Exchange-traded bonds can provide certainty in a portfolio otherwise prone to volatility and rising interest rates, says fixed income firm XTB.
Speaking in Sydney yesterday, XTB chief executive Richard Murphy said exchange-traded bonds (XTBs) and term deposits can provide investors with an element of predictability – unlike investments such as shares, ETFs or property trusts which are unable to provide a guaranteed outcome.
“There’s certainty upfront with term deposits, and you also get that with bonds,” he said.
“If you invest in a bond, you know you’re going to get $100 back at maturity, and you’re going to get 4 per cent, 3 per cent, 6 per cent, whatever the coupon rate is for that bond.”
This element of providing certainty was most important for investors dependent on their investment returns, Mr Murphy said.
“[For] all those investors that actually rely on their income to live on, so non-salary people, predictability is extremely important,” he said.
“We get, all the time, younger investors through their advisers not as interested in predictability part of it, but [for] older investors, most certainly the predictability is critical and that's the reason they’re not moving out of the term deposit.
“They know exactly what they’re going to get and they don’t want to move into equities where obviously the predictability is very, very low.”
Further, the returns of bonds did not fluctuate with spikes or drops in interest rates, Mr Murphy said.
“Let’s say interest rates rise and you’re holding 10 [...] corporate bonds, three-four years into maturity, and rates suddenly shoot up in the next year and the year after and the year after,” he said.
“If I’m owning a managed fund or ETF, there’s nothing really I can do about it, other than just sell out. It’s not like I’m going to be able to hold it to maturity – it never matures, it just goes on and on,” he said.
“Whereas if I’m holding the bonds and next year the first interest rate rise occurs, I can just decide to say, ‘well, I’m just going to hold to maturity, and that interest rate doesn’t affect me whatsoever because I liked the deal on day one’,” he said.
“Interest rates can shoot up, drop dramatically, and the $100 you’re owed is the $100 that you’re owed.
“That is a very critical distinction.”