Selecting XTBs by YTM
A basic approach to portfolio construction is to rank the bonds or XTBs by yield and pick the top yielding ones.
For example, the top 8 XTBs would make a portfolio with an average yield of 3.87%*
|ASX CODE||UNDERLYING BOND ISSUER||MATURITY DATE||COUPON TYPE||COUPON P.A.||INDICATIVE YIELD*|
|YTMAWC||Alumina||19 NOV 2019||FIXED||5.50%||4.881%|
|YTMDOW||Downer||11 MAR 2022||FIXED||4.50%||4.044%|
|YTMQF3||Qantas||19 MAY 2022||FIXED||7.75%||3.884%|
|YTMAZJ||Aurizon||28 OCT 2020||FIXED||5.75%||3.856%|
|YTMQF2||Qantas||11 JUN 2021||FIXED||7.50%||3.792%|
|YTMLL1||Lend Lease||13 MAY 2020||FIXED||6.00%||3.602%|
|YTMQF1||Qantas||27 APR 2020||FIXED||6.50%||3.555%|
|YTMIPL||Incitec Pivot||21 FEB 2019||FIXED||5.75%||3.374%|
* Data as at 06 JUL 2016
This approach doesn’t take any other factors into account.
As you’ll see there is a wide range of available yields, and a general relationship between yield and tenor, or time to maturity. Longer dated bonds usually have higher yields than shorter dated bonds of the same credit quality.
The wide range of XTBs creates an investment choice:
- Do we just pick the top 8 or 10 from the list ranked by yield?
- Or should we also consider other factors like credit risk, or interest rate risk and take time to maturity into account?
Plotting yields versus maturity dates shows you the general relationship between yields and term to maturity (While these bonds are all investment grade, there will also be some differences between the yields, because of the different credit ratings of the issuers. For example, NAB is a lower credit risk than Qantas).
XTB YTM vs Maturity Date scatter chart
Other ways to narrow your selection
There are a number of other filters you can use to narrow your selection. Some of these include: