The NZ Bond Fund provides an attractive investment grade alternative to owning direct bonds or term deposits. The Smartshares NZ Bond ETF invests in New Zealand fixed interest assets, with the objective of outperforming the S&P/NZX A-Grade Corporate Bond Index over rolling 3-year periods. The investment manager for the fund is Nikko Asset Management New Zealand Limited.
The NZ Bond Fund was created on the 12th of November 2015 to provide an alternative for retail investors looking to invest in investment grade fixed interest securities. One issue for investors intending to trade in amounts less than $5,000 per security is access to publicly listed securities, namely fixed interest securities. The NZ Bond Fund provides a low cost well diversified option for investors to create and maintain a portfolio of fixed interest investments.
The current fixed interest environment is tough for retirees and investors looking for risk adjusted yield outside of term deposits. The Reserve Bank held the Official Cash Rate (OCR) at 1.75% throughout 2018, but yielded to the market in May 2019 and dropped the OCR to 1.5%, a drop of 0.25%. The Reserve Bank of New Zealand cited a slowdown in global economic growth since mid-2018, uncertainty around the global economic outlook, and continuing house price softness in some areas, has tempered the growth in household spending. Should this trend continue, we may see further cuts to the OCR over the coming year, which is detrimental for investors holding short dated term deposits (2 years or less).
The running yield of the NZ Bond Fund is 3.87% p.a, while a more reliable indicator of the yield is called the Yield To Maturity, which is currently 2.75% p.a. The difference between the two forms of yield relate to the bonds included within the fund trading at a premium on the back of a very low interest rate environment. Bonds are issued at $1, over time they can appreciate in value if interest rates drop, or drop in value if interest rates rise, but they often mature at $1. Consequently, the Yield To Maturity accounts for the fact that the premiums on bonds held within the fund will unwind up to the point of maturity.
The NZ Bond Fund has a quarterly dividend distribution policy and has fund charges of 0.54% p.a, which are deducted from the net assets of the fund.