The launch of exchange traded bond funds in the Australian market significantly lagged their equity counterparts. There were a lot of ropes to jump, balls to juggle and hoops to hula. Personally, I find an index-tracking fixed income ETF perplexing – why track an index in which the highest weighting is given to the securities with the greatest debt and, potentially, the greatest risk?
As the fintech revolution continues a-pace, the door has opened to a range of innovative products, including the subject of this blog, XTB – a business that has brought investment in corporate bonds within the reach of the average investor.
Why corporate bonds?
My last blog, What is Fixed Income looked at fixed income and how it works, so I’m not going to cover old ground. Suffice to say, corporate bonds share many characteristics with other forms of fixed income…the main differentiator being that they are issued by companies rather than governments or statutory bodies. As a result, corporate bonds can have widely disparate risk profiles, largely linked to financial stability of the business that issues them.
Australian companies can raise money via equity (issuing shares) or debt. This can take two forms – borrowing from the bank or issuing bonds.
Consider two business: a big four bank versus a small resources company. Both issue bonds to raise money. You’d expect the risk profile of the bank to be much lower and, likewise, the interest coupon attached to the investment.
While many corporate bonds have a coupon that is fixed, other have ‘floating’ coupons pegged to an industry benchmark that offers investors a fixed margin above that benchmark. For example, a floating rate that tracks the Bank Bill Swap Rate (BBSW) and offers investors 0.75% above this rate would have a coupon referred to as BBSW + 0.75%.
What are XTBs?
The brainchild of the Australian Corporate Bond Company (ACBC), XTBs (Exchange Traded Bond units) provide individual investors with access to the returns of individual corporate bonds; they’re securities traded on the ASX that bring together the predictable income from corporate bonds with the transparency and liquidity of the ASX market.
Usually the domain of institutional investors, retail investors could only, until now, access corporate bonds via an actively managed fund or a more passive fixed income index fund or ETF. Investors certainly could not pick and choose which corporate bonds they’d like to buy in the same way they can choose shares.
Buying XTBs on ASX is just like buying shares or exchange traded funds; call your broker or buy through a low-cost online broker such as OpenMarkets.
XTBs provide investors with the income and capital repayment of specific corporate bonds – think Telstra, Woolworths or BHP. The performance of each XTB closely follows their individual bond counterpart in the wholesale market. Each XTB has the same maturity date and coupon payment frequency as its corporate bond – for example, a 3-year corporate bond with a coupon of 5% translates to a 3-year XTB with a coupon of 5%.
Once an investment decision has been made, the order for an XTB is executed in the same way as for other ASX-traded securities; transactions are settled through CHESS and each XTB is listed on the investor’s CHESS account.
It’s as simple as that.
An idea that’s gaining traction…
XTB trading recently reached the $100 million milestone. The prevailing low interest rate environment world-wide, coupled with the continued GFC hangover, is driving the need for higher-yielding, lower volatility products. XTBs over corporate bonds are a relatively stable and predictable income-generating security.
With financial institutions struggling to offer three percent on the average term deposit, XTBs outstrip the humble TD, without the price volatility of other income generating investments, such as shares and hybrids.
ACBC currently offers 39 XTBs, six floating-rate and 33 fixed-rate, across a broad range of familiar ASX-listed companies, including:
|UNDERLYING BOND ISSUER||MATURITY DATE||COUPON TYPE||COUPON % P.A.|
|AGL ENERGY||5 NOV 2021||FIXED||5.00|
|ALUMINA||19 NOV 2019||FIXED||5.50|
|AMP||6 JUNE 2018||FLOATING||BBSW + 0.87|
|BANK OF QUEENSLAND||12 JUNE 2018||FIXED||4.0|
|BANK OF QUEENSLAND||12 JUNE 2018||FLOATING||BBSW + 1.00|
|BHP||18 OCT 2017||FIXED||3.75|
|BHP||30 MAR 2020||FIXED||3.00|
|NAB||20 MAY 2019||FIXED||4.25|
|NAB||20 MAY 2019||FLOATING||BBSW + 1.00|
|QANTAS||19 MAY 2022||FIXED||7.75|
|SUNCORP||23 APRIL 2019||FLOATING||BBSW + 1.10|
|TELSTRA||15 JULY 2020||FIXED||7.75|
|WOOLWORTHS||21 MAR 2019||FIXED||6.00|
And all of this is available on the familiar and convenient environment of the ASX!
The nitty gritty
The yield and price of each XTB will reflect the yield and price of the underlying bond, after fees and expenses. For fixed-rate XTBs, the fees are 0.4% of the face value of the bond for the life of the bond, and 0.2% for floating-rate XTBs.
The great thing about XTBs is the parcel size; you can invest as little as $100 in each XTB you select (broker dependent). This gives you the control to build the corporate bond portfolio of your choice to meet your – or your client’s – investment objectives.
Financial advisers recommending XTBs can create a portfolio or use one of four XTB model portfolios that have been created to meet different objectives. Alternatively, the XTB website offers an interactive cash flow tool that enables you to build a bespoke XTB model portfolio and map its cash flows. That way, you can be sure to meet your clients’ income needs.
XTBs are yet another great example of a business using technology to make investment more accessible, at a reasonable price, to all investors. Keep it coming!
For more information about XTBs visit xtbs.com.au