Bond ETFs shouldn't replace term deposits: Russell

28 March 2012
| By Staff |
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Bond exchange-traded funds (ETFs) shouldn't replace term deposits in portfolios - rather, they should be used strategically to achieve investor goals, says Russell Investments director of ETFs Amanda Skelly.

While bond ETFs have low volatility compared to hybrids, term deposits have zero volatility on their capital - which is very important to investors, Skelly said.

Following the launch of three bond ETFs on the Australian Securities Exchange earlier this month, Russell has seen the biggest take-up from retail investors, said Skelly.

"We're not seeing a lot of interest from institutions. And the reason is they can access bonds themselves … at very low cost. Right now it's primarily more of a retail proposition," Skelly said.

But financial advisers need to educate their clients about bond ETFs, and the way they can be used to complement cash and hybrids, added Skelly.

"We recognise that there are risks with putting these tools in investors' hands and saying 'on your way'. We'll be giving tilting advice quarterly and providing advice on what to do," she said.

It was also up to investors to educate their clients about the risks of hybrids, she added.

"There's been a huge take-up of hybrids of late. We are a little concerned about the rush to hybrids, because we feel that people don't really understand how they can act in difficult market environments," Skelly said.

In fact, there have been recent examples of hybrid issuers being required to stop their coupon payments, she added.

"The common phrase is: When you want hybrids to act like bonds, they act more like equities," Skelly said. 

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