Some investors utilise hybrids in their portfolios for income and diversification. But do hybrids really have a place in the defensive component of a portfolio?
- Hybrids often behave more like shares than bonds, particularly when the share market is weak. Hence, they shouldn’t be viewed as defensive or stable investments.
- Hybrids don’t offer investors certain income. As with shares, dividends are optional, making cash flows uncertain. Defensive assets should provide steady, reliable income.
- Investors don’t know when their capital will be repaid. The maturity date of hybrids isn’t fixed and can be deferred by the issuer or regulators. You may incur significant capital losses if you need to access your money before the maturity date.
- Hybrids can convert to shares at the discretion of the issuer – the investor has no control. The diversification benefit is lost and investors can be left with even more shares and a more concentrated portfolio.
XTBs vs. Hybrids
Thankfully there is a more effective way of gaining exposure to defensive assets and obtaining the diversification you’re looking for. If you’re looking for a low risk investment that provides an attractive and stable income, XTBs might be the answer.
What are corporate bonds?
If a company wants to borrow money to fund growth, or other investments, it has two options; borrow from a bank, or issue bonds.
Corporate bonds are basically IOUs that:
- Pay back the loan when the bond matures – known as the ‘principal’ or ‘face value’.
- Deliver a steady stream of income, normally paid quarterly or semi-annually throughout the life of the bond – known as the coupon.
Corporate bonds are difficult to access for most individual investors due to the high minimum investment – normally $500,000.
XTBs (or Exchange Traded Bond units), are securities traded on the Australian Stock Exchange (ASX) that give you exposure to the benefits of individual corporate bonds. You receive the same coupons and principal payment that you’d receive if you were to invest directly in a corporate bond.
- Coupons = regular, fixed income paid for the lifetime of the bond
- Principal payment = the amount you lend the company, paid back to you at maturity of the bond.
Easy to access, cost effective and flexible
XTBs trade in large and small parcel sizes, meaning they are accessible to all investors – not just those with very large portfolios. Because XTBs are traded on the ASX, they can easily be bought and sold at any time, so you can access your money at any time.