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SMSF appetite for XTBs growing

SMSFs, particularly those close to or in retirement phase, are showing great interest in exchange-traded bond units (XTB) as they present an innovative way to gain access to the Australian bond market, which in turn helps to reduce portfolio risk.

“The demand for reliable income streams – the contractual nature of bonds makes the income stream more reliable than dividends – amongst those SMSFs in pension phase is strong,” Macquarie banking and financial services group chief investment officer and Owners Advisory founder John O’Connell told selfmanagedsuper.

“We have seen very strong interest in bonds from our clients as both a source of diversification within portfolios as well as for a stream of reliable income.

“The income stream aspect is more pronounced with SMSFs in the pension phase.”

O’Connell’s comments come after Macquarie yesterday announced it had added XTBs onto the OwnersAdvisory automated advice platform, reflecting the continued search for income in a low-yield environment by investors, in particular, SMSFs.

He also revealed SMSF investors’ key concern about XTBs was fully understanding their cash flows, just like any other investment.

“Admittedly, the contractual nature of fixed term bonds makes this easier to understand than an asset class where there is greater risk of the vagaries of the economy, equities for example,” he noted.

“Like all investments, there is still risk. In the case of bonds these risks include default risk, meaning a coupon payment is not made, for example, if the issuer was to fail. Mitigating this somewhat is XTBs are from highly rated issuers. [The other issue is] interest rate risk.

“If you decide to sell the bond before it matures, and if interest rates have risen, then you will need to take a capital loss to entice a buyer versus other bonds paying a higher coupon.

“In a nutshell, XTBs are an effective and elegant way for retail investors to gain access to the benefits of the wholesale Australian corporate bond market.”

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