The Vanguard Australian Government Bond Index ETF (ASX: VGB) is a leading exchange-traded fund (ETF) for Aussies who want exposure to bonds.
There are different areas of the bond market that people can choose to invest in, including company bonds. For example, the Vanguard Australian Fixed Interest Index ETF (ASX: VAF) gives exposure to some corporate entities.
However, the idea of the VGB ETF is that its entire portfolio invests in bonds issued by Australian government entities.
Bonds are essentially debt issued by a company or government, so investors must decide if they trust the borrower will pay back the bond. Typically, the riskier the borrower, the higher the interest rate on the bond.
What bonds is the VGB ETF invested in?
The Vanguard Australian Government Bond Index ETF invests in bonds from several different issuers.
Currently, the biggest positions in the portfolio are:
- Commonwealth of Australia
- State of Victoria
- State of New South Wales
- State of Queensland
- State of Western Australia
- State of South Australia
- Government of Australian Capital Territory
- Government of Northern Territory
- State of Tasmania
Government bonds can provide some protection against capital volatility compared to other assets like ASX shares. If any entity is going to be able to pay its bond interest payments, you would think that a government entity would be the most reliable.
Rating agencies such as Fitch, Moody's, and others consider bonds rated 'AAA' or 'AA' to be among the safest.
According to Vanguard, 76% of the portfolio was invested in AAA-rated bonds in June 2024, and 24% were invested in AA-rated bonds. It has no A-rated or below bonds.
Interest rate
Vanguard shares a number of statistics with investors every month.
The yield to maturity is the rate of return an investor would receive if the fund's fixed-income securities were held to their maturity dates. Bonds usually have a certain term length.
The VGB ETF's yield to maturity at the end of June 2024 was 4.41%, which is comparable to what good savings bank accounts are paying at the moment.
In the past year, the Vanguard Australian Government Bond Index ETF has delivered a total return of 3.1%, with a distribution return of 2.5%.
Management fees
The costs of an investment can play an important part in the net returns, particularly when it comes to fund investments like an ETF. The lower the fees, the more the returns stay in the hands of investors.
The VGB ETF's annual management fee is 0.16%, which I think is quite low considering that many fund and share-based investments have materially higher costs.
I think this is a noteworthy investment for investors looking for asset diversification and a decent level of passive income. It could pay more reliable payments than ASX dividend shares but not as much of a yield as plenty of income-focused stocks.
