Are bond ETFs a good complement to T-bills?

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By Gerald Wong, CFA • 26 Jun 2024 • 0 min read

We compare bond ETFs to Singapore T-bills to find out if they are a good complement for investors looking to earn an attractive yield.

abf singapore bond etf vs tbill
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This post was created in partnership with Nikko Asset Management Asia Limited. All views and opinions expressed in this article are Beansprout's objective and professional opinions.

What happened?

Demand for T-bills has been very strong recently. 

Applications for the 6-month T-bill reached a record high of S$16.0 billion in the auction on 11 April, as the yield on the T-bill remained elevated. 

At the same time, investors regained confidence that the US Federal Reserve may cut interest rates this year after Chairman Jerome Powell indicated that the next interest rate move is unlikely to be a rate hike. 

Thereafter, I started receiving questions on whether there are instruments that allow us to gain exposure to a diversified portfolio of Singapore government bonds, and some potential capital appreciation should interest rates start to fall. 

In this post, I will be sharing more about bond Exchange Traded Funds (ETFs) and find out if they are worth considering as a complement to my investment in T-bills. 

What is a bond ETF?

Bond ETFs allow you to gain exposure to a diversified basket of bonds in a single trade.

In the same way that a stock ETF may offer you the ability to own many stocks with one trade, a bond ETF allows you to diversify your bond holdings in a simple way. 

With these benefits, it is no wonder that bond ETFs have grown in popularity amongst investors, with the total fund size of bond ETFs listed on SGX reaching S$4.6 billion as of December 2023. (Source: SGX)

For investors looking at bond ETFs which offer exposure to Singapore bonds, the two bond ETFs listed on the SGX with the highest asset under management are the ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF (Source: SGX)

What is the ABF Singapore Bond Index Fund? 

The ABF Singapore Bond Index fund was the first SGD denominated Singapore Government Bond ETF to launch in Singapore back in 2005. 

It aims to track the iBoxx ABF Singapore Index, which comprises 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. (as of 31 March 2024)     

The Index may also include Singapore dollar bonds issued by other Asian governments or entities linked to the government from time to time, 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.

As of 31 March 2024, its top 10 holdings consist entirely of Singapore government bonds. These bonds have various maturities ranging from 2025 to 2036. 

In total, bonds issued by the Singapore government represent about 80% of the fund holdings as of 31 March 2024. This is followed by HDB (12%), LTA (5%) and Temasek Financial (2%). ^

Bonds issued by the Singapore government
Source: Nikko Asset Management as of 31 March 2024

What is the Nikko AM SGD Investment Grade Corporate Bond ETF?

The Nikko AM SGD Investment Grade Corporate Bond ETF offers access to Singapore dollar-denominated corporate bonds with a relatively low risk of default.

This will allow you to gain exposure to the bond issuances of Singapore blue chip companies as well as highly rated bonds issued by foreign companies such as AIA Group, ABN AMRO, Commerzbank etc, as of 31 March 2024. ^     

The ETF’s holdings as of 31 March 2024 include the bonds issued by DBS, UOB and Singtel.^ 

ETF’s holdings as of 31 March 2024.png
Source: Nikko Asset Management as of 31 March 2024

How much dividends do the bond ETFs pay?

The ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF pay out dividends on a semi-annual basis1, subject to the discretion of the manager.

As interest rates have moved up over the past 12 months, some investors may also like to look at the yield to maturity of bonds held in the portfolio currently. 

The ABF Singapore Bond Index Fund has a weighted average yield to maturity* of 3.47% as of 30 April 2024.     

The Nikko AM SGD Investment Grade Corporate Bond ETF has a weighted average yield to maturity* of 3.78% as of 30 April 2024.

How do Bond ETFs compare to T-bills and Singapore Government Securities (SGS)?

There are differences between these bond ETFs and the T-bill we need to be aware of. 

I have summarised some of these differences in the table below.

 T-bill/SGS bondABF Singapore Bond FundNikko AM SGD Investment Grade Corporate Bond ETF
Yield

6-month T-bill cut-off yield of 3.65% as of 23 May

Yield of T-bill and SGS bond varies according to issuance and tenor, amongst other factors

Weighted average yield to maturity* of 3.47% as of 30 April 2024Weighted average yield to maturity* of 3.78% as of 30 April 2024
Minimum investmentS$1,000As low as about S$1As low as about S$1
Maximum individual holdingNo limitNo limitNo limit
Term

6 or 12 months for T-bill

2 years to 50 years for SGS bonds

Weighted average duration2 of 7.85 years as of 31 March 2024Weighted average duration2 of 5.88 years as of 31 March 2024
Capital guaranteedReceive principal amount at maturity. Potential interest rate risk if sold before maturity.Not capital guaranteedNot 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 fallPotential for capital appreciation if interest rates fall
Flexibility No early redemption but can be sold in secondary marketTrades on the SGXTrades on the SGX
DiversificationHave to build bond ladder to diversify holdings. In simple terms, a bond ladder is a portfolio of individual bonds that mature on different dates. This strategy helps in minimizing exposure to interest rate fluctuations.Diversified holdings that will be reinvested by fund managerDiversified holdings that will be reinvested by fund manager
Source: MAS, Nikko Asset Management 

 

I see that the average maturities of the ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF are longer than the 6-month and 12-month maturity of T-bills.

Due to expectations of a Fed rate cut, long-term interest rates are now lower than short-term interest rates. 

This is one of the reasons why the historical yield of the ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF is lower than the yield of the 6-month T-bill. 

However, the weighted average yield to maturity* on the ABF Singapore Bond Index Fund is comparable to the 10-year average return on the latest Singapore Savings Bonds. 

The weighted average yield to maturity* on the Nikko AM SGD Investment Grade Corporate Bond ETF is higher than the yield of the 6-month T-bill and 10-year average return on the latest Singapore Savings Bonds. 

Comparing yields to T-bill and SSB

What are the advantages of bond ETFs?

#1 - Bond ETFs offer capital gain potential if interest rates fall 

The price of the bonds held by the bond ETFs may go up should interest rates decline. 

For example, we have seen the net asset value of the Nikko AM SGD Investment Grade Corporate Bond ETF rising since July last year with the dip in interest rates over this period. 

Figure: Net asset value (NAV) of Nikko AM SGD Investment Grade Corporate Bond ETF

NAV of Nikko AM SGD Investment Grade Corporate Bond ETF
Source: SGX as of 24 June 2024

 

Reflecting this, the Nikko AM SGD Investment Grade Corporate Bond ETF has generated a return of 6.20% over the past 1 year as of 30 April 2024.

Figure: Performance of Nikko AM SGD Investment Grade Corporate Bond ETF

Performance of Nikko AM SGD Investment Grade Corporate Bond ETF
Source: Nikko Asset Management Asia Limited as of 30 April 2024

Returns are calculated on a NAV-NAV basis and assuming all dividends and distributions are reinvested, if any. Returns for period in excess of 1 year are annualised. Past performance is not indicative of future performance. Benchmark is iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index.

#2 – Resilience even in economic downturn

The iBoxx ABF Singapore 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. 

Sovereign Credit Ratings

 

S&P

Moody’s

Fitch

Singapore

AAA

Aaa

AAA

United States

AA+

Aaa

AA+

Hong Kong

AA+

Aa3

AA-

United Kingdom

AA

Aa3

AA-

Japan

A+

A1

A

Source: Bloomberg as of 14 Aug 2023

#3 – Lower minimum investment amount required

Some of these bonds held by the ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF are only accessible by accredited investors and come with a large investment sum.

For example, the bond issued by HDB comes with a minimum investment quantity of S$250,000 and might be less accessible to individual investors.

The ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF trade in minimum lot sizes of 1 unit, which means that you can get access to the ETF with just S$1 (excluding trading costs).

What are the risks of bond ETFs?

On the flip side, your initial investment into bond ETFs will be 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 will 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. 

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 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.

To earn a potentially higher yield compared to Singapore government bonds, we can also consider the Nikko AM Investment Grade Corporate Bond ETF

Learn more about how ETFs allow you to start investing in a simple way here.

 

*Weighted Average Yield to Maturity (%) is an average yield calculated by weighting each security presently held by the Fund at time of calculation with capitalisation and duration. Yield to Maturity and Yield to Call measures are used in the calculation for non-callable and callable bonds respectively. The figure is for reference only and would vary from time to time due to market conditions and it does not represent the fund/sub-fund’s distribution yields or actual rates of return.

^ Reference to any particular securities is purely for portfolio information as at indicated date only and does not constitute a recommendation to buy, sell or hold any securities or to be relied upon as financial advice in any way.

1ABF Singapore Bond Index Fund: Distributions are not guaranteed and are at the absolute discretion of the Manager. Distributions will only be paid to the extent that they are available for distribution pursuant to the Trust Deed and covered by income received from the underlying investments of the Fund. Any distribution is expected to result in an immediate reduction of the Fund’s net asset value per unit. Past payout yields and payments do not represent future payout yields and payments. Please refer to the Fund prospectus and product highlights sheet for further details.

Nikko AM SGD Investment Grade Corporate Bond ETF: Distributions are not guaranteed and are at the absolute discretion of the Managers. If the investment income is insufficient to fund a distribution for the Fund, the Managers may determine that such distributions should be paid from the capital of the Fund. Any distribution is expected to result in an immediate reduction of the Fund’s net asset value per unit. Where distributions are paid out of capital, investors redeeming their Fund units may receive an amount less than their initial investment. Past payout yields and payments do not represent future payout yields and payments. Please refer to the applicable fund prospectus and product highlights sheet for further details.

2Weighted Average Duration (years) is an average duration weighted with capitalisation, and the figure is for reference only and would vary from time to time due to market conditions.

Important Information by Nikko Asset Management Asia Limited:   

This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).   

Past performance or any prediction, projection or forecast is not indicative of future performance. The Fund or any underlying fund may use or invest in financial derivative instruments. The value of units and income from them may fall or rise. Investments in the Fund are subject to investment risks, including the possible loss of principal amount invested. You should read the relevant prospectus (including the risk warnings) and product highlights sheet of the Fund, which are available and may be obtained from appointed distributors of Nikko AM Asia or our website (www.nikkoam.com.sg) before deciding whether to invest in the Fund.   

The information contained herein may not be copied, reproduced or redistributed without the express consent of Nikko AM Asia. While reasonable care has been taken to ensure the accuracy of the information as at the date of publication, Nikko AM Asia does not give any warranty or representation, either express or implied, and expressly disclaims liability for any errors or omissions. Information may be subject to change without notice. Nikko AM Asia accepts no liability for any loss, indirect or consequential damages, arising from any use of or reliance on this document. This advertisement has not been reviewed by the Monetary Authority of Singapore.     

The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be suspended or delisted from the SGX-ST. Listing of the units does not guarantee a liquid market for the units. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units. 

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

Neither Markit, its Affiliates or any third party data provider makes any warranty, express or implied, as to the accuracy, completeness or timeliness of the data contained herewith nor as to the results to be obtained by recipients of the data. Neither Markit, its Affiliates nor any data provider shall in any way be liable to any recipient of the data for any inaccuracies, errors or omissions in the Markit data, regardless of cause, or for any damages (whether direct or indirect) resulting therefrom. Markit has no obligation to update, modify or amend the data or to otherwise notify a recipient thereof in the event that any matter stated herein changes or subsequently becomes inaccurate. Without limiting the foregoing, Markit, its Affiliates, or any third party data provider shall have no liability whatsoever to you, whether in contract (including under an indemnity), in tort (including negligence), under a warranty, under statute or otherwise, in respect of any loss or damage suffered by you as a result of or in connection with any opinions, recommendations, forecasts, judgments, or any other conclusions, or any course of action determined, by you or any third party, whether or not based on the content, information or materials contained herein. Copyright © 2023, Markit Indices Limited.

The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index are marks of Markit Indices Lmited and have been licensed for use by Nikko Asset Management Asia Limited. The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index referenced herein is the property of Markit Indices Limited and is used under license. The Nikko AM SGD Investment Grade Corporate Bond ETF is not sponsored, endorsed, or promoted by Markit Indices Limited.

Nikko Asset Management Asia Limited. Registration Number 198202562H. 

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  • Richard • 28 Jun 2024 02:04 AM