Are ETFs the way to invest in bonds?

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While ETFs were first introduced to the Australian market in 2001, it was only in March 2012 that we saw the first ETF backed by bonds. At this time iShares (a Blackrock subsidiary) and Russell Investments created a number of ETFs that seek to replicate the returns of various bond indices. iShares has chosen to benchmark to indices from UBS, while Russell’s funds are benchmarked to the respective Deutsche Bank indices.

Because of the nature of the Australian bond market, where government, semi-government and senior bonds from the Big Four banks dominate, these funds have the majority of their exposure to these same assets. This is good in that these issuers are very low risk and offer the funds the highest levels of liquidity, enabling them to meet unitholders fund requirements. However, as the funds are exposed almost exclusively to the lowest risk issuers in the market, the returns are also low.

What are the different funds?

Both iShares and Russell offer three funds: iShares offers funds that invest in a mix of all bonds (the composite fund), inflation-linked bonds (the inflation fund) and government bonds (the government fund). Russell offers funds investing in government, semi-government and corporate bonds. They have detailed mandates for each fund, but essentially, you get what’s written on the label.

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