Could Vanguard Australian Fixed Interest Index ETF (ASX: VAF) be a good ETF option for bonds on the ASX?
What is Vanguard?
Vanguard is a funds management business that is owned by its own investors. It was founded in 1975 and now has (or had) around AU$9.7 billion. It has 192 funds in the US, and 232 funds in markets outside the US. It’s a world leader in providing low-cost ETFs.
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Why is considering bonds a good idea?
There are different asset classes for different levels of risk. Shares are the ‘riskiest’ because they can be volatile, the share price can go up and down in value quite substantially in a short period of time. Just look at what’s happened because of COVID-19.
Bonds can provide a better return than cash, but a safer (and less volatile) return compared to shares. Bonds are essentially debt issued by governments or businesses.
What is Vanguard Australian Fixed Interest Index ETF?
Vanguard Australian Fixed Interest Index ETF invests in high-quality, income-generating securities issued by the Commonwealth Government of Australia, Australian State Government authorities and treasury corporations, as well as investment-grade corporate issuers.
Essentially, it’s invested in many of the safest bonds that you can find in Australia. The top five issuers it’s invested in: the (federal) Commonwealth of Australia, Queensland Treasury Corporation, New South Wales Treasury Corporation, Treasury Corporation of Victoria and the Western Australia Treasury Corporation.
Around 94% of Vanguard Australian Fixed Interest Index ETF is invested in bonds that are rated as AAA or AA. That means that the bonds are rated as safe.
The management fee
It’s important to be aware of the management cost of an ETF. Vanguard Australian Fixed Interest Index ETF has an annual management fee of 0.20% per year. That’s cheap compared to what active fund managers may charge.
The yield
Vanguard revealed that on 31 May 2020 the yield to maturity is 0.87%. That’s pretty low after years of interest rate cuts.
Summary
If you want an allocation to bonds then Vanguard Australian Fixed Interest Index ETF could be a good option. However, interest rates are incredibly low and aren’t likely to go much lower, meaning there isn’t going to be much capital growth. I don’t think there is too much upside to investing today apart from the very low-interest rate.
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