The BetaShares Australian Government Bond ETF (AGVT) will track a Solactive index of long duration government bonds.
To qualify, bonds must be AUD denominated and fixed rate, with a term to maturity of 7 - 12 years. Three quarter of the portfolio will go to bonds issued by the federal and state governments. The remaining 25% will go to bonds from issuers other than Australian governments. (i.e. government-related banks and supranational organisations).
AGVT will be the fifth such ETF to track Australian government bonds. The fund will charge 0.22%, in line with its competitor from State Street. Most interestingly, the effective duration of AGVT will be 7.8 years, BetaShares website indicates. This is much longer than its competitors and should put it in good stead of interest rates continue falling.
|Ticker||Fund Name||TER (% p.a.)||AUM ($M)||Effective duration (years)|
|GOVT||SPDR S&P/ASX Australian Government Bond Fund||0.22||19.6||6.5|
|RGB||Russell Australian Government Bond ETF||0.24||70.7||7.1|
|IGB||iShares Treasury ETF||0.26||143.9||6.5|
|VGB||Vanguard Australian Government Bond Index ETF||0.20||295.9||6.1|
Analysis – longer duration is smart
The defining difference of today’s listing is BetaShares decision to take more duration risk. It strikes me as the right decision.
Broadly speaking, buying long term bonds has been a good trade in recent years. As interest rates globally have fallen, duration has paid off and credit spreads have continued tightening.
ETF providers peddling short duration bond ETFs (and plenty of active bond managers) argue that this trend might reverse. That is, that central banks might – however gradually – withdraw stimulus and raise interest rates, providing a boon for contrarian traders. They also argue that it can pay to be in short duration products when the term premium is negative. (As the 10YR Treasury is now in the US).
For my part I’m more on BetaShares' side. To me, central banks across the world have made it clear that they will use every tool at their disposal to stop asset prices, including bonds, from falling. If this means taking interest rates to zero, then that’s what they’ll do. If interest rates do slowly creep to zero, then bingeing at the duration bar is a good place to be.
Image: Alex Vynokur. Supplied