the BetaShares Australian Composite Bond ETF (ASX:OZBD) started trading on the ASX yesterday.
It provides investors with exposure to a basket of Australian government and corporate fixed income assets.
What is a Traded Index Fund (ETF)?
If this all sounds like a bunch of corporate jargon, don’t worry.
We’ll dive into the ETF and the role it could play in your portfolio.
Fixed income? Obligations ?
Fixed income is a general term to describe loans, bonds, or other assets that pay a predetermined interest payment over the life of the asset.
An example of a fixed income asset is a mortgage.
Households agree to take out a 30-year mortgage, with monthly interest and principal payments over the life of the loan.
Bonds are not too different from mortgages. The main difference is that they are issued by governments and companies.
What is the difference between stocks and bonds?
Equities, also called stocks, represent a slice of ownership In a company. Investors can vote on the direction of the company and share the profits.
Conversely, fixed income assets such as bonds represent the ownership of debt.
Bondholders do not benefit from the increasing value of a company. But if the value of the business drops, it still receives a steady stream of income.
If a company goes bankrupt, bondholders will be paid before shareholders.
For this reason, bonds are generally considered safer than stocks.
The case of stocks and bonds
Bonds also behave differently than stocks. When stock markets fall, bonds tend to perform strongly.
For this reason, bonds and stocks are often found in diversified portfolios.
Bonds provide steady and steady cash flow while stocks provide upward growth for companies around the world.
Why choose OZBD?
OZBD follows Bloomberg Australian Enhanced Yield Composite Bond Index for a management fee of 0.19%.
The ETF holds 72% assets in Australian federal and state government bonds.
The rest is made up of corporate debt such as Woolworth and Vodaphone.
What makes OZBD unique is that ETFs are selected on a risk-adjusted basis, meaning they constantly adjust to ensure investors have a high probability of income and capital appreciation.
Subsequently, OZBD has outperformed the AusBond benchmark in each of the past ten years.
As part of a diversified portfolio, OZBD is an excellent core ETF offering diversified exposure to Australian fixed interest.