The Vanguard Australian Corporate Fixed Interest Index ETF (ASX: VACF) is one of the largest ASX corporate bond ETFs. How does it stack up against its peers?
Comparing bond ETFs
There are several ways to compare bond ETFs. One factor we can look at is past performance, although this does not say much about the ETF by itself. We can also look at how many holdings an ETF has to see if it is diversified, and we can look at the average credit quality of these holdings to determine how “risky” the ETF is.
Another factor we can use is duration. Duration measures a portfolio’s exposure to changes in interest rates and is normally given in years. For example, if a bond portfolio has a duration of 3 years, this suggests bond prices would fall roughly 3% if interest rates moved up by 1% or rise 3% if interest rates fell by 1%. So, duration can tell us about the potential volatility of a bond portfolio.
VanEck Vectors Australian Corporate Bond Plus ETF
The VanEck Vectors Australian Corporate Bond Plus ETF (ASX: PLUS) invests in a portfolio of AUD denominated corporate bonds listed in Australia, focusing on the highest-yielding investment-grade bonds.
The PLUS ETF has 122 holdings with credit ratings currently ranging from BBB to one A+ holding. These holdings cover many industries including banks, telecommunications, and commercial services, and the issuing companies are based around the world, with more than half in Australia but some from the US, the UK, South Korea, the UAE, and more.
Over the last three years, PLUS has returned 4.91% per annum including quarterly distributions and has a running yield of 3.63%. It also has the highest modified duration of these three ETFs (4.54 years) meaning it has the most exposure to interest rate changes.
The PLUS ETF charges a 0.32% management fee per year.
Russell Investments Australian Select Corporate Bond ETF
The Russell Investments Australian Select Corporate Bond ETF (ASX: RCB) is a portfolio of investment-grade Australian corporate bonds with a focus on the largest and most liquid Australian bonds. The RCB ETF has 12 holdings and the latest maturity date is in 2025, with most of the bonds maturing in 2023 or 2024. This is shorter than the PLUS ETF, which has an average portfolio maturity of 5.16 years. As would be expected with shorter-term bonds, RCB also has a lower running yield of 2.55%.
The potential upside is that RCB’s effective duration is 3.58 years, suggesting the portfolio is less exposed to interest changes than PLUS. With a lower running yield and less exposure to interest rate changes (which have been negative over the last 12 months), it is no surprise that RCB’s total return has been slightly lower at 4.48% per year over the last three years.
While returns have been slightly lower over three years, RCB has shown stronger performance over the last 12 months and its focus on large, liquid bonds means that the average credit quality is higher.
RCB’s management fee is 0.28% per year.
Vanguard Australian Corporate Fixed Interest Index ETF
The Vanguard Australian Corporate Fixed Interest Index ETF (ASX: VACF) sits right between the RCB and PLUS ETFs on many measures. VACF is more diversified than PLUS or RCB with 367 holdings, but the effective duration sits between RCB and PLUS at 3.9 years and the weighted average maturity is similar at 4.3 years.
VACF’s running yield is 3.51%, which is slightly lower than PLUS, but the VACF ETF also has a weighted-average credit quality of A+. This suggests that VACF achieves a similar running yield but with higher quality holdings.
VACF’s returns over the last three years have been marginally lower than RCB or PLUS at 4.44% per year, but VACF also has the lowest management fee of 0.26% per year.
Which one is best?
It is difficult to choose between these ETFs and none of them appear as a clear winner on every measure. VACF might be considered the ‘safest’ option with a low effective duration, the most holdings, the highest average credit quality, and the lowest management fee. However, PLUS may provide higher returns over the long term with its mix of holdings.
The choice will largely come down to your personal risk appetite, but I believe any of these ETFs could be worth considering.
Disclaimer: At the time of writing, Max does not have a financial interest in any of the ETFs mentioned.