The BetaShares Legg Mason Australian Bond Fund (ASX: BNDS) could be one way to achieve the many potential benefits of adding bond exposure to your portfolio.
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 Australian Finance Podcast episode below explains index funds, ETFs and managed funds in more detail:
What Is The BNDS Australian Bond Fund?
The BetaShares Legg Mason Australian Bond Fund is a collaboration between BetaShares and US fund manager Legg Mason.
The BNDS ETF has a market capitalisation of $104 million and is an actively managed fund that seeks to outperform the Bloomberg AusBond Composite Index over a rolling three-year period. The fund aims to achieve this by investing in a mix of corporate bonds, government bonds, and other fixed interest securities.
Currently, roughly 42% of the fund is allocated to corporate bonds, and around 20% is allocated to commonwealth government bonds and semi-government bonds respectively.
Bonds can be a good addition to an investment portfolio due to the regular income they provide (in this case, monthly). Further, bonds can be an effective way of diversifying a share portfolio as bond prices and share prices tend to move inversely. Typically, bonds are considered a defensive asset.
Keeping this in mind, we can look at the running yield of the BNDS ETF which is 3.25% per year. This figure is the expected income from investing now at the market price. Over the last six months, the fund has returned 7.48% with the help of two interest rate cuts.
Fees & Risks
The BNDS fund has a management fee of 0.42% per year, which seems relatively low for an actively managed fund. However, given the return is also on the lower side, this fee could have a considerable impact on returns.
Bonds also come with interest rate risk since prices are directly impacted by interest rate cuts or rises. There is also a risk of default, particularly on the corporate bonds. However, with an average credit rating of AA, default seems unlikely for most of the bonds in this portfolio.
I’ll be looking at more bond ETFs in the coming weeks as I’m looking at possibly diversifying my portfolio with bonds. This fund seems like a reasonable option for diversification and regular income, even if the fees are somewhat high. However, if you’re only looking for diversification benefits, it’s possible that a passive fund with lower fees could provide a more compelling option.
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Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.