In learning about finance and investing, you’ll hear plenty of investors advocating a portfolio of shares and government bonds. The SPDR S&P/ASX Australian Government Bond Fund (ASX: GOVT) could be one easy way to implement this.
What Are ETFs?
Exchange-traded funds, or ETFs, are investment funds that are listed on a stock exchange and provide exposure to a range of shares or assets with one purchase.
This Rask Finance video explains ETFs:
SPDR Australian Government Bond Fund
The SPDR GOVT Fund is an ASX-listed ETF run by State Street Global Advisors. It is designed to track the performance of the S&P/ASX Government Bond Index.
This is achieved by investing in a portfolio of 76 holdings which include Australian government bonds and semi-government (state government) bonds. Around 70% of the fund is allocated to government bonds and 30% to semi-government.
As they are government bonds, the average credit rating is very high. 82% of the portfolio has an AAA rating while 18% has an AA rating.
There is also a large mix of maturities, with some bonds maturing in less than a year, some in 20-30 years and everything in between. The average maturity is 7.53 years.
The end result is a current yield of 3.17%, a better return than most term deposits and high-interest savings accounts.
The portfolio has a modified duration of 6.53 years. Modified duration is a measure of how much bond prices are affected by interest rates, and a figure of 6.53 basically means a 1% move in interest rates could be expected to move the price of the bonds by roughly 6.53%.
Over the last 12 months, the GOVT ETF has returned 2.28% through distributions, but declining interest rates boosted the overall return to 12.48%. Since inception in July 2012, the GOVT ETF has returned 4.68% per year.
Fees And Risks
The GOVT ETF charges a management fee of 0.22% per year, which is included in the returns above.
While the ETF has benefitted from declining rates, it is arguable that rates may not fall much further when they’re already set at 0.75%. Bonds are also sensitive to rates moving in either direction, so if interest rates begin to rise you might expect a negative return on a government bond portfolio.
The GOVT ETF is also relatively small, with around $25.6 million under management. Ideally, I would be looking for a larger ETF with a long track record.
My Take
Some investors have argued lately that the idea of a 60/40 portfolio (60% shares, 40% bonds) is dead, but I disagree. Government bonds still play an important role in a diversified portfolio as they can provide regular income and a negatively correlated return to shares.
The GOVT ETF is certainly worth considering, but it’s important to compare it to other bonds ETFs before making an investment decision.
For our number one ETF pick, have a look at the free report below.
[ls_content_block id=”14948″ para=”paragraphs”]
Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.
