With governments around the world sending interest rates steadily to zero – and in some cases even lower – investors have turned the planet inside out in their hunt for yield.
One hunting ground that's growing in popularity is long maturity government bonds. These are bonds that mature over decades, meaning investors have to wait a long time – in some cases a lifetime – to get their money back.
These bonds are thought to be riskier, and as such are rewarded with a higher yield.
TickerFund NameExpense ratioGGOVBetaShares Global Government Bond 20+ Year ETF0.22%
But while long maturity government bonds – and ETFs that buy them – have picked up in the US, they've yet to truly take off in Australia.
BetaShares is listing Australia's first - and also the world's first - bond ETF that invests exclusively in G7 debts with 20+ year maturities.
The BetaShares Global Government Bond 20+ Year ETF (GGOV), which begins trading on the ASX tomorrow, will track an index of sovereign bonds with maturities greater than 20 years issued by G7 countries.
The G7 countries are: USA, Japan, Germany, United Kingdom, Italy, France and Canada.
TickerRunning yieldModified durationGGOV1.83%21.3
Bonds with negative yields are excluded from the index.
The fund buys bonds issued in local currencies. It then hedges exposure back into Aussie dollars. It does this in order to reduce any effect that a rising Aussie dollar may have on yields.
The fund will be extremely sensitive to interest rates. GGOV's duration – the measure most commonly used to predict interest rate sensitivity – is 21 years. This means that if interest rates in every G7 country rise by 1%, the fund's value could fall around 21%.
While some bond ETFs – such as Vanguard’s EDV, which is listed in the US – also invest exclusively in ultra-long maturity bonds, GGOV will be the world’s first to target ultra-long maturity G7 bonds.
BetaShares pursued a similar strategy last year when listing its Australian government bond ETF.
According to Alex Vynokur (pictured), chief executive of BetaShares, the fund is targeting institutional investors, as befits the fund's small fee.
While institutional investors can use futures for bond index coverage, Vynokur says there are fewer options available to them for global ultra-long maturity.
“We have had some very interesting conversations already with institutional clients,” he says.
“Institutional clients are able to use futures...[but at] the ultra-long duration end there is actually not that much available in the futures space, which is definitely quite interesting. They are also not available for every market.”
Vanguard and BetaShares dominate in first quarter
The fund should also prove useful for investors concerned about the disappearance of yield on G7 debts.
The disappearance of yield has proved particularly difficult for global pension funds which lean on blue chip dividend paying stocks and hard currency bonds in order to support pensioners.
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