Fund manager BetaShares has launched a fund that gives investors exposure to floating-rate notes issued by banks, with a pitch to investors that the fund will capture any upside when interest rates start to rise again.
The BetaShares Australian Bank Senior Floating Rate Bond ETF has been set up with the objective of tracking the performance of the Solactive Australian Bank Senior Floating Rate Bond Index, which is made up of the largest and most liquid floating rate bonds issued by Australian banks.
The bonds in the Solactive index are senior unsecured debt obligations of the debt issuer.
The fund is an exchange traded fund listed on the Australian Securities Exchange.
BetaShares says it expects the fund’s monthly payments to exceed the income paid on cash and short-dated term deposits, without the requirement to lock up capital. Because it is exposed to floating-rate securities, income will rise as interest rates rise.
At May 31, the fund’s running yield was 2.87 per cent. The management fee is 19 basis points and fund expenses are expected to be an additional three basis points.
BetaShares managing director Alex Vynokur says: “In the current environment of historically low interest rates we believe the case for investing in floating rate bonds is very compelling.
“In the United States, the Federal Reserve has raised interest rates twice in the past six months in an effort to return monetary policy to a more normal footing. In Australia, the last increase in the cash rate by the Reserve Bank was in November 2010.
“Australian investors now have access to an ETF that can be expected to deliver an increased total return, rather than decreased, during rising interest rate periods.”
A floating-rate bond (also called a floating-rate note) is a debt security that pays interest (or a coupon) linked to a variable reference rate – usually the bank bill swap rate. The coupon is set at a margin over the reference rate.
A floating-rate can pay a different amount at each payment date, depending on the movement of the reference rate.
An investor’s return from holding a floating-rate bond will also be affected by changes in the market price of the bonds, which are traded in the wholesale fixed income market. Changes in bond prices may result in a loss of value of the fund’s units.
Eighty per cent of the securities in the portfolio are bonds issued by the major banks – all rated AA-. Other issuers in the portfolio include Suncorp, Bendigo and Adelaide bank, Bank of Queensland, AMP Bank and Macquarie Bank. All securities are rated investment grade.
