Vanguard Australian Fixed Interest Index ETF (ASX:VAF)
- Name: Vanguard Australian Fixed Interest Index ETF
- Ticker code: VAF
- Issuer: Vanguard
- Management Expense Ratio (MER): search our complete list
- Exposure: Australian Bonds
- Potential allocation: Core
What Does VAF Do?
The Vanguard Australian Fixed Interest Index ETF (ASX: VAF) invests in high-quality, income-generating securities issued by Federal and State Governments, treasury corporations and investment-grade corporate issuers.
What Is VAF Used For?
The prices of bonds are typically inversely related to interest rates. In other words, if interest rates go up, a bond will be worth less; and if interest rates go down, a bond will be worth more.
Bonds are also used by investors who want to receive a consistent stream of income, as most bond investors receive a ‘coupon’, which is like a regular interest payment.
What VAF Invests In
The VAF ETF seeks to track the return of the Bloomberg AusBond Composite 0+ Yr Index, which is designed to measure the Australian debt market.
As such, the VAF ETF invests in a huge basket of predominantly Australian bonds issued by the government (called “treasuries”) and semi-government bodies (e.g. State Governments). The rest of the ETF is split across other types of issuers like financial companies (e.g. bonds issued by the big banks), foreign organisations issuing bonds in Australia and utility companies.
Vanguard Australia is one of Australia's largest ETF providers, both by number of ETFs and total money invested (called 'funds under management'). Part of the global Vanguard Group Inc, Vanguard's history dates back to the mid-1970s.
Globally, Vanguard has nearly $7 trillion invested in its ETFs and unlisted index funds. It also offers rules-based investment strategies -- Vanguard calls them 'active strategies' but we categorise them as rules-based.
Vanguard Group Inc manages nearly $7 trillion of investor money
One of the things that makes Vanguard unique in the finance industry globally is that it is investor-owned ("mutual"). The US-based Vanguard Group Inc is, therefore, funded by the very investors it serves.
We believe this unique ownership structure is one of the key reasons why Vanguard has become the global leader in low-cost ETFs and index funds and will continue to be so.
The bestETFs Australian Bonds and Cash sector includes ETFs, managed funds and index funds which cover the 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.
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.
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.
The benchmark data for the Australian Bonds and Cash ETF sectors is currently being updated by our ETF experts.
Please check back here in coming weeks... or tell us what you think about our website and bonds and cash ETFs by using our Contact page (click here).
There are many risks to investing in Australian bond ETFs. Here are some of the risks (note: it's not a complete list):
- 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 an 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.
We believe this ETF should be used as part of a 'core' allocation in a diversified long-term portfolio because of its diversified and transparent investment strategy, low costs, risk profile and the expectation of long-term returns.
What is The Core-Satellite Approach?
When you're investing in ETFs or managed funds, we think it's a good idea to consider breaking up your overall investments into two 'buckets':
Bucket 1: Core Investments
The 'core' is the larger part of your investment portfolio and could be reserved for a few different ETFs, blue-chip shares and/or managed funds. For example, you might have three diversified, low-cost and easy to understand ETFs in the 'core' of your portfolio. Each ETF might have between 20% and 30% of your money.
If you're new to investing, the core is a good place to start.
Core ETFs might include:
Bucket 2: Satellite/Tactical Investments
The 'satellite' or tactical bucket is the smaller part of your portfolio (e.g. 0% to 30% of your entire portfolio). In this section, you might decide to take more risk, invest in unique or unproven strategies, buy fast-growth individual shares, etc.
Tactical strategies could be higher risk, higher cost and more complicated strategies that you use in the hope of outperforming the averages (e.g. ASX 200, S&P 500, etc.).
Tactical ETFs might include:
The bestETFs website currently provides free access to a database of Australian ETFs, index funds and (soon) selected managed funds. If you want to access our top Australian ETF picks and research (for a small fee), please click here to learn more.
How do we pick ETFs?
All of the selected ETFs in our model portfolio must meet our strict criteria before we'll consider recommending them.
To learn more about our research and access the bestETF model portfolio, please click here.
For our #1 ETF idea of 2019, please click here (free).
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What Is An ETF?
Investing in an Exchange Traded Fund or ETF is typically a way to buy a tiny slice of many different shares, bonds or currencies with one investment. Technically, ETFs are 'funds' or legal 'trusts' which allow investors to pool their money together in one place and invest in the same strategy.
What Is An Index Fund?
An index fund is a type of 'managed fund' which pools money in one place and follows an index. For example, an ASX 200 index fund buys all 200 shares included in the S&P/ASX 200 index maintained by Standard & Poor's.
What's The Difference Between An 'Active' and 'Passive' Investment?
Traditionally, 'active' investors pick individual stocks they think will outperform the market (e.g. ASX 200 index). For example, an 'active' fund manager would pool investors' money together and invest that money in their best stock ideas.
'Passive' investors are investors who buy into standard index funds, like one that follows the ASX 200 or USA's S&P 500. These are also run by fund managers but they don't use their 'skills' or 'analysis' to pick individual stocks. Instead, they invest in the entire market and investors benefit from the growth of all companies, on average.
What Are Rules-Based Investments?
In recent times we've witnessed the emergence of 'rules-based' or 'smart beta' investment strategies, which are kind of in-between active and passive.
Typically, these strategies use automated rules to invest with strategies covering stocks/shares, bonds/fixed income, currencies, commodities (e.g. gold) and derivatives contracts (e.g. options). For example, a rule might be 'buy this share if XYZ happens' or 'sell that share if ABC is true', etc..