Tuesday 02 June 2015 by Elizabeth Moran Week in review

Introducing the new XTB units

First published in The Australian

This month exchange traded bond units (XTBs) were launched on the ASX as a way for retail investors to buy into the wholesale bond market. Investors buy units in a trust which invests in a single bond

An XTB sounds like the latest model Ford Falcon, but in reality it’s a way for retail investors to access the wholesale bond market.

Launched this month on the ASX, an XTB or exchange traded bond allows investors to buy units in a trust representing ASX50 companies’ wholesale bonds. There are 17 XTBs available that have maturity dates that range from July 2017 for a BHP bond through to November 2020 for a bond issued by Stockland.

Efforts to increase access to the bond market are welcome, as Australians are still under allocated to bonds by global standards and increasing options will help develop the market. Investors can now choose to invest direct or indirect through bond funds, ETFs and now XTB units.

The primary benefit of the XTB units is their very low minimum investment. Theoretically, you could invest in one of the XTBs for as little as $100. The bonds are generally low risk, defensive investments. If you chose to invest in an XTB, the investment will provide a half yearly income and should return $100 face value of the underlying bond at maturity. But it’s important to note XTBs are a unit trust structure which then invests in the underlying bonds.

XTBs allow investors to buy units in sub-trusts that hold single lines of bonds rather than multiple lines of bonds in ETFs. These units pay a distribution that coincides with the interest payments on the bonds which gives a more direct link to income generated by the bond than in a bond fund. In the world of investments, the closer an investor is to direct ownership the more control they have and the less their return is diluted. As with other unitised investments XTBs have the same liquidity and pooled investment constraints.

The 0.40% per annum fee charged by the securities manager on top of transaction costs of the market maker buying and selling the bonds mean returns are lower than buying bonds direct in the OTC market but possibly better than in a managed fund.

An investor has to do a bit of work to determine the return because the yields you can earn are not what are shown on the website. If you use the price shown on the ASX then go back to the XTB website and put it into their calculator, the yield will be less. A comparison of the rates of return on a sample of five bonds with rates FIIG offers revealed that in all cases direct ownership of the same bonds would yield a higher return to investors.

Key to investment is diversification. In terms of constructing a portfolio from the XTBs on offer, all are fixed rate and this concentration is a primary concern. Many of the XTB prices are higher than the $100 bond face value and should interest rates start to increase the price of the XTBs would likely fall and the value of your investment would also fall. But, no matter what happens to interest rates, holding the XTBs to maturity should result in a positive return.

A truly diversified portfolio should also have an allocation to floating rate and inflation linked bonds, to protect a portfolio under various economic conditions.

Investing in bonds through exchange traded funds and managed funds would improve diversity but investors forgo choice and lose the benefits of known income and a maturity date. XTB units provide more transparency however direct bond investment gives you better control and complete transparency.

Disclaimer

The contents of this document are copyright. Other than under the Copyright Act 1968 (Cth), no part of it may be reproduced or  distributed to a third party without FIIG’s prior written permission other than to the recipient’s accountants, tax advisors and lawyers for the purpose of the recipient obtaining advice prior to making any investment decision. FIIG asserts all of its intellectual property rights in relation to this document and reserves its rights to prosecute for breaches of those rights.

Certain statements contained in the information may be statements of future expectations and other forward-looking statements. These statements involve subjective judgement and analysis and may be based on third party sources and are subject to significant known and unknown uncertainties, risks and contingencies outside the control of the company which may cause actual results to vary materially from those expressed or implied by these forward looking statements. Forward-looking statements contained in the information regarding past trends or activities should not be taken as a representation that such trends or activities will continue in the future. You should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Opinions expressed are present opinions only and are subject to change without further notice.

No representation or warranty is given as to the accuracy or completeness of the information contained herein. There is no obligation to update, modify or amend the information or to otherwise notify the recipient if information, opinion, projection, forward-looking statement, forecast or estimate set forth herein, changes or subsequently becomes inaccurate.

FIIG shall not have any liability, contingent or otherwise, to any user of the information or to third parties, or any responsibility whatsoever, for the correctness, quality, accuracy, timeliness, pricing, reliability, performance or completeness of the information. In no event will FIIG be liable for any special, indirect, incidental or consequential damages which may be incurred or experienced on account of the user using information even if it has been advised of the possibility of such damages.

FIIG provides general financial product advice only. As a result, this document, and any information or advice, has been provided by FIIG without taking account of your objectives, financial situation and needs. Because of this, you should, before acting on any advice from FIIG, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If this document, or any advice, relates to the acquisition, or possible acquisition, of a particular financial product, you should obtain a product disclosure statement relating to the product and consider the statement before making any decision about whether to acquire the product. Neither FIIG, nor any of its directors, authorised representatives, employees, or agents, makes any representation or warranty as to the reliability, accuracy, or completeness, of this document or any advice. Nor do they accept any liability or responsibility arising in any way (including negligence) for errors in, or omissions from, this document or advice. Any reference to credit ratings of companies, entities or financial products must only be relied upon by a ‘wholesale client’ as that term is defined in section 761G of the Corporations Act 2001 (Cth). FIIG strongly recommends that you seek independent accounting, financial, taxation, and legal advice, tailored to your specific objectives, financial situation or needs, prior to making any investment decision. FIIG does not provide tax advice and is not a registered tax agent or tax (financial) advisor, nor are any of FIIG’s staff or authorised representatives. FIIG does not make a market in the securities or products that may be referred to in this document. A copy of FIIG’s current Financial Services Guide is available at www.fiig.com.au/fsg.

An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.

The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.