Australia Bond ETF Showdown: AUNZ vs. AUD - Top Yielding ETFs
05 Diciembre 2011 - 4:17AM
Zacks
As the American economy continues to sputter and the European
crisis remains in the spotlight, heavy bond investments in either
area seems like an unwise proposition. Yields remain pathetically
low on U.S. debt while European securities are all over the place;
German bonds offer next to nothing for payouts while peripheral
nations are spitting out impressive coupon payments but face
significant risks from a capital preservation perspective. Given
these realities, many investors have decided to look to other
regions for their bond exposure, helping to diversify holdings in
this key component of a portfolio.
Unfortunately, options remain limited for those focusing in on
developed markets. Canada remains heavily tied to the U.S. while
Japan has budget issues of its own and isn’t exactly paying out
double-digit yields either. Other Asian nations, such as Singapore
or Hong Kong, remain much too small for huge investments, leaving
many investors with only one option; Australia.
Australia, and to an extent New Zealand as well, represent a
large market for developed market investors in a relatively strong
and uncorrelated region of the globe. The area remains a commodity
powerhouse, has low exposure to the European debacle, and Australia
is rated AAA by all the major issuers. While one might think that a
region with such fundamentals have extremely low yields, this isn’t
really the case as both Australia and New Zealand have benchmark
rates far higher than those in other corners of the developed
world. In fact, Australia’s benchmark rate is a whopping 4.5%, 18
times higher than the current rate in the U.S. (see German
Bond ETFs In Focus)
This reality has led to a new push by ETF issuers to offer
greater exposure to the space and has resulted in the recent launch
of two Aussie-bond focused funds for American investors. These two
funds, AUNZ and AUD, while still brand new, could see a great deal
of inflows as investors move towards higher yielding, but still
extremely safe, securities in the developed world. Furthermore, the
funds could interest from those looking to escape the European
crisis to an extent or those that are just looking to spread bond
assets around in the same way that they already do with their
equity holdings (see Top Three High Yield Real Estate ETFs).
For these investors, a closer look at the two options is
necessary as both products have several similarities including a
related focus as well as the same expense ratio of 45 basis points.
Yet while they might seem similar on the surface, there are still
several key differences that investors need to be aware of before
choosing one for their portfolio, a number of which we have
highlighted below:
WisdomTree Australia & New Zealand Debt Fund
(AUNZ)
AUNZ is the slightly older product of the two, having beaten
PIMCO’s product to the punch in the Oceania bond space. The fund
doesn’t track an index but rather seeks a high level of total
returns made up of both income and capital appreciation. This is
done by investing in debt securities that are denominated in either
Australian or New Zealand dollars with a heavy focus on government
bonds (read November ETF Asset Report: Bond ETFs Are Big
Winners).
In fact, the portfolio of AUNZ looks to be roughly equally
allocated between three sectors; government bonds, semi-government
bonds, and supranational bonds. Australian government bonds
dominate the list of top holdings although a few supranational
issues— denominated in Aussie dollars—also find their way into the
top ten as well. New Zealand bonds, however, make up about 11% of
the portfolio helping to juice the overall return of the fund since
these securities tend to have higher rates than their Australian
cousins. Nevertheless, the 30 Day SEC Yield of AUNZ is about 3.75%
with an effective duration of just under 4.2 years. This yield is
far higher than similar American or European products which have a
duration as low as this WisdomTree fund, suggesting that investors
may get a bigger bang for their buck in this product when compared
to other Western nations.
PIMCO Australia Bond Index Fund (AUD)
For investors seeking a play focused on the broad Australia bond
market, AUD could be a way to go. The fund tracks the BofA Merrill
Lynch Diversified Australia Bond Index which tracks the performance
of large, Australian dollar denominated investment grade debt
instruments publicly issued in the Australian domestic market,
including sovereign, quasi government, corporate, securitized and
collateralized securities.
The current portfolio consists of 30 securities with top
weightings going to a variety of Australian government institutions
including local governments and bonds due from the Federal Republic
of Australia. However, unlike AUNZ, this PIMCO ETF doesn’t allocate
anything to New Zealand bonds and does use Aussie corporates in its
basket. Bonds from companies such as Telstra and HSBC Bank make
their way into the top ten holdings of AUD and, much like the New
Zealand bonds in AUNZ, these securities help to juice the overall
yield of the fund. Nevertheless, this leads AUD to have a yield
slightly lower than its WisdomTree counterpart at 3.61% but it also
helps to give the fund a lower effective duration of just 4.05
years (also read Forget FXI: Try These China ETFs Instead).
This suggests that for investors seeking the highest yield
possible, AUNZ could be the best choice thanks to its slightly
higher payouts. Additionally, investors may prefer AUNZ if they are
looking to tap into New Zealand bonds as well, diversifying across
the region. However, for investors seeking an option with lower
interest rate risk and the inclusion of corporate bonds, AUD seems
like the better choice. The fund does a nice job of including all
types of bonds in Australia and the exclusion of the AA+ rated New
Zealand in favor of the AAA Australia could serve to further limit
the risk of this fund. Either way, both products look to do a nice
job of offering investors exposure to the space. Just remember,
while the funds may seem identical, they have several key
differences that should easily help investors differentiate between
the only two Australia bond ETFs on the market today.
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