A new way to add predictable income to your portfolio

It’s been a wild ride for investors this year, especially if your portfolio has been invested predominantly in equities.

With recent market swings far from normal, it’s a good time to revisit one of investing’s golden rules – diversification.

And a well-diversified portfolio can only be achieved if you have a strategy that is both well thought-out and well diversified across a range of asset classes.

We zoom in on the power of diversification through the lens of an asset class that may have been overlooked by the average investor.

A quick refresher on corporate bonds

When part of a well-constructed portfolio, investment grade corporate bonds may provide diversification, income and, during difficult times, may help cushion the impact of any sell off in stocks.

Corporate bonds are a way for companies (large and small) to raise money from investors, by way of borrowing funds. In return for your money, the issuer will pay periodic interest payments and repay your initial principal at a fixed date.

Corporate bonds tend to offer higher yields than government bonds because they are generally considered to be a higher risk investment. This is because there is a greater likelihood that a company may default on its bond payments compared to a government, which has the ability to raise taxes or print more money to meet its financial obligations.

Like government debt, corporate bonds have a predetermined ‘maturity’ date where the issuer must repay the principal. Maturity dates range from one to 30 years.

You can learn more about corporate bonds at this website.

How have investment grade corporate bonds performed during a crisis?

One important benefit of corporate bonds is how they have historically held up during a financial crisis. Between 1993 and 2024, Australian fixed-rate corporate bonds only recorded two years of outright declines (2021 and 2022). In contrast, Australian shares have recorded six negative calendar years and global stocks had eight negative calendar years over that same period.

Investment grade corporate bond returns have tended to exhibit low correlation with shares, which may help mitigate the effects of share market downturns. The following table looks at specific years of financial tumult to demonstrate the historical performance of corporate bonds compared to stocks . In 2002, 2008 and 2011, corporate bonds recorded material gains at the same time as when stocks were struggling.

Source: Bloomberg. Data was sourced on 28 April 2025. Corporate Bonds represented by the Bloomberg AusBond Credit 0+Yr Index. Stocks is represented by the ASX 200 Total Return Index. You cannot invest directly in an index. Past performance is not indicative of future performance of any index or ETF.

It’s important to note that this relationship hasn’t always held up. In 2022, both asset classes sold off in unison as markets reacted to surging inflation and rising interest rate expectations. Under these circumstances multi-asset portfolios did not benefit from bonds as a defensive allocation.

Returns aren’t everything – volatility matters too

Between 1999 and 2024 (i.e. the last 25 complete calendar years), Australian fixed rate corporate bonds returned 5.22% p.a. compared to a 8.69% p.a. return for the ASX 200.

It’s important to note that corporate bonds achieved these returns with significantly less volatility. Corporate bond volatility has been 2.48% p.a. over the last 25 years. In contrast, share market volatility has been 15.67% p.a. over that same time. The maximum and average drawdowns seen in corporate bonds have also tended to be significantly smaller than for shares.

Bonds have a role to play in volatile times

Corporate bonds, especially those of investment grade, have generally demonstrated substantially lower volatility than shares. This can help reduce risk and provide defensive benefits for an investment portfolio during share market declines. In addition, corporate bonds can pay a stable and regular income through most investing cycles.

Betashares has recently launched the Defined Income Bond ETF range, offering the features of a bond and the benefits of an ETF.

These ETFs may be suitable for many types of investors, ranging from income-focused investors to retirement planners and even for those who use the income they make from their investing journey to support their lifestyle/cost of living.

You can learn more about each of the products in the new Defined Income Bond ETF range here.