Share dividends from ASX-listed bank stocks aren’t the only way to generate investment income. In this article I take a look at the Russell Investments Australian Select Corporate Bond ETF (ASX: RCB).
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Getting To Know The Russell Corporate Bond ETF (RCB)
The Russell Corporate Bond ETF (RCB) tracks the DBIQ 0-4-year Investment Grade Australian Corporate Bond Index by holding a small portfolio of corporate bonds and paying quarterly distributions.
Corporate bonds, aside from paying regular income, can provide diversification benefits to a share portfolio because bond and share prices tend to move inversely to one another.
Unfortunately, the RCB ETF holds a portfolio of just ten bonds and on closer inspection, there’s not a great deal of diversification.
Right now every bond inside the RCB ETF comes from a bank — Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB), Westpac (ASX: WBC) and ANZ (ASX: ANZ).
RCB’s total return over the last five years has been 4.39% per year, and 5.56% per year over the last two years.
Fees & Risks For RCB
RCB charges a yearly management fee of 0.28%.
In general, bonds are exposed to interest rate risk and are sometimes relatively illiquid. In terms of the RCB ETF, there is concentration risk as there are only 10 bonds that come from just four issuers.
Although it isn’t a risk, per se, an investor must consider if they may be better off just buying shares in the big four banks — which all pay fully franked dividends. Shares tend be a riskier investment than a bond ETF like RCB, but the current dividend yields on the bank shares are significantly higher than the bond coupons inside the RCB ETF.
BCB – Buy, Hold Or Sell?
Returns from the RCB ETF seem reasonable and it’s a large, well-established ETF. So it might be an option to consider for income.
However, investors should also consider whether they would be better off just buying some bank shares instead to match the yield. The answer will vary depending on your investment preferences, including your risk tolerance and outlook for the Australian banks and the economy at large. Ultimately, there’s no one right answer.
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Disclosure: At the time of writing, Max does not have a financial interest in any of the companies mentioned.