This article covers:

• What is a Fixed Income Investment?

• What Benefits Does Fixed Income Offer in a Portfolio?

• Investing in Fixed Income: ASX and US ETFs

• The Role of Gold During the Investment Cycle

With the stock market and cryptocurrency both well off their highs as central banks hike interest rates in response to inflation, investors would be wise to pay attention to the holdings in their portfolios.

Please consult a financial adviser, your tax accountant, and the PDS to decide if any products mentioned here, or elsewhere, are right for you.

What is a Fixed Income Investment?

Fixed income refers to a group of investments that typically pay investors fixed levels of interest at regular intervals until a future date in time known as the maturity' date. 

Upon maturity, investors generally receive their original investment back, which is otherwise known as the principal' or face' value.

Arguably the most understood type of fixed income investing is a term deposit. You generate interest on a regular basis, and at the end of the term, you may withdraw your original deposit and associated earnings.

However, bonds are one of the most popular choices of fixed income investments that provide investors with regular income called coupon payments'. Quite often, experienced investors automatically associate fixed income investments with bonds.

A bond is a type of debt package' that consists of loans made to an entity issuing the bond. Companies and governments issue bonds to borrow money. This type of investment has grown rapidly, with funds under management (FUM) for Australian bond ETFs increasing tenfold since 2015.

Other types of fixed income products include hybrids, certificates of deposit, floating rate notes, and money market funds.

Learn more about investing in hybrid securities here.

What Benefits Does Fixed Income Offer in a Portfolio?

Fixed income is another type of investment strategy that you may choose to leverage during uncertain market conditions. Just like investors may consider share investing for growth or dividend income, fixed income is designed to provide an option for investors who might be looking for a more defensive and stable form of investment that provides regular cash flow. 

Fixed income may serve an integral role in an investor portfolio, especially as a balance against other investments during a downturn in the investment cycle.

Some of the potential benefits of investing in fixed income include:

1. Diversification: fixed income investments are generally less volatile and less risky than shares during uncertain macroeconomic conditions, and they may even act as a hedge against a falling share market to deliver a balanced portfolio.

2. Dependable income: fixed income generally offers a steady and reliable source of cash flow that may smooth out portfolio returns.

3. Preserve capital: bonds are usually more defensive than stocks, and therefore less volatile, owing to the fact they offer greater visibility in terms of stated objectives, namely, to return the principal amount to the investor, and to offer yield until maturity.

4. Risk-averse investing: investors approaching retirement may benefit from an asset that is generally considered less risky and more stable than shares, but younger investors also stand to benefit from fixed income where the market outlook is uncertain and one portfolio is already exposed to excessive investment risk. 

Investing in Fixed Income: ASX and US ETFs

One of the risks of fixed income is a lack of liquidity in the bond market. While an investor can readily buy a bond, sellers sometimes find it difficult to dispose of a fixed income asset. What more, transaction fees, pricing transparency, and minimum investment criteria are hurdles.

However, ETFs make it easier for investors to buy and sell fixed income assets, overcoming the liquidity issue and other barriers associated with direct investments in fixed income assets.

If you're new to ETFs, read our beginner guide here.

There are a number of exchange-traded products across both the ASX and US stock markets that offer investors exposure to fixed income. By and large, the majority of these products hold a basket of bonds. 

In some cases, these are government bonds, issued by countries around the world with different sovereign credit ratings. These bonds are often favoured during a stock market correction to hedge a portfolio against market losses. 

In other cases, it may be corporate bonds, issued by companies of different investment-grade quality. There are varying levels of risk as a company could in theory default on its loans, and the full value of the principal payment may not be received. 

Generally speaking, bonds with a better credit profile and shorter duration (i.e. less sensitive to interest rates) tend to hold up better during a market downturn. On the contrary, bonds with a poor credit rating are more susceptible to price weakness, albeit offer higher yields.

There are also a selection of funds targeting cash or hybrids, a type of investment that combines equity and debt-like features.

The Role of Gold During the Investment Cycle

While fixed income may have distinct advantages during a market downturn, there are also risks tied to inflation and interest rates.

As fixed income products provide a fixed payment on a regular basis, yield needs to outpace inflation, otherwise real returns are negative. Inflation-linked bonds are one option, but this means a smaller choice of ETFs.

Normally, rising interest rates would also put pressure on bond prices. However, if the market believes the terminal (i.e. final) value of interest rates may not be as high as originally expected, bond prices can rally. 

These considerations may give rise to another investment option when inflation is high and interest rates are rising - investing in gold. 

Given its scarcity, and its status as a safe haven' asset, the precious metal is typically viewed as a hedge against inflation. This is because demand for the commodity tends to increase during periods of uncertainty, where investors either look to preserve their capital, or outpace inflation.

Over the long term, the price of gold has increased nearly 500% since the year 2000.

As part of an investment portfolio, gold, as well as other precious metals, can provide balance through the downturn of an investment cycle. The potential benefits of investing in gold include diversification, reduced risk exposure, and lower portfolio volatility.

A number of ASX and US ETFs on the Selfwealth platform allow investors to invest in gold.

Learn more about the different ASX-listed gold ETFs here.

Fixed Income and Gold in a Portfolio

As investors move through the investment cycle, it may be prudent to consider alternative asset classes as part of a diversified portfolio. ETFs help investors overcome the barriers associated with investing directly in these assets. For just $9.50 flat-fee per trade, you can invest in fixed income and gold ETFs through the Selfwealth platform and look to immediately balance the market cycle.