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Bonds, ETFs

T-bills are hot. But should we consider a bond ETF too?

21 Feb 2023

The ABF Singapore Bond Index Fund offers a simple way to gain exposure to a diversified portfolio of Singapore government bonds.

TL;DR

  • The ABF Singapore Bond Index Fund (A35.SI) was the first bond ETF to launch in Singapore back in 2005. It offers exposure to a diversified portfolio of high quality Singapore government or government linked bonds. 
  • We would consider the ABF Singapore Bond Index Fund if we are looking to earn passive income through a diversified portfolio of Singapore government bonds, and some potential capital appreciation should interest rates start to fall. 
  • Compared to investing in T-bills or SGS bonds directly, the key drawback of the ABF Singapore Bond Index fund is that there’s no guarantee that we would get back our initial investment when the bond holdings mature. 
  • Compared to investing in SSBs, the ABF Singapore Bond Index Fund is not capital guaranteed. However, it could offer some capital appreciation if interest rates were to fall. 

What happened?

You might now be very familiar with Singapore Treasury Bills (T-bills) and Singapore Savings Bonds, following the recent surge in interest towards these bond instruments issued by the Singapore government. 

It’s no wonder that a Telegram poll that Beansprout did in November 2022 showed that a significant number of community members were interested in these bonds issued by the Singapore government.

However, there was significantly lower interest in a bond ETF and a bond fund. 

Hence, we wanted to dive deeper into the ABF Singapore Bond Index Fund (A35.SI), which is a bond ETF that gives you exposure to a portfolio of high quality Singapore government or government linked bonds. 

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Source: Beansprout Telegram poll in Nov 2022

What is the ABF Singapore Bond Index Fund? 

We earlier shared that a bond ETF allows you to earn a potential passive income through a diversified basket of bonds. 

The ABF Singapore Bond Index fund was the first of such ETFs to launch in Singapore back in 2005. 

It aims to track the iBoxx ABF Singapore Bond Index, which comprises of Singapore dollar bonds issued by the Singapore Government or Singapore Government-linked entities. This would include entities such as HDB, Temasek and Land Transport Authority. 

The Index may also include Singapore dollar bonds issued by other Asian governments or entities linked to the government, such as the Export-Import Bank of Korea. 

In other words, by holding on to the ABF Singapore Bond Index Fund, you get exposure to a basket of securities that is made up mainly of Singapore government bonds.

Why consider the ABF Singapore Bond Index Fund?

#1 – Simple way to get exposure to a diversified basket of Singapore government bonds

Let’s take a look at the holdings of the ABF Singapore Bond Index Fund.

As of 31 December 2022, its top 10 holdings consist entirely of Singapore government bonds. These bonds have various maturities ranging from 2024 to 2046. 

In total, bonds issued by the Singapore government represent about 82% of the fund holdings as of 31 December 2022.This is followed by HDB (10%), LTA (5%) and Temasek Financial (2%). 

Some of these bonds like the one issued by HDB come with a minimum investment quantity of S$250,000, and might be less accessible to individual investors.

The ABF Singapore Bond Index Fund trades in minimum lot sizes of 1 unit, which means that you can get access to the ETF with just S$1 (be mindful of trading costs though).

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Source: Nikko Asset Management

#2 – Resilience even in economic downturn

The iBoxx ABF Singapore Bond Index has performed well during previous episodes of financial uncertainty. 

This is due to the high credit quality of Singapore government bonds.

Did you know that Singapore is the only Asian country that has the highest AAA credit rating awarded by all 3 major credit rating agencies?

Singapore has maintained the AAA credit rating in the last 25 years, including during the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008. 

In fact, the Singapore government bond has been given a similar or higher rating when compared to the US government bond by credit rating agencies. 

Government bond credit rating

What are the risks of the ABF Singapore Bond Index Fund?

As with all bond ETF, your initial investment in the ABF Singapore Bond Index Fund is subject to greater capital risk compared to a similar portfolio of bonds. 

Unlike individual bonds, a bond ETF does not have a maturity date where you will be repaid their initial investment. 

As such, there is no guarantee that you would be able to get back your initial investment.

Here, it is important to note interest rate risks once again. Remember that the price of a bond goes down when interest rates go up. 

Hence, the price of a bond ETF may go down when interest rates are rising. This means that you may suffer some capital loss if you were to sell the bond ETF. 

On the other hand, you may also make a capital gain should interest rates go down and the price of the Singapore government bonds held by the fund goes up. 

How much dividend does ABF Singapore Bond Index Fund pay?

The ABF Singapore Bond Index Fund pays out dividends on a semi-annual basis.

The ABF Singapore Bond Index Fund paid out two dividends in the past 12 months - a dividend of S$0.0123 per security in January 2023, and a dividend of S$0.0122 per security in July 2022. 

Based on the price of the ETF as of 21 February 2023, this translates to a total historical dividend yield of about 2.4%.

ABF Singapore Bond Index Fund dividend.png
Source: SGX

This may appear low compared to the latest yield on the 6-month T-bill, but it would include a period in early 2022 when interest rates were lower. 

We can also take a look at the current yield of the Singapore government bonds held by the fund. As at 31 December 2022, the weighted average yield to maturity of the ABF Singapore Bond Index Fund was at 3.07%.

This means that if all the bonds in the ETF are held till they mature, they would offer a weighted average yield of 3.07%. 

The expense ratio of the ABF Singapore Bond Index Fund is 0.24%. Deducting the expense ratio from the weighted average yield of 3.07%, we would get to a net yield of about 2.83%.

How does the ABF Singapore Bond Index Fund compare to T-bills and Singapore Government Securities (SGS)?

 T-bill/SGS bondABF Singapore Bond Fund
Net YieldHigher yieldLower yield
Minimum investmentS$1,000As low as about S$1
Maximum individual holdingNo limitNo limit
Term

6 or 12 months for T-bill

2 years to 50 years for SGS bonds

 

Current weighted average maturity of about 10 years, but will be reinvested by fund manager
Capital guaranteedReceive principal amount at maturity. Potential interest rate risk if sold before maturity.Not capital guaranteed
Capital appreciation potentialReceive principal amount at maturity. Potential for capital appreciation if interest rates fall and sold before maturity.Potential for capital appreciation if interest rates fall
Flexibility No early redemption but can be sold in secondary marketTrades on the SGX
DiversificationHave to build bond ladder to diversify holdingsDiversified holdings that will be reinvested by fund manager

Let’s compare the ABF Singapore Bond Index Fund with T-bills and Singapore Government Securities.

Based on our calculations, the weighted average maturity of the bonds held is 9.7 years as of 21 February 2023. 

This is much longer than the 6-months or 12-months maturity of T-bills.

We explained earlier that with concerns about a global recession, long-term interest rates are now lower than short-term interest rates. 

This is one of the reasons why the weighted average yield to maturity of the ABF Singapore Bond Index Fund is lower than the yield of the 6-month T-bill. 

However, the weighted average yield to maturity of the ABF Singapore Bond Fund is similar to the yield on the 10-year SGS bond. 

This would make sense given that the weighted average maturity of the bonds held is close to 10 years. 

ABF Singapore bond index fund yield

How does the ABF Singapore Bond Index Fund compare to Singapore Savings Bonds?

 SSBABF Singapore Bond Fund
Net YieldHigher yieldLower yield
Minimum investmentS$500As low as about S$1
Maximum individual holdingS$200,000No limit
TermUp to 10 yearsCurrent weighted average maturity of about 10 years, but will be reinvested by fund manager
Capital guaranteedCapital guaranteedNot capital guaranteed
Capital appreciation potentialReceive principal amount plus accrued interest on maturity and redemptionPotential for capital appreciation if interest rates fall
Flexibility Redeemable in any given month with no penaltyTrades on the SGX

Some investors may also compare the ABF Singapore Bond Index Fund with the Singapore Savings Bond (SSB), which are known to be a simple and low-cost way to generate safe returns.   

The key advantage of the SSB over the ABF Singapore Bond Index Fund is that the SSB is principal guaranteed. You will get your investment amount back in full and not incur any capital losses.

The SSB also offers flexible redemption. You can choose to get your money back in any given month, with no penalty! Hence, you do not have to decide how long to invest into the Singapore Savings Bonds for from the start. 

Using the January issuance of the SSB (SBJAN23 GX23010Z) that was open for application in December as an example, the average return over 10 years is 3.26% per annum. 

This is higher than the weighted average yield to maturity of the ABF Singapore Bond Fund of 3.07% as of 31 December 2022.

ABF Singapore Bond Index Fund vs SSB
Source: MAS

ABF(4).pngWhat are some reasons an investor would consider the ABF Singapore Bond Index Fund over the SSB then? 

From our discussion of interest rate risk earlier, bond prices typically go up when interest rates come down. Hence, an investor who is comfortable with the current yield offered by the fund, but expects that interest rates to fall might prefer the ABF Singapore Bond Index Fund over the SSB.

For example, the price of the ABF Singapore Bond Index Fund has gone up from late October 2022 after the yield on the 10-year Singapore government yield started falling. 

You can also hold a maximum of S$200,000 of SSBs, while there is no limit to the amount of ETF you can hold (remember always to diversify even your ETF holdings though!)

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Source: Yahoo Finance

What would Beansprout do?

We would consider the ABF Singapore Bond Index Fund if we are looking to earn passive income through a diversified portfolio of Singapore government bonds, and some potential capital appreciation should interest rates start to fall. 

We shared earlier how you can construct a portfolio of T-bills or SGS bonds by using a bond ladder to build a passive income.

If you find it too much of a hassle to build a bond ladder and having to keep reinvesting the funds yourself, then what you’d get by buying the ABF Singapore Bond Index Fund is the same diversification through a portfolio of Singapore government bonds.

However, the key drawback of the ABF Singapore Bond Index Fund compared to T-bills and SGS bonds is that there’s no guarantee that we would get back our initial investment when the bond holdings mature. 

Compared to investing in SSBs, the ABF Singapore Bond Index Fund is not capital guaranteed. However, it could offer some capital appreciation if interest rates were to fall. 

Click here to find out more about the ABF Singapore Bond Index Fund.

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