Are fixed income ASX ETFs a good buy right now?

Why this could be a good time to look at bonds.

| More on:
Bonds spelt out on block cubes stacked on top of each other in front of a laptop.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Fixed income ASX ETFs could be a good asset class to look at to invest in right now.

If readers aren't sure what bonds are, they should read the linked explainer. Basically, it's investing in a slice of the debt issued by a government or company, which will then pay interest over the term of the loan/bond.

Plenty of bonds have gone through the adjustment pain of higher interest rates. Many bond prices are lower than they were two years ago, pushing the yield of that bond to be higher and comparable with similar assets for similar terms.

Bonds weren't an attractive investment during the period of ultra-low interest rates because the income return on offer was really weak.

But, there are (at least) two good reasons why fixed income ASX ETFs could be a good buy right now.

Better income yields

There are a number of options that investors can choose on the ASX. The three ETFs I'm going to mention are offerings from Vanguard, one of the world leaders in providing cheap ETFs.

Vanguard Australian Government Bond Index ETF (ASX: VGB) provides exposure to Australian government bonds, both federal and state. This ETF now has a yield to maturity of 4.8%, which is a very attractive rate of return considering government bonds are meant to be the safest asset class.

Vanguard Australian Fixed Interest Index ETF (ASX: VAF) provides exposure to a mixture of Australian federal and state government bonds, as well as investment-grade corporate issuers. This fixed income ASX ETF has a yield to maturity of 4.95%.

Vanguard Global Aggregate Bond Index (Hedged) ETF (ASX: VBND) provides exposure to bonds from governments, government-owned entities and investment-grade corporates. There are a total of 2,910 issuers with this portfolio. The yield to maturity of this one is 4.44%.

Interest rates have peaked?

The capital value of bonds has suffered over the past two years because of rising interest rates. But, the risk of capital losses could be reducing significantly with interest rates in the US and perhaps Australia at their peaks.

If interest rates have peaked, it could make the capital value of bonds very attractive.

In fact, the next move by the US Federal Reserve could be a cut, though investors may need to wait a while for that move.

If interest rates do start falling then this could turn into capital growth for the bond price, while investors also get a solid level of passive income.

Foolish takeaway

I do think it's a good time to look at bonds because the outlook for both income and capital growth is promising. However, I'm not looking to invest with my own portfolio because I think individual ASX shares have a stronger upside potential if they do well.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on ETFs

The letters ETF with a man pointing at it.
ETFs

Why this is the biggest ASX ETF holding in my portfolio

This is one of the best ETFs to buy, in my opinion.

Read more »

A group of young people lined up on a wall are happy looking at their laptops and devices as they invest in the latest trendy stock.
ETFs

How to build a $100k ASX ETF portfolio in 10 years

Let's see how you could go from zero to $100k with exchange traded funds.

Read more »

happy investor, share price rise, increase, up
ETFs

3 fantastic ASX ETFs to supercharge your growth portfolio

Let's see why these funds could be top picks for investors looking for growth options.

Read more »

Global technology shares
ETFs

How to invest in the world's best stocks with ASX ETFs

These funds could be great options for investors looking to invest globally.

Read more »

A bland looking man in a brown suit opens his jacket to reveal a red and gold superhero dollar symbol on his chest.
ETFs

Where to invest $10,000 in ASX ETFs this week

Let's see which funds could be great picks for your hard-earned money.

Read more »

A young woman uses a laptop and calculator while working from home.
ETFs

$10,000 invested in QUAL ETF a year ago is now worth…

This ASX ETF follows an index that uses a filter to ensure all stock holdings meet 3 financial metrics.

Read more »

Cubes placed on a Notebook with the letters "ETF" which stands for "Exchange traded funds".
ETFs

2 excellent ASX ETFs I rate as buys in June

These ASX ETFs have lots of positives.

Read more »

A female ASX investor looks through a magnifying glass that enlarges her eye and holds her hand to her face with her mouth open as if looking at something of great interest or surprise.
ETFs

5 fantastic ASX ETFs to watch

Let's see what they provide investors with easy access to.

Read more »