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This commentary is written by Vanguard Principal, Corporate Affairs & Market Development Robin Bowerman. The title is Take-up of fixed-interest and high-dividend ETFs

It was first published on Thursday 19 July 2012

And is read by Michael Mullins

Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.

These are very early days on the Australian market for fixed-interest and high-dividend yield Exchange Traded Funds (ETFs).

The market capitalisation of the seven fixed-interest ETFs listed locally reached $93.25 million by the end of June 2012, reports the latest ETF Monthly Update, published by the ASX. These funds were launched between early March and late April this year.

And the market capitalisation of the four high-dividend yield ETFs listed in Australia has risen to more than $240 million, despite a difficult sharemarket. These funds were launched between May 2010 and May 2011.

These fixed-interest and high-dividend yield ETFs have entered the market when there is a particularly strong demand for income given the highly volatile sharemarket, degree of economic uncertainty and widespread aversion to risk among many investors.

When sharemarket volatility is high, more investors turn to fixed-interest investments as a means to reduce risk in their overall investment portfolio while earning a steady and reliable income.

Another key driver behind the take-up of fixed-interest ETFs would be their use as a means to rapidly and easily diversify or rebalance a portfolio at a low cost.

And when share prices have been falling or subdued, it is understandable that many investors choose to place a greater emphasis on income from shares paying high, tax-effective dividends. Of course, these shares – obtained directly or through managed funds such as the high-dividend yield ETFs – also hold the potential for long-term capital gains.

Returning to fixed-interest ETFs, a challenge for financial planners and ETF providers is to help investors better understand how fixed-interest investments can work to their advantage. Investors should know, for instance, how fixed interest can complement other popular forms of defensive investments – term deposits and high-interest savings accounts.

And it is important for investors to learn more about how to spread their risks and opportunities by investing in a diversified portfolio of bonds with a range of securities and maturity dates. Fixed-interest ETFs and other managed bond funds provide a means to access such portfolios.

And that concludes the column

Take-up of fixed-interest and high-dividend ETFs

from Robin Bowerman,  Principal, Corporate Affairs & Market Development at index fund manager Vanguard Investments Australia

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Please remember that advice in this podcast represents a general view. It is recommended that you seek specific financial advice, before making investment decisions.