XTBs are a financial product that provides easy access to the returns of individual corporate bonds. They open up an asset class that has traditionally been hard to reach for everyday investors.
In these times of greater market uncertainty, defensive assets that deliver regular and predictable income can be more important than ever. Today, financial advisers and investors are using corporate bond XTBs to provide income and predictability in their investment portfolios.
Investing in corporate bonds used to be limited to those with large sums to invest. Everyday investors generally had to access them via pooled investments such as bond ETFs, LICs or managed funds. This route removed some of the predictability bonds should offer. Now corporate bond XTBs make it easy to add the benefits of corporate bonds to your portfolio.
You can invest in XTBs over some of Australia’s biggest ASX-listed businesses and can start by investing just a few hundred dollars. XTBs make it easier than ever to incorporate the benefits of specific corporate bonds into your portfolio.
How XTBs work
XTBs represent a fraction of a corporate bond traded on ASX
A company issues a corporate bond, raising capital to finance its operations. Minimum investment amounts are typically $250,000, putting them out of reach of many investors.
XTB’s parent company instructs the XTB market maker to buy the corporate bonds in the wholesale market. The bonds are transferred to the Australian Corporate Bond Trust, which issues XTB units with a $100 face value and prices quoted on ASX.
Investors can purchase XTBs through any broker that trades securities on ASX – the process is the same as purchasing shares. Each XTB has a unique 6-digit ticker code, starting with the letters ‘YTM’. e.g. the AGL XTB has a ticker code of YTMAGL.
The XTB mirrors the coupon payments of its underlying bond. XTB investors receive the same regular coupon payments throughout the life of the bond that a holder of the bond itself would receive. This provides a predictable source of income.
XTBs are generally a buy and hold investment – most investors choose to keep them until they mature. Each XTB matures at $100 – investors receive $100 back for each XTB unit they hold. They can also be sold on ASX before maturity, if needed.
XTBs are available over a range of bonds trading in the wholesale market. From time to time ‘primary XTBs’ will also be available. Primary XTBs will make new bond issues available to ASX investors on, or close to the day of issue.
Watch our 2-minute XTB explainer video to learn more about how XTBs work
XTBs are well-established:
traded on ASX
coupon payments made
returned at maturity
How do XTBs generate income?
As an XTB holder, your money is working for you in three ways:
1. Regular coupon return
A key benefit of corporate bond XTBs is the predictability of the income they generate.
Each XTB has a fixed coupon schedule. For fixed-rate bonds, coupons are generally paid twice a year and coupon amounts are always the same. A change in interest rates or market volatility has no impact on the coupons received. This provides investors with a level of predictability not offered by many investments. XTB investors can predict their investment returns BEFORE they invest.
2. Return of face value at maturity
At maturity the corporate bond’s face value is returned to the investor. Each XTB unit has a face value of $100 – investors receive $100 for each XTB unit they hold at maturity. Also, by holding to maturity investors only pay brokerage to buy their XTBs on ASX – there’s no cost to sell when you hold your XTB until its maturity date.
3. Trading out on ASX
Unlike some fixed income products, XTBs also offer flexibility if needed.
As an ASX-traded instrument, XTBs can be traded through any broker. If your situation changes, your capital isn’t locked up and inaccessible.
How do XTBs compare to other investments?
Each type of investment carries a different balance of risk and return.
One important thing to remember is that more return ALWAYS equals more risk.
As a fixed income investment, XTBs play a defensive role in your investment portfolio. The underlying bonds for XTBs are generally issued by ASX 200 companies. These tend to be lower-risk and offer predictable returns at the lower end of the investment mix.
The risk vs return chart below demonstrates where each type of investment fits on the risk vs reward spectrum.
Where do XTBs fit in a portfolio?
Institutional investors have long known of the stabilising benefits of corporate bond returns in a well-structured portfolio.
Examine a typical institutional portfolio and it’s clear to see that corporate bonds make up a significantly larger proportion for the professionals than for most retail investors:
Source: AustralianSuper Balanced Conservative Portfolio, August 2020
In these times of heightened equity market volatility, your portfolio can benefit from the stabilising effect of corporate bond returns too. XTB prices may still fluctuate over time, but by holding to maturity they offer predictability and add resilience to a portfolio.
Enhanced Income potential
In these times of ultra-low rates, every single basis point of return counts
One look at term deposit rates from the Big 4 and it’s clear to see that rates have fallen considerably in recent times. Adding corporate bond XTBs alongside your term deposit and cash holdings could make your money work harder. This could provide a an uplift in your return, without substantially increasing your risk profile:
Source: Canstar 14 Dec 2020, $10,000 investment in top 4 bank
Greater predictability than pooled fixed income investments
Many investors have been using bond ETFs, LICs and managed funds to provide access to bond markets.
These investments do solve the issue of access and provide diversification. However, they don’t offer the same predictability as individual corporate bonds. They are pooled investments which don’t mature. This means they cannot offer the key feature of fixed income – knowing your return BEFORE you invest.
What companies can you invest in?
XTBs enable you to invest in underlying bonds from some of Australia’s largest companies:
What’s being said about XTBs?
“XTBs offer a superior fixed interest return for the risk investors are exposed to.”
Shaun Liddicoat, Financial adviser
“I don’t have to worry about share price volatility anymore.”
Frank Gardiner, Retail investor
“The predictability of receiving known income on set dates has been of great comfort to my clients. After a turbulent time in their lives, they were looking for an investment without any surprises, but one which still performs better than other fixed income alternatives.”
Shane Casey, Financial adviser
How can I see the income XTBs could generate for me?
Use our Cash Flow Tool to pick up to 10 XTBs and chart the income you will receive month by month and year to year. The tool includes the date that you will receive the face value of your XTBs back when the bond matures.
The cashflow tool allows you to predict your total investment return before you make in investment. See the regular, predictable income that XTBs could deliver for you here: