RCB, but the current dividend yields on those shares are significantly higher than the bond coupons.
My Take On RCB
The returns from the RCB ETF seem reasonable and it’s a large, well-established ETF. This might be an option to consider for income, but investors should also consider whether they would be better off just buying the bank shares instead. The answer will vary depending on investment preferences, so there’s no one right answer.
For our number one ETF pick, have a look at the free report below.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
