Australian Composite Bond ETF (OZBD) $45.16

This ETF provides broad exposure to fixed-rate bonds issued by high-quality Australian corporates along with the Australian Government. It won’t make us rich, but it’s a solid security that provides stability and yield in an income portfolio that seeks to generate consistent returns of 7%+ with substantially less volatility than the underlying share market i.e. the objective of the Market Matters Active Income Portfolio. ~26% of the portfolio is held in Australian Government Bonds, ~13% in State Government issuance, 32% in what is termed Supernational & Government-backed development banks, the Asian Development Bank an example where two or more member countries form an entity to promote development activities in a region – importantly, the bonds have the explicit Government guarantee of the member countries, and then the balance (~30%) is in Australian corporate debt.

While the running yield of ~3.2% and yield to maturity of 4.65% is not overly compelling when a 1-year term deposit is offering 4.5%, it’s the fixed-rate nature of these returns that are appealing as a hedge against future economic pain which would lead to aggressive rate cuts. In other words, this is one for the pessimists that want portfolio protection in the event that things sour from an economic standpoint.

Worth remembering that Hybrids which we also hold in this portfolio are floating in nature, so yields will fall if we go into a period of aggressive interest rate cuts. This is not our preferred scenario, however, preparing for the lower probability outcomes and having diversification in a portfolio will deliver more consistent returns over time.