A: Thanks for the question.

Firstly, I think that fixed interest securities should be part of most portfolios. In a growth portfolio, you would probably have around 70% of funds invested in growth based assets such as shares, property, commodities etc – and around 30% in income producing assets. 15% to 20% in fixed interest sounds about right – certainly no higher than a 20% weighting.

Bond ETFs? I think it comes down to index vs active – if you are comfortable with index returns, then bond ETFs make sense. If you prefer a more active style of management, then I would look at some of the bond funds around. Try names like AMP Capital.

A downside with bond ETFs is that you need to decide which part of the market you want to invest in, as most track particular indices. For example, Russell’s RGB, RSM and RCB track respectively government bonds, semi-government bonds, and corporate bonds up to 5 years. They have quite different characteristics, as shown by the modified duration and yield to maturity:

Modified Duration Yield to Maturity

RGB (Govt Bond) 6.13 years 2.66%
RSM (Semi-Govt) 3.37 years 2.52%
RCB (Corporate Bonds) 3.07 years 3.17%

iShares IAF tracks a composite bond index – in this case, providing exposure to the whole fixed interest market.

Because of the prime nature of the security, government bonds will typically have the lowest yield to maturity. They do, however, have a long duration. Corporate bonds, on the other hand, carry more credit risk and will accordingly, usually offer a higher yield.

How to invest in Bond ETFs?

This is what I would do. Unless I thought interest rates were going to come down or credit spreads were blowing out, I would probably by pass the Govt and Semi-Govt and invest (for the higher yield) in the Corporate Bond ETF. Either that or look at a broader base index such as that offered by IAF.