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. ETFs can be ‘managed funds’ or ‘index funds’, or in other words, active or passive.
The Rask Finance video below explains index funds:
What Is The iShares IAF ETF?
The iShares Core Composite Bond ETF invests in a portfolio of Australian investment-grade fixed income securities, which includes Treasury bonds, corporate bonds and cash.
The fund pays quarterly distributions and aims to track the performance of the Bloomberg AusBond Composite 0+ Yr Index.
The fund began in 2012 and has since returned 5.41% per year. Over the last five years, it has returned 5.13% per year, and 4.5% per year over the last three years. As you can see, the return has been gradually decreasing, reflecting the move towards lower interest rates globally. This trend could be expected to continue, so take the historical returns with a grain of salt.
The weighted average maturity of the bonds inside IAF is 6.44 years, and the effective duration is 5.57. Effective duration is a measure of how much bond prices are affected by interest rates, and a figure of 5.57 basically means a 1% move in interest rates could be expected to move the price of the bonds by roughly 5.57%.
This partially explains why the fund has returned 11.01% over the last 12 months, as interest rates have been cut twice in that time.
Risks And Fees
Performance has been helped by interest rate cuts this year and it’s possible that more cuts could be coming. However, with rates already at 1% there is arguably limited upside for bond prices and the IAF ETF. If you choose to invest in this ETF, I think you should expect returns to be lower than the historical figures.
The IAF ETF has a management fee of 0.2%, which is very reasonable for a bond ETF. The main risk for bond ETFs is typically interest rate changes. As interest rates rise, bond prices typically fall.
My Take
IAF may not be the best bond ETF available but at a base level, it looks reasonable. The management fee is low and performance has, for the most part, been very close to the benchmark. This is one ETF that could be worth considering for stable income and added diversification.
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 own shares in any of the companies mentioned.
