Key takeaways:

• The Vanguard Australian Government Bond Index ETF edges out the BetaShares Australian Government Bond ETF for size

• Other than a one-year timeline, Vanguard’s product has also outperformed head-to-head, but that is in part because the BetaShares fund has existed less than five years  

• AGVT pays a monthly distribution, as opposed to VGB, but that comes with a slightly higher management cost 

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Last month’s head-to-head comparison put the spotlight on the ASX’s two largest ETFs dedicated to tracking local small-cap stocks, being the Vanguard MSCI Australian Small Companies Index ETF (VSO) and the iShares S&P/ASX Small Ordinaries ETF (ASX: ISO).

However, with bond prices and bond yields the talk of the market over recent months, we’re now turning our attention to Australian government bond ETFs. While there are a number of products that cater to this focus, either wholly or partially, we’re looking at the two biggest ASX-listed funds in this space.

On that note, let’s examine the BetaShares Australian Government Bond ETF (ASX: AGVT) and the Vanguard Australian Government Bond Index ETF (ASX: VGB).

Fund Objective

First off, the BetaShares Australian Government Bond ETF aims to track the performance of the Solactive Australian Government 7 – 12 Year AUD TR Index, before fees and expenses, which provides exposure to a portfolio of high-quality bonds issued by Australian federal and state governments, and with a component issued by supranationals and sovereign agencies.

According to BetaShares, the manager of the fund, Australian government bonds have the highest credit ratings in the Australian bond market, while the fund’s longer duration bonds are designed to offer monthly income, alongside diversification and ‘defence’.

The Vanguard Australian Government Bond Index ETF seeks to track the return of the Bloomberg AusBond Govt 0+ Yr Index before taking into account fees, expenses, and tax. 

This ETF invests in high-quality, income-generating securities issued by the Commonwealth Government of Australia, Australian State Government authorities, and treasury corporations.

Fund Profiles and Holdings

AGVT was admitted to the ASX in July 2019, making it a relatively recent entrant in this field. However, since that time, it has accumulated $612 million in funds under management (FUM).

On the other hand, Vanguard’s VGB ETF is a longstanding product, which was listed on the ASX back in April 2012. At the end of 2023, VGB’s FUM stood at $1.02 billion, making its net assets significantly larger than AGVT.

More recently, December’s trading data from all broker participants paints a contrasting picture. Whereas AGVT recorded FUM growth of $36.5 million, including $15.3 million in fund inflows, VGB recorded a $3.6 million decrease in FUM, with the fund impacted by $30.8 million in fund outflows throughout the course of the month.

But the Vanguard Australian Government Bond Index ETF reigned supreme as far as trade volumes, with 5,430 trades across all ASX broker participants, more than double the 2,480 trades in the BetaShares Australian Government Bond ETF. Despite the higher trade volumes, VGB’s monthly liquidity was 4.4%, as opposed to 7.1% for AGVT.

As far as holdings, AGVT invests primarily in a portfolio of relatively ‘long duration’ Australian government bonds. These bonds must be AUD-denominated fixed-rate bonds with a term to maturity of between 7 to 12 years. 

By composition, 75% of AGVT’s total portfolio weight is allocated to bonds issued by Australian federal and state governments. The remaining 25% is allocated to bonds issued by supranational organisations, Australian and foreign government agencies, and other similar issuers.

Vanguard’s approach to VGB differs slightly. The ETF invests in high-quality, income-generating securities issued by the Commonwealth Government of Australia, Australian State Government authorities, and treasury corporations. According to the fund manager, investments in the ETF are predominantly rated AA or higher by Standard & Poor’s ratings agency or equivalent.

As the composition of a bond portfolio is very different to that of a fund investing in equities, below are some of the key characteristics of each product. 

While VGB features two-and-a-half times as many holdings as AGVT, the weighted average maturity for AGVT is notably longer. This refers to the length of time for bonds in the portfolio to mature. Similarly, AGVT also has a longer modified duration, being its sensitivity to changes in interest rates.

AGVT^

• Number of holdings: 61

• Running yield (% p.a.): 2.81%

• Yield to maturity (% p.a.): 4.47%

• Average maturity: 9.04 years

• Average credit rating: AAA

• Modified/Effective duration: 7.79 years

VGB*

• Number of holdings: 155

• Running yield (% p.a.): 2.79%

• Yield to maturity (% p.a.): 3.98%

• Average maturity: 6.5 years

• Average credit rating: AAA

• Modified/Effective duration: 5.5 years

^ = as at Jan 17, 2024; * = as at Dec 31, 2023

Performance and Distributions

Since inception, AGVT has delivered an average return of -1.94% per annum. Much of this stems from losses over previous years, because on a one-year basis, the fund returned 6.2%, and on a three-year timeline, the fund returned -4.9% per annum.

Due to its date of admission to the ASX, no performance data is available for the fund across a five-year period at this time. However, the underlying index that AGVT tracks returned 0.29% per annum over the last five years.

When it comes to VGB, it has delivered investors a return of 2.55% per annum since inception. On a one, three, and five-year timeline, its returns are 4.68%, -3.27% per annum, and 0.29% per annum.

It should be noted that past performance is not indicative of future performance, and these results do not provide any guarantee that future returns will be of the same magnitude, or that returns will be positive.

As far as distributions, the BetaShares Australian Government Bond ETF pays monthly distributions to unitholders. This differs from the Vanguard Australian Government Bond Index ETF, which instead pays distributions on a quarterly basis. 

As always, the amount and timing of distributions will vary from period to period, and there may even be periods where no distributions are made.

Fees

Both products advertise themselves as low-cost funds, however, Vanguard’s VGB ETF edges out BetaShares AGVT ETF, with the two funds charging a management cost of 0.20% per annum and 0.22% per annum respectively. 

In the case of BetaShares’ fee, the 0.22% per annum comprises 0.19% per annum of the Fund’s Net Asset Value for its management fee, plus recoverable expenses estimated at 0.03% per annum of the Fund’s Net Asset Value. According to the fund manager, Indirect costs are estimated at 0%.

For the Vanguard Australian Government Bond Index ETF, there is a management fee of 0.20% per annum of the Net Asset Value of the Fund, while indirect costs and expense recoveries are estimated to represent 0% of the NAV of the Fund.

Prospective investors should note that other fees may apply. Please refer to the relevant Product Disclosure Statements for up-to-date details on costs and expenses, which may be deducted from the fund’s assets as and when they are incurred. 

Summary

The BetaShares Australian Government Bond ETF and the Vanguard Australian Government Bond Index ETF share some similarities, with the former being a more recently established name taking on the incumbent. Both focusing predominantly on Australian government bonds, each fund currently comprises a portfolio of bonds with an average credit rating of AAA, albeit AGVT has a longer timeframe to maturity and a greater modified duration.

AGVT has outperformed its rival over the last year, but that is the only timeline it comes out ahead, with VGB faring better over a three-year period, and since inception. Whereas VGB pays unitholders a quarterly distribution, BetaShares’ Australian Government Bond ETF does so monthly. However, this comes with the tradeoff of a slightly higher management cost, at 0.22% p.a. versus 0.20% p.a. for the Vanguard Australian Government Bond Index ETF.

AGVT vs VGB Comparison

• Benchmark:

  • AGVT: Solactive Australian Government 7 – 12 Year AUD TR Index

  • VGB: Bloomberg AusBond Govt 0+ Yr Index

• Funds Under Management:

  • AGVT: $612.0 million

  • VGB: $1.02 billion

• Number of holdings:

  • AGVT: 61

  • VGB: 155

• Performance since Inception (p.a.):

  • AGVT: 1.94%

  • VGB: 2.55%

• Three-year performance (p.a.):

  • AGVT: 4.9%

  • VGB: 3.27%

• Distributions:

  • AGVT: Monthly

  • VGB: Quarterly

• Management fees (p.a.):

  • AGVT: 0.22%

  • VGB: 0.20%