How to invest in corporate bonds in Australia
Corporate bonds make up an important part of any investors portfolio. Australia has one of the lowest levels of retail corporate bond investment, despite being one of the largest issuers of bonds in the world. Unlike the US, corporate bonds are not readily available to retail investors. But there are a number of ways you can access the market. This article explains how to invest in corporate bonds in Australia.
The 5 second summary
You can invest in corporate bonds via a number of different channels.
- Directly via the ASX – downside is there are a limited number of bonds.
- Directly via a bond broker – access greater range of bonds, but can’t access wholesale issuance.
- ETFs – easy access to broad portfolio, limited ability to select portfolio.
- XTBs – able to access a range of bonds directly via the ASX. Costs slight higher.
- Managed funds – traditional route, greater variety / costs an issue.
Why invest in corporate bonds?
All portfolios should include an element of fixed income. In Australia, investment portfolios have traditionally been very undiversifed, with most investors limiting themselves to listed equities, bank term deposits and property.
Fixed income provides a steady income stream, while having a lot lower risk of losing your capital than shares. Corporate bonds are fixed income investments issued by companies allowing you to achieve a higher yield. This means you get some of the benefit of investing in a company, such as higher returns, without necessarily all the risks that comes with investing in shares.
Most big Australian companies issue bonds but generally these bonds have not been available to retail or “mum and dad” investors. Wholesale investors usually require minimum investments in the tens to hundreds of thousands.
Click here for further information bond basics and whether your a retail or wholesale investor.
How do I invest in corporate bonds in Australia?
There are a range of ways to invest in corporate bonds in Australia.
Direct via ASX
Bonds have been listed on the ASX for a number of years now. This includes Australian government bonds and certain corporate bonds. The good news is that if you already have a share broker account, such as Comsec or NAB online, then you can simply use that to by bonds, paying normal brokerage. Unfortunately, very few bonds have been listed on the ASX and most of these are hybrid securities. So if you’re looking for senior bank debt, for example, you won’t find it listed on the ASX.
Direct via a dedicated bond broker
If you want to directly buy a wider variety of Australian corporate bonds, you will have go via a dedicated bond dealer. Most bonds are bought and sold in the over the counter market. Bond dealers don’t usually charge brokerage, but will earn a spread between what you pay and what they pay for the bond. This makes pricing a little less transparent and harder to understand. If unsure, ask your broker.
Outside of the investment banks, there are a range of bond brokers available to retail investors. These include FIIG, Bond exchange and Interactive Brokers among others. Minimum account opening size varies, with Bond Exchange taking accounts as small as $10,000 AUD, Interactive Brokers requiring a minimum of $10,000 USD and FIIG requiring around $250,000 as a minimum portfolio balance. Interactive Brokers also gives you easy access to overseas markets, but is entirely self service – there is no human broker to guide you.
Exchange Traded Funds
Investing in a bond ETF is an easy way to get a diversified exposure to a fixed income portfolio. They are listed on the ASX, so easy to access via your stock broker account.
The biggest advantage bond ETFs have over managed portfolios is cost. Their fees are usually a hell of a lot lower than manage bond funds. The main disadvantage from a cost perspective is that you have to buy ETFs via the ASX and hence you will have to pay brokerage to buy and sell them. This means for smaller investments (less than a few thousand dollars) it’s not really economic to purchase directly.
There are a range of different ETFs available on the ASX, broken down into broad based indexes, to specific classes. As at the date of writing, the following ETFs were available for all bonds. Corporate Bond ETFs are highlighted. Note that all the non Australian bond ETFs listed on the ASX hedge foreign exchange exposure back to AUD.
|BetaShares Australian Investment Grade Corporate Bond ETF||CRED||Corporate||Solactive Australian Investment Grade Corporate Bond Select TR Index||0.25|
|VanEck Vectors Australian Floating Rate ETF||FLOT||Corporate||Bloomberg AusBond Credit FRN 0+ Yr Index||0.22|
|BetaShares Australian Bank Senior Floating Rate Bond ETF||QPON||Corporate||Solactive Australian Bank Senior Floating Rate Bond Index||0.22|
|iShares Core Cash ETF||BILL||Cash||Australian Cash||0.07|
|iShares Enhanced Cash ETF||ISEC||Cash||Australian Cash||0.12|
|UBS IQ Cash ETF||MONY||Cash||Australian Cash||0.18|
|VanEck Vectors Australian Corporate Bond Plus ETF||PLUS||Corporate||Markit iBoxx AUD Corporates Yield Plus Index||0.32|
|Australian High Interest Cash ETF||AAA||Cash||Australian Cash||0.18|
|iShares Core Composite Bond ETF||IAF||Mixed||Bloomberg AusBond Composite Index||0.2|
|iShares Government Inflation ETF||ILB||Government||Bloomberg AusBond Inflation Government Index||0.26|
|iShares Treasury ETF||IGB||Government||Bloomberg AusBond Treasury Index||0.26|
|Russell Australian Government Bond ETF||RGB||Government||Australian Government Bonds||0.24|
|Russell Australian Semi-Government Bond ETF||RSM||State Government||Australian Semi-Government Bonds||0.26|
|Russell Australian Select Corporate Bond ETF||RCB||Corporate||Australian Corporate Bonds||0.28|
|SPDR S&P/ASX Australian Bond Fund||BOND||Mixed||S&P/ASX Australian Fixed Income Index||0.24|
|SPDR S&P/ASX Australian Government Bond Fund||GOVT||Government||S&P /ASX Bond Index||0.22|
|Vanguard Australian Corporate Fixed Interest Index Fund||VACF||Corporate||Bloomberg AusBond Credit 0+ Yr Index||0.26|
|Vanguard Australian Fixed Interest Index||VAF||Mixed||Bloomberg AusBond Composite Index||0.2|
|Vanguard Australian Government Bond Index ETF||VGB||Government||Bloomberg AusBond Government Index||0.2|
|iShares Global High Yield Bond (AUD Hedged) ETF||IHHY||Corporate||Markit iBoxx Global Developed markets Liquid High Yield Capped Index (AUD Hedged)||0.56|
|iShares Core Global Corporate Bond (AUD Hedged) ETF||IHCB||Corporate||Barclays Global Aggregate Corporate Bond Index (AUD Hedged)||0.26|
|iShares J.P. Morgan USD Emerging Markets Bond (AUD Hedged) ETF||IHEB||Government and Semi||J.P. Morgan EMBI Global Core Index (AUD Hedged)||0.51|
|Vanguard Global Aggregate Bond Index (Hedged) ETF||VBND||Mixed||Bloomberg Barclays Global Aggregate Float Adjusted Bond Index hedged into Australian dollars||0.2|
|Vanguard International Credit Securities Index (Hedged) ETF||VCF||Mixed||Barclays Global Aggregate Governement related and Corporate Index hedged into Australian dollars||0.3|
|Vanguard International Fixed Interest Index (Hedged) ETF||VIF||Government||Barclays Global Treasury Index hedged into Australian dollars||0.2|
XTB’s are listed exchange traded bond units that was launched in 2015. They are similar to ETFs, in that you don’t actually invest directly in the bond itself, but rather purchase units in a unit trust that holds the bonds on your behalf.
How XTB’s work
Each XTB gives you exposure to a specific corporate bond, issued into the corporate bond market. XTBs are units in a unit trust and each bond is issued as a sub-trust.
Each bond has its own units, so if you want to invest directly in a certain bond or maturity, you can. Unlike ETFs, which are usually an index product over which you have no control, each XTB is specific to a certain bond.
The main advantages of XTBs are that you are able to invest in wholesale bonds in smaller amounts that usually available. That is, as a retail investor, you can access a wholesale bond issuance with a lot less capital. Normally wholesale issuance require hundreds of thousands of dollars to invest. Liquidity is also improved, as the creators of XTBs make a market in the products they have issued.
The primary disadvantage, like many fixed income products listed on the ASX, is cost. You have to pay brokerage on buying and selling. This makes it a little more expensive than investing directly in the bonds and makes short term trading prohibitively expensive in small amounts.
Their list of XTBs available are here https://xtbs.com.au/all-available-xtbs/
There are a wide variety of listed and non-listed managed bond funds. These have become less popular than they were 10 or 15 years ago, as interest rates have come down meaning actively managed funds have become more expensive. For example, who wants to pay 1% on an actively managed bond fund, that is yielding 5%? That’s a large chunk of your returns gone. Sites like Canstar provide a good list https://www.canstar.com.au/managed-funds/ of managed funds.
What are corporate bonds?
Below is a brief summary of corporate bond concepts.
Types of corporate bonds available
There are a range of different categories of corporate bonds available, depending on their risk. In the event of a company going bankrupt, the share holders lose their money first. Then, in order from most risky to least risky.
Basic Bond terminology
- Bond types – The main classifications of bonds are government bonds, semi-government bonds and corporate bonds.
- Maturity dates – the date you get your principal back.
- Coupon – the amount of cash you receive each period.
- Coupon types – bonds are usually classified into fixed or floating rate. Fixed bonds pay the same amount of coupon each period. Floating rate pay an amount over a benchmark, such as BBSW. Therefore they pay a different coupon each period.
- Yield to Maturity – this is the yield you will receive, if you buy the bond today at the price offered and hold the bond to maturity.
- Running yield – is the current yield on the bond. It difference from the yield to maturity, as its calculated as coupon divided by current price, rather than the return you would receive if held to maturity.
- Margin above BBSW – is the amount above the benchmark that the bond is paying. This margin generally stays the same, while the benchmark moves period to period. This is relevant for floating rate bonds.
There are a number of different mechanism in which is invest in corporate bonds in Australia, including ETFs, directly and via funds. Find out more about what is a hybrid securities and their place in your portfolio..