Question 1: As interest rates are cut, bond yields should fall, and bond prices increase. Could you please suggest any ASX-listed exchange traded funds (ETFs) that should capture the anticipated capital value of bonds as rates are cut?
Answer: Bond yields in Australia have already fallen. Not as much as in the USA, but a reasonable amount. The Australian Government 10-year bond touched 4.55% around Anzac Day. Today, it is a fraction under 4% (3.97%). Our bond yields tend to be highly correlated to the USA. That’s not to say that they can’t (and won’t) fall further, particularly if the RBA gets aggressive on cutting interest rates and inflation falls. It is very easy to invest in the bond market through an ETF. The picks are probably VAF (Vanguard Australian Fixed Interest) or IAF (iShares Core Composite Bond). Both track the benchmark index, are low cost, and have a long duration. Duration (in years) is the best measure to look at (if you think yields are going to fall). There has already been some appreciation in the prices of these ETFs. VAF was trading at $44.41 per unit around Anzac Day, today it is around $46.02. Likewise, with IAF, from $99.75 per unit to $102.64 per unit over that period.
Question 2: Is there an ETF on the ASX for the Russell 2000, the major US index for mid and small caps?
Answer: Unfortunately, there is no ETF listed on the ASX that tracks the Russell 2000 index.
Question 3: I have a SMSF and am looking to add an EFT that pays a quarterly distribution and has franking credits. Are there any that have a yield around 5% and 100% franking credits?
Answer: I don’t know of too many ETFs with a forecast yield of 5% or higher, let alone are fully franked. Yields have dropped as share prices have risen, and with the effective abolition of off-market buybacks, franking levels have come down. Try Vanguard’s Australian Shares High Yield ETF (ASX: VHY). It has about 66 stocks and tracks the FTSE Australia High Yield Index. This index comprises stocks that have a higher forecast dividend yield than the market, but with carve outs to limit sector concentration and no REITs (real estate Investment trusts). It pays distributions quarterly, has a low management fee of a 0.25% pa, a forecast yield (as at 31 July) of 4.8% and franking at around 78%.
Question 4: How is it possible to protect against significant drops like that experienced by Megaport (MP1) the other day, a 20% downward movement on open. I set a stop loss 5% below the prior day close before it opened on the day, but because it dropped 20%, on open stop loss order was bypassed?
Answer: Regrettably, it is almost impossible to protect against an overnight (gapping) movement. Where the stock closes, and opens the next day, are not directly related. Stop losses really only work during the day when the market is continuous. If you own one of the more liquid stocks, you could potentially buy a put option. This provides “continuous” protection, but only up until the time the option expires. Put and call options are typically only available on the top 50 or so stocks.
