BNDS: Track Record Warning

When an ETF does not have a sufficiently long track record -- typically, we consider this to be at least 3 years -- the ETF is could be at a higher risk of being closed down (if it doesn't grow), and the historical performance and returns (if any) cannot be relied upon.

Some of the risks associated with an ETF that has a short or no track record include:

• Performance - When a fund, ETF or investment firm does not have a track record, it is often difficult to know what to expect from the investment. This is not the case with all ETFs that are new, especially if the ETF follows a highly liquid benchmark that has been in existence for five years or more. However, we apply the track record warning as a reminder to investors that it's important to think long and hard about how this ETF will perform, and its role in a portfolio. Please note: at Best ETFs Australia we do not accept 'backtests' as a legitimate form of performance.
• Funds under management (FUM) - Although some of the largest ETF providers have established marketing departments and distribution teams, and joint ventures between distribution experts and boutique fund managers are now more common, new funds often fail to get enough money invested into them in the first 1-3 years to make them very profitable for the issuer. One obvious reason for this is most funds management and ETF ratings agencies (like us), who provide the ratings on fund managers for financial advisers, demand a three-year track record. We will accept a shorter-term track record (i.e. under three years), but it must meet a range of criteria before we will consider it a worthwhile fund/ETF.
• Buy-sell spread - The buy-sell spread, shown on our ETF listings page and in fund/ETF factsheet and quarterly reports, tells you how much it 'costs' to get your money in-and-out of a fund. Basically, it's an estimate of what it costs the fund manager to take your money and invest in whatever is inside the fund/ETF. Obviously, the lower/smaller the spread is the better it is for you. New ETFs/funds can have difficulty lowering the buy-sell spread to a reasonable level until they reach scale (e.g. having FUM more than $100 million).

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Fixed interest – Australia sector

The Best ETFs Australian Fixed Interest sector includes ETFs, managed funds and index funds which cover Australian bonds ranging from Government treasuries to Corporate and Hybrids; right through to Cash Management Trusts (CMTs) and simple Term Deposit ETFs.

This sector may also include cash or bond products from foreign Governments or companies issuing their debt (bonds) or cash products here in Australia.

Performance Characteristics

Over the ultra-long-term, we expect the Australian bonds and cash sector to perform with low amounts of volatility (ups and downs) but equally low capital gains. Moreover, we believe investors should expect the income return produced by high-grade bonds and cash to remain low for the foreseeable future as inflation and Australian interest rates remain well below historical levels.

Don't Forget...

One of the unique features of the Australian term deposit market -- it's a legacy of our time during the Global Financial Crisis (GFC) of 2008/2009 --  is the Australian Government Guarantee on deposits.

Before buying a cash ETF, we think you should learn more about this relatively unique protection mechanism for Australians who deposit up to $250,000 in an approved bank. It may offer more security than buying a cash ETF. You can learn more about the Australian Government's deposit guarantee by clicking here.

We think you should consult a licensed, independent and trustworthy financial adviser if you need help understanding the guarantee.

What exactly does Fixed interest – Australia invest in?

BNDS invests in an actively managed, diversified portfolio of Australian bonds in an attempt to outperform the Bloomberg AusBond Composite Index over a rolling three-year period. BNDS invests across the full spectrum of Australian fixed income markets, including corporate, government, semi-government and supranational bonds, amongst others.

Sector risks

There are many risks to investing in Australian bond ETFs. You should always consult a licensed and trusted financial adviser before doing anything. This information is general information and should not be considered personal financial advice.

Here are some of the risks:

• Index risk - Unlike sharemarket indices (e.g. ASX 200), most bond market indices use an incredibly poor construction methodology. In the sharemarket, the biggest companies get a bigger weighting in an index because they are valued by their market capitalisation (number of shares x total shares). This rewards a company for growth. However, in the bond market, most indices use the total amount of debt to weight companies in the index. Meaning, companies with the most debt are the biggest part of the index (and hence part the index fund ETF). As you can imagine, lots of debt can be a bad thing!
• Liquidity risk - Unlike shares, some bonds trade infrequently. For example, many big pension funds or investors will buy a bond and never sell it (they'll just collect the coupon payments until it matures). A problem arises because ETFs need to let investors in-and-out (buy and sell) each day. If the ETF issuer can't buy the bonds in the index for you, they'll have to find other ways to provide the bond market exposure. Ultimately, this 'lack of liquidity' means the ETF's unit price can deviate from the value (NTA) of the bonds (called a "premium" or "discount"). For this reason, you need to pay careful attention to the ETF's discount and premium when you're buying or selling and consider sticking to reputable ETF providers. This risk tends to be worst during a market crash or a rapid recovery - when trading activity steps up.
• Concentration risk - Diversified portfolios balance their exposure across many different issuers, sectors, countries and credit ratings. That is, owning bonds issued by companies or countries from just one sector or geography can create unnecessary risk. In Australia, the bond market is heavily skewed towards corporate bonds. That is, bonds issued by big companies. And within the corporate bond sector, many of those bonds are issued by Australia's banks (Commonwealth Bank, ANZ, Westpac, etc.). If too much of a bond portfolio is concentrated towards one sector of the market, an investor may be overly exposed to risks only in that sector. That's we think it's best for bond portfolios to be evenly diversified across all markets, bond types, issuers, industries and credit ratings.
• Credit risk - Companies and countries that issue bonds are 'rated' by expert credit rating agencies (S&P, Fitch, Moody's, etc.). If there's a big chance the company/government could go bankrupt, the bond will have a lower/worse credit rating (e.g. CCC). The safest bonds are issued by stable governments and given a 'AAA' rating. "Junk bonds" are typically rated BBB- or lower and have a higher chance of default.

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What you need to know about BetaShares

BetaShares is one of Australia's largest ETF issuers, by number of ETFs issued on the ASX. At the end of 2018, Betashares had $6.1 billion of money invested in its ETFs.

BetaShares was founded in Sydney by a group of finance professionals who have a venture capital (VC) business called Apex Capital Partners. BetaShares was an 'in house' investment for Apex but grew quickly as ETFs took off.

Betashares is part-owned by Mirae Asset Global Investment Group, a specialist ETF business which manages nearly $130 billion.

$6b+ invested in BetaShares ETFs

BetaShares launched its first ETF in 2010 but has grown its ETF count rapidly to have around 50 ETFs in the market today.

BetaShares has issued index fund ETFs, rules-based ETFs and actively managed funds in an ETF wrapper. To launch its active funds, BetaShares teamed up with Legg Mason and AMP.

Potential allocation for BNDS

This ETF might be used as part of a 'tactical' or 'satellite' allocation in a diversified long-term portfolio because of its unique strategy, costs, risk-reward profile and the expectation of long-term returns.

What is The Core-Satellite Approach?

A core-satellite approach puts investments into two 'buckets' depending on the expected risk and returns.

Bucket 1: Core Investments

The 'core' is the larger part of an investment portfolio and could be reserved for more conservative investments. For example, this might include diversified, low-cost and easy to understand funds, bonds, shares or ETFs.

If you're new to investing, the core is a good place to start.

Core ETFs might include:

• Australian shares (index strategies)
• Australian bonds and global bonds
• Cash

Bucket 2: Satellite/Tactical Investments

The 'satellite' or tactical bucket is the smaller part of a portfolio (e.g. 0% to 30% of your entire portfolio). In this section, investors might decide to take more risk, invest in unique or unproven strategies, buy fast-growing individual shares, etc.

Tactical strategies could be higher risk, higher cost and more complicated strategies that are used in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).

Tactical ETFs might include:

• Australian shares (rules-based strategies)
• Global shares (rules-based strategies)
• Commodity ETFs
• Currency ETFs
• Cash ETFs
• Hedge funds

Typically, what is BNDS used for?

Investors could use the BNDS Fund to diversify an existing portfolio and gain exposure to Australian bonds, or to create a regular income stream from the monthly distributions offered by this ETF.

How do I invest in the Legg Mason Australian Bond Fund (Managed Fund) ETF ETF?

The easiest way to buy an ETF is through your online share brokerage account. Just search for the ticker code and buy it. The following podcast explains how to buy shares and ETFs for the first time.

Meaning, you can follow the exact same process for ETFs as you do for shares -- both can be purchased in one account.

Australian Investing 101

Don't have a brokerage account for ETFs?

Read our tutorial on understanding how share brokerage accounts work.

Is BNDS a good ETF?

We believe that knowing whether or not to invest in an ETF requires a lot of research, even for an ETF like this one. ETFs are long-term investments, so it's important to do the right amount of research into the ETF before you invest, and consider how it fits with your risk profile, strategy and the other investments in your portfolio.

Where you can go to find more research on this ETF:

Reports like this one on the Best ETFs Australia website were built to help you understand ETFs and to provide free access to news and research across all Australian ETFs, index funds and selected managed funds.

This report is the free version of our ETF reserach and it contains general information and should not be considered as a recommendation or personal financial advice. If you want to receive personal financial advice and have someone tailor the ETF research to you, you should speak to a financial adviser.

If you don't want to pay a financial adviser, here's what you can do:

• Before doing anything, you should always read the ETF's Product Disclosure Statement (PDS), which should be available on the ETF provider/issuer's website. The PDS explains some of the risks, the fees and other important information.

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Disclaimer: Any information contained in this report is limited to general financial advice/information only. The information should not be relied upon because it has not taken into account your specific needs, goals or objectives. Please, consult with a licenced and trusted financial adviser before acting on the information. Past performance is no guarantee of future performance. Nothing in this article should be considered a guarantee. Investing is risky and can result in capital loss. By reading this website, you acknowledge this warning, having read our Financial Services Guide (FSG) and agree to our terms & conditions available here. This article is authorised by Owen Raszkiewicz of The Rask Group Pty Ltd.