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Everyone knows the rule. 

“Diversify your portfolio”

“Smooth out the ride” 

“Don’t put all your eggs in one basket”. 

Yep, yep. We nod along to this advice like it’s a universal truth.

We know that we can’t have all our investments in high-risk companies. But things get a bit fuzzy on the defensive side of the portfolio. You know, the part of your portfolio that’s meant to keep things steady while shares do their dramatic ups and downs. 

This is where people often lump term deposits and fixed income into the same mental bucket. They’re both kinda safe. Hopefully very predictable. Kinda similar, right?

Not quite.

Once you scratch the surface, term deposits and fixed income ETFs behave quite differently, and understanding that difference matters more than most people realise.

Where fixed income ETFs and term deposits feel similar

Both fixed income ETFs and term deposits are about predictability. You’re not chasing moonshots. You’re aiming for steadier returns and lower volatility, while your shares do the heavy lifting.

When markets get choppy, the defensive assets tend to move less dramatically than shares. And that can help reduce the emotional whiplash that leads people to make bad decisions at the worst possible time.

They also both generate income - in different ways. Term deposits pay interest, while fixed income ETFs distribute income earned from the bonds they hold. In a diversified portfolio, both can play the role of the calmer, income-producing component.

But this is where the similarities end.

Where they are very different beasts

A term deposit is like locking your money in a safe for a fixed period. You know exactly what interest rate you’ll get and exactly when you’ll get your money back. The trade-off is flexibility. Break it early and there’s usually a penalty. 

With term deposits, you’re exposed to one main risk: interest rates could rise and your money is stuck earning yesterday’s (lower) rate.

Fixed income ETFs are more like a basket of IOUs that trade on the market. Instead of lending to one bank, you’re spreading your money across many borrowers. Governments, companies, different maturities and sometimes even different countries.

Because they trade daily, fixed income ETFs can go up and down in price. That sounds scary until you remember that this movement is usually far smaller than what you see with shares. The upside is liquidity. You’re not locked in. You can buy or sell whenever markets are open.

So which one belongs in a portfolio?

The million-dollar question! It shouldn’t be an either/or decision. 

• Term deposits can be great for short-term certainty and known expenses. 
• Fixed income ETFs tend to make more sense as part of a long-term diversified portfolio where flexibility and diversification matter.

So whether your goals are income, diversification or total returns, Franklin Templeton’s range of fixed income strategies can play a role as part of a diversified portfolio.

Find out more about Franklin Templeton’s fixed income capabilities

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Disclaimer:

All information contained in the Flux app, www.flux.finance, www.joinflux.com, app.flux.finance and any podcast of Flux Media Pty Ltd (ABN 27 639 804 345) is for education and entertainment purposes only. It is not intended as a substitute for professional financial, legal or tax advice. While we do our best to provide accurate information on the podcast, we accept no responsibility for any inaccuracies that may be communicated. 

Flux does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) and ASIC RG 36.66. Flux Technologies Pty Ltd provides general advice on credit products under our own Australian Credit Licence No. 530103. The product information presented does not constitute an offer and we are not recommending or suggesting any particular product. 

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