Unpacking The SPDR Australian Government Bond Fund
The SPDR GOVT Fund is an ASX-listed ETF run by State Street Global Advisors that is designed to track the performance of the S&P/ASX Government Bond Index.
For those unfamiliar, the Rask Finance video below explains index funds:
In order to track the index, the GOVT ETF invests in a portfolio of 76 holdings which include Australian government bonds and semi-government (state government) bonds. Nearly 70% of the fund is allocated to Australian government bonds and 30% to semi-government bonds.
As these are government bonds, the average credit rating of the ETF is very high. 82% of the portfolio has an AAA rating, while the remaining 18% has an AA rating.
The bonds inside the GOVT ETF also have a large mix of maturities, with some maturing in less than a year, some in 20-30 years, and everything in between. The average maturity is 7.53 years.
The portfolio has a modified duration of 6.53 years. Modified duration is a measure of how much bond prices are affected by interest rates. A figure of 6.53 basically means a 1% move in interest rates could be expected to move the price of the bonds by roughly 6.53%.
Over the last 12 months, the GOVT ETF has returned 2.28% through distributions, but declining interest rates has boosted the overall return to 12.48%. Since inception in July 2012, the GOVT ETF has returned 4.68% per year.
Fees & Risks
The GOVT ETF charges a management fee of 0.22% per year, which has been taken into account in the returns above.
This ETF has benefitted from declining rates, but it is arguable that rates may not fall much further since they’re already set at 0.75%. Bonds are also sensitive to rates moving in either direction, so if interest rates begin to rise you might expect a negative return on a government bond portfolio.
The GOVT ETF is also relatively small, with around $25.6 million under management. Ideally, I would be looking for a much larger ETF with a long track record.
Recently, some investors have argued the idea of a 60/40 portfolio (60% shares, 40% bonds) is dead. However, I disagree. Government bonds still play an important role in a diversified portfolio as they can provide regular income and a negatively correlated return to shares.
The GOVT ETF is certainly worth considering, but it’s important to compare it to other bonds ETFs before making an investment decision.
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Disclosure: At the time of writing, Max has no financial interest in any of the companies mentioned.