As many of our readers may have noticed, there are a number of new ETFs being offered in the bond and cash space over the last six months. The latest income-focused ETF to officially start trading on the ASX is the VanEck Vectors Australian Floating Rate ETF (ASX: FLOT) which started trading last Friday.
In the last three months we have seen six income focused ETFs listed on the ASX, taking the total number of ETFs listed on the ASX to twenty-three. Cash and fixed-interest ETF sector now accounts for around $3.1 billion of funds under management. A full listing can be found in our ETF table.
The majority of the recent ETF listings have investment strategies focused on cash and floating-rate assets. These products have no doubt been manufactured for those investors who do not believe that there will be a contraction in yields any time soon and who also expect interest rates and yields to head north.
Historically, SMSFs and retail investors have not been able to easily access this part of the bond market, with most ETFs having been focused on the fixed-income space. Fixed-income ETFs, due to the nature of their underlying exposures, deliver both positive and negative capital movements (depending on whether interest rates rise or fall).
Cash and floating-rate ETFs will be attractive to those investors who prefer capital stability and don’t want to be caught short on downward capital movements when rates rise, which is what happens with fixed-interest funds.
Christopher Joye, from SmarterMoney Investment, recently pointed out the reduced volatility in a portfolio of floating rate bonds versus a portfolio of fixed rate bonds. “A portfolio of Australian floating-rate bonds has one-sixth the volatility, or return variation, of a portfolio of five-year fixed-rate bonds provided by the same companies precisely because the value of the latter move wildly up and down depending on where punters think rates are heading.”