Interest Rates Are Falling. Time to Look at Singapore Bond ETFs?

Bonds

By Gerald Wong, CFA • 21 May 2025

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In our AMA session with Nikko AM, we explored how bond ETFs differ from T-bills and how they can help investors build resilient income portfolios in today's uncertain market.

In this article

What happened?

As T-bill yields continue to trend lower, many investors have started searching for alternative income-generating options.

At the same time, global uncertainties from interest rate shifts to tariff risks have driven more attention to safer and more resilient assets.

We've seen growing discussion around bond ETFs, with retail investors asking how they compare to T-bills and where they fit in a diversified portfolio.

To address these questions, we hosted a live Ask-Me-Anything session with Nikko Asset Management.

We spoke with Bertram Sarmago, Investment Director at Nikko AM, to understand how bond ETFs work, what returns to expect, and what risks to consider in today’s market.

Here’s a quick recap of the key takeaways from the session.

Transcript of Time to Look at Singapore Bond ETFs? | AMA with Nikko AM Portfolio Manager Bertram Sarmago

Summary of key points

Bond ETFs offer diversified exposure to government or corporate bonds and trade like stocks on the SGX.
They typically yield 2.5% p.a. to 3.2% p.a, compared to about 2.3% p.a. for T-bills.
With longer durations, bond ETFs are more sensitive to interest rate movements but can benefit from capital appreciation when rates fall.
ETFs provide broader diversification than individual bonds or T-bills, holding a wide range of securities.
They pay semi-annual dividends derived from the bonds' coupon income.
Expense ratios are low, generally between 0.24% p.a and 0.26% p.a.
SGD-denominated ETFs eliminate currency risk for Singapore-based investors.
Some bonds in the ETF may be unrated but are selected based on implied ratings from the index provider.
Portfolios are rebalanced monthly to reflect market developments.
These ETFs suit income-focused, risk-averse investors seeking portfolio stability.

3:13 What exactly are bond ETFs and how do they compare to T-bills?

Bond ETFs are exchange-traded funds that hold a diversified basket of bonds and trade on the SGX like stocks.
They offer investors easy bond market access with just one trade, along with daily liquidity and built-in diversification.
Compared to T-bills, which are short-term (6–12 months) with fixed yields around 2.3% p.a., bond ETFs offer higher yields (around 2.5%–3.2% p.a.) and longer durations.
While T-bills return only the principal at maturity, bond ETFs also offer potential capital gains.
Bond ETFs typically hold over 100 bonds, whereas a T-bill represents exposure to just one bond.

9:28 What does bond duration really mean?

Duration is a measure of how sensitive a bond or bond ETF is to changes in interest rates.
For example, a bond ETF with a duration of 8 years could see its price rise or fall by approximately 8% if interest rates move by 1%.
Longer-duration ETFs like ABF (8.1 years) and Nikko AM Corporate Bond ETF (5.7 years) can be more volatile but also offer more upside when rates decline.
Investors need to balance their risk appetite with duration when selecting bond ETFs.

11:46 What is the ABF Singapore Bond Index Fund?

The ABF Singapore Bond Index Fund invests mainly in Singapore dollar-denominated government bonds and statutory board bonds.
Launched in 2005 to support the development of the local currency bond market.
It is an index-tracking ETF that replicates the iBoxx ABF Singapore Index.
Holdings include bonds issued by entities like HDB, LTA, and Temasek, with a focus on high-credit-quality issuers.
The fund holds a diversified basket of bonds, with maturities ranging from 1 year to as long as 50 years.
Top 10 holdings include government bonds maturing from 2026 to 2072.
Investors seeking exposure to Singapore government bonds and who are comfortable with longer duration and interest rate risk could consider this option
Often used as a diversification tool in a broader investment portfolio due to its stable, government-backed nature.

14:08 What is the Nikko AM SGD Investment Grade Corporate Bond ETF?

The Nikko AM SGD Investment Grade Corporate Bond ETF was launched in 2018 to give investors access to Singapore dollar-denominated corporate bonds.
It invests exclusively in high-quality, investment-grade bonds issued by corporates and statutory boards.
Top holdings include trusted names like Temasek, NTUC, Singtel, and UOB.
The portfolio is diversified across sectors such as government agencies, banking, real estate, and financial institutions.
Only bonds rated AAA to BBB are included, ensuring strong credit quality and low default risk.
The current yield is approximately 3.2% p.a, offering attractive income for risk-conscious investors.
Bonds downgraded below investment grade are removed from the index and the ETF.
Those seeking higher yields than government bonds while maintaining credit quality and diversification may consider this option.

17:47 How are dividends from bond ETFs paid?

Bond ETFs distribute income to investors via semi-annual dividend payouts, funded by the coupon interest received from underlying bonds.
While the yield on the fact sheet shows the fund’s average yield to maturity, actual dividend yields may differ based on fund income and expenses.
For example, the ABF Singapore Bond Index Fund paid approximately 2.27% p.a over its last two payouts.
Dividend income may fluctuate depending on bond market conditions and fund manager discretion.

19:36 How should investors evaluate the value and returns of bond ETFs?

Bond ETFs can offer capital gains when interest rates fall, as bond prices rise.
The Net Asset Value (NAV) of a bond ETF reflects the price of its underlying bond holdings.
Dividend payouts temporarily reduce the NAV, but reinvested dividends contribute to total return.
Investors should assess bond ETFs based on total return, which includes both dividend income and NAV changes.
Over the past year, the NAV of the corporate bond ETF rose steadily due to falling interest rates.
The corporate bond ETF delivered a 6.7% total return in the past year.
The ABF Singapore Bond ETF performed even better due to strong demand for government bonds during uncertainty.
Investors should avoid evaluating bond ETFs based on only one metric like NAV or yield.
It's important to consider both dividend yield and NAV movement to understand overall performance.

23:05 What are some of the other potential advantages of bond ETFs?

Bond ETFs offer resilience during economic downturns and periods of market volatility.
Singapore government bonds are AAA rated and have maintained this rating for decades.
Singapore’s credit rating is even higher than that of the United States and many other countries.
The high credit quality of underlying bonds provides stability and strong investor confidence.
The ABF Singapore Bond Index has historically performed well during financial crises and uncertain environments.
The AAA rating of Singapore bonds supports consistent demand and defensive performance.

24:28 How should we think about the risks of bond ETFs?

Bond ETFs are exposed to interest rate risk — when rates rise, bond prices fall, leading to capital losses.
This risk was evident during the high inflation period in 2022 when interest rates increased sharply.
Exiting a bond ETF during a rising rate environment may result in negative returns.
There is also credit risk, depending on the quality of the bonds held in the ETF.
ABF Singapore Bond ETF holds AAA-rated government bonds, so its credit risk is minimal.
Corporate bond ETFs carry higher credit risk, especially during economic recessions.
The performance of bond ETFs can be affected if the underlying issuers struggle to repay their debt.
Investors should consider their individual risk appetite and choose ETFs with appropriate credit quality.

27:08 Why is T-bill demand still high, and how can bond ETFs complement them?

Demand for T-bills remains strong due to ongoing global uncertainties and market volatility.
T-bills are viewed as safe haven assets, offering stability similar to cash in uncertain environments.
Investors prefer low-risk instruments like T-bills amid concerns such as US tariffs and potential economic slowdowns.
Despite lower yields, T-bills continue to attract interest because of their short duration and minimal risk.
Bond ETFs complement T-bills by offering potential capital appreciation when interest rates decline.
Recent bond ETF performance has improved as interest rates have come down in recent months.
While T-bills provide capital preservation, bond ETFs offer higher yield and growth potential.
Both can coexist in a portfolio to balance safety and returns.

29:18 Are there currency hedging costs involved in Singapore bond ETFs?

Bond ETFs like the ABF Singapore Bond Index Fund and Nikko AM Investment Grade Corporate Bond ETF do not carry currency risk as all underlying bonds are denominated in Singapore dollars.
Since there is no foreign currency involved, there is no hedging cost for Singapore-based investors.
Hedging costs only arise when ETFs invest in foreign currency bonds (e.g., USD), which require conversion and protection against FX fluctuations.
These costs stem from interest rate differentials between currencies, such as higher US rates vs Singapore rates.

32:15 How should we think about the attractiveness of bonds vs equities?

They tend to perform better during periods of global or market uncertainty.
Bonds are generally considered a safer asset class compared to equities.
When growth concerns rise, markets expect interest rate cuts, which support bond prices.
Bond ETFs benefit from falling interest rates, leading to capital appreciation.
There is a low correlation between equity ETFs and bond ETFs, helping to stabilise portfolio performance.
Bonds play a defensive role and help reduce volatility during risk-off environments.
Given ongoing macro uncertainty, bonds remain a reliable diversifier in investment portfolios.

39:40 How should we compare bond ETFs to bond mutual funds?

Bond ETFs are usually passive funds that track a benchmark index, resulting in lower management fees and expenses.
In contrast, bond mutual funds are actively managed, leading to higher costs due to fund manager involvement.
ETFs offer a cost-efficient way to access the bond market with minimal overhead.
They trade on stock exchanges, providing real-time pricing and generally lower trading costs.
Mutual funds are typically sold through banks and may include upfront sales charges or fees.
The total expense ratio (TER) of ETFs covers management, legal, and custody fees, offering transparent and predictable costs.
Overall, bond ETFs are a more affordable and straightforward option for most investors compared to traditional mutual funds.

36:40 What is the expense ratio of the ABF and Nikko AM bond ETFs?

The expense ratio for both the ABF Singapore Bond Index Fund and the Nikko AM SGD Investment Grade Corporate Bond ETF is approximately 0.24% to 0.26% p.a.
This is considered very low compared to actively managed mutual funds.
The cost has remained consistent at around 24 to 26 basis points over the past three years.
The low expense ratio makes these ETFs a cost-efficient option for investors seeking fixed income exposure.

37:38 How is the ETF constructed and managed?

The ETF is designed to track the performance of a specific underlying index.
For example, the ABF ETF tracks an index that includes Singapore government and statutory board bonds.
New bonds are issued regularly, and some older bonds exit the index once they fall below one year to maturity.
The ETF undergoes monthly rebalancing to reflect these changes in the index.
The fund manager adjusts the portfolio by adding new eligible bonds and removing outdated ones.
The goal is to closely match the index in terms of holdings and characteristics.
Bond liquidity in the secondary market can be a challenge, especially for older bonds.
Despite this, the manager strives to minimise tracking error and deliver returns that align with the index.

39:45 What goes into managing a bond ETF?

Fund managers monitor the index closely and ensure the ETF stays aligned with it.
Rebalancing is done monthly, adding new bond issues and removing those nearing maturity.
They assess upcoming bond issuances and may buy in advance to maintain index alignment.
Liquidity management is crucial, as some bonds are harder to trade than stocks.
Managers handle cash flows from investor subscriptions and redemptions, adjusting holdings accordingly.
Bid-offer spreads and transaction costs are actively managed to keep expenses low.
A key performance metric is tracking error, which managers strive to minimise.
Unlike active funds, the goal is to match index performance, not beat it.
The management fee reflects these ongoing activities to replicate the index effectively and cost-efficiently.

42:45 How are unrated bonds in the investment grade corporate bond ETF evaluated?

A portion of bonds in the ETF do not carry formal credit ratings from global rating agencies.
These are typically high-quality Singapore issuers (e.g. Keppel, Singapore Airlines, LTA) that choose not to obtain ratings.
An implied credit rating model is used, developed by the index provider (iBoxx), not the fund manager.
This model compares pricing data of rated vs non-rated bonds to infer credit quality.
Based on this quantitative framework, 20–30% of the ETF may consist of unrated bonds deemed investment grade.
The decision to include these bonds follows a passive approach, strictly defined by the index.
The fund manager does not independently assess or decide the credit quality — they follow the index methodology.
Many unrated issuers are well-regarded in the local market and do not require formal ratings for issuance.

45:45 How often are bond ETFs rebalanced, and what are the related costs?

The ETF’s underlying index is rebalanced monthly to reflect new bond issuances and bond maturities.
For example, Singapore government bonds from monthly auctions are added to the index at month-end.
The ETF is updated accordingly to stay aligned with the index composition.
Rebalancing also occurs when there are large inflows or redemptions, to ensure the fund continues to track the index accurately.
The rebalancing process involves buying and selling bonds, but is managed carefully to minimise trading costs.
Overall, this approach ensures the ETF maintains tight tracking with the benchmark index.

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