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Summary

1) There are 12 SGX-listed Bond ETFs with a cumulative market cap of US$2.7 billion.

These ETFs provide exposure to three different categories: 1) Government Bonds, 2) Investment Grade Corporate Bonds and 3) High Yield Bonds.

We compiled the latest portfolio yield, credit rating, duration and number of bonds held in each of these ETFs for easy comparison.

2) Macro factors have been supportive of Bond ETF returns in the past five years.

With a decline in government bond yields and tighter credit spreads, SGX-listed Bond ETFs have enjoyed a strong run in the past five years. However, it would be prudent to manage down forward-looking return expectations from here.

3) We highlight areas of concern for some of the SGX-listed Bond ETFs.

We compiled the ETFs’ market cap, total expense ratio, bid/ask spread ratio, daily trading volume and Index replication method. The results indicate which ETFs have higher liquidity risk and lower cost efficiency.

4) Be aware that there are still risks to “AAA” credit rated Government Bond ETFs

The ABF Singapore Bond Index Fund temporary fell by 5.8% within a two-week period in March 2020, when 10-year Singapore Government Bond yields surged 0.76%

Investors should be aware that such drastic price moves are possible even for government bond ETFs of the highest credit quality.

5) Mutual funds might make sense as an alternative to Corporate Bond ETFs

Some of the more commonly held SGD-denominated Bond Mutual Funds have a relatively shorter portfolio duration and SGD-hedging feature that might be preferred in the current environment.

6A) IQ’s view for government bond exposure

• For investors who cannot stomach volatility, Fixed Deposits and Singapore Savings Bonds (SSB) look like good alternatives to the SGX-listed Government Bond ETFs currently, offering greater flexibility, similar levels of interest rates, with no mark-to-market risk if the interest rate environment normalizes higher.

• From a relative value perspective, we see better risk reward from the SGX-listed China Govt Bond ETFs and Asian High Yield Bonds, which offer a significant yield pick-up. We had detailed our reasoning for the former in this article.

6B) IQ’s view for corporate bond exposure

• For investors who have a view that A) interest rates will increase from current levels, B) SGD will strengthen relative to USD, C) credit selection is important in a recession, Corporate Bond Mutual Funds might make more sense compared to the Corporate Bond ETFs.

1) SGX-listed Bond ETFs: Portfolio Details

There are 12 bond ETFs that can be purchased on SGX. These ETFs offer distinct exposure to three main categories of bonds and we have sorted them to their appropriate category below:

Government Bonds:

• ABF Singapore Bond Index Fund

• Xtrackers II Singapore Government Bond UCITs ETF

• CSOP FTSE Chinese Government Bond Index ETF, available in USD and SGD share classes

• NikkoAM-ICBCSG China Bond ETF, available in USD, SGD and RMB share classes

Investment Grade Corporate Bonds:

• Nikko AM SGD Investment Grade Corporate Bond ETF

• iShares JPM USD Asia Credit Bond Index ETF, available in both USD and SGD share classes

High Yield Corporate Bonds:

• iShares Barclays USD Asia High Yield Bond Index ETF, available in both USD and SGD share classes

The latest portfolio details for each of these ETFs may be found in the table below, in descending order of credit risk. These details include:

• Base Currency that the ETF trades in

• Net Yield to Maturity of the ETF’s portfolio (after deducting off the ETF’s total expense ratio)

• Average Credit Rating

• Portfolio Duration

• No. of bond issues in the ETF

Bloomberg, as of 21 January 2021. Latest ETF factsheets, as of Oct-Dec 2020. Net yield to maturity has been computed by deducting the fund/ETF’s total expense ratio from gross portfolio yield to maturity.

*Note: Average credit rating is IQ’s estimate, as the specific ETF had provided only the credit rating distribution and not the average

2) SGX-listed Bond ETFs: Historical Performance

Historical performance of the SGX-listed bond ETFs has been strong. In the past five years, SGX-listed bond ETFs have returned an annualized 3.4% to 6.7%, inclusive of distributions received (highlighted cells in grey in the below table).

Bloomberg, retrieved 21 January 2021

The strong return for bond ETFs has been due to a decline in government bond yields, as well as credit spread tightening.

• Singapore’s 10-year government bond yields have declined from 2.5% five years ago to 1% currently. Without this supportive macro factor, the 5-year annualized returns on the bond ETFs would have likely been 1% to 2% lower.

• Investment-grade Corporate Credit Spreads now sits near the lowest levels in the past 15 years, having tightened from 1.9% five years ago to 0.9% currently (see chart below for US IG credit spreads in the past 15 years).

Bloomberg, retrieved 17 January 2021.

The InvestQuest’s View: With government bond yields and credit spreads already at such low levels, it is less likely that bond ETFs will enjoy the same tailwind experienced in the past five years. Investors should manage down return expectations accordingly.

Now more than ever, investors will need to realize that “Yield to Maturity” is NOT the same as “Expected Return”. We’ve written an article that explains the difference.

3) SGX-listed Bond ETFs: Areas of Concern

We performed a quick screen to check for negative traits within these ETFs, which might result in increased liquidity risk, lower cost efficiency and/or increased counterparty risk. The traits are as follows:

1. Market cap (AUM) of less than USD 100 million.

2. Total expense ratio of more than 0.6%

3. Daily average trading volume below USD 100k

4. Bid/ask spread of more than 0.5%

5. ETFs that are synthetic rather than physically-backed

We highlight potential areas of concern (pink cells) in the table below:

Bloomberg, retrieved as of 21 January 2021.

The ETFs that look relatively more efficient are:

Government Bonds:

• ABF Singapore Bond Index Fund

• CSOP FTSE Chinese Government Bond Index ETF, USD or SGD share classes

Investment Grade Corporate Bonds:

• Nikko AM SGD Investment Grade Corporate Bond ETF

High Yield Corporate Bonds:

• iShares Barclays USD Asia High Yield Bond Index ETF, USD share class

These four ETFs would give you the necessary arsenal to invest across Government Bonds, Investment Grade Corporate Bonds and High Yield Bonds. In the next section, we briefly discuss alternatives to the bond ETFs and when they might make sense.

4) The Risks of “AAA” rated Government Bond ETFs

Among the SGX-listed Bond ETFs, the ABF Singapore Bond Index Fund is pretty popular with an AUM of approximately S$1bn. My guess is that investors of the ABF Singapore Bond Index Fund are looking for a stable low risk investment. While the credit quality of the portfolio is indeed high with an average AAA rating (invested mainly in Singapore Government bonds), the key risk that investors face by investing in this ETF is interest rate risk.

Example of how interest rate increase (i.e. govt bond yield increase) leads to a fall in ETF prices:

• Assuming 10-year Singapore government bond yields rebound from 1.0% currently back to 2.5% (the level two years ago), the price of this ETF would fall by approximately 13%. The 13% is computed based on the absolute change in government bond yields (2.5% – 1.0% = 1.5%), multiplied by the portfolio duration of 8.9 years.

• In fact, this ETF did temporary fall by 5.8% within a two-week period in March 2020, when 10-year Singapore Government Bond yields rebounded 0.76%, from 1.01% to 1.77%.

Investors should be aware that such drastic price moves are possible even for government bond ETFs of the highest credit quality.

The InvestQuest’s View for Government Bond Exposure

• For investors who cannot stomach volatility, Fixed Deposits and Singapore Savings Bonds (SSB) look like good alternatives to the SGX-listed Government Bond ETFs currently, offering greater flexibility, similar levels of interest rates, with no mark-to-market risk if the interest rate environment normalizes higher.

• From a relative value perspective, we see better risk reward from the SGX-listed China Govt Bond ETFs and Asian High Yield Bonds, which offer a significant yield pick-up. We had detailed our reasoning for the former in this article.

5) Alternatives to the Corporate Bond ETFs

Mutual funds may make sense for Corporate Bond exposure. In a research paper published by Morningstar, it was computed that actively managed Corporate Bond and High Yield mutual funds have been able to outperform passive ETFs in the last decade, on a net of fees basis.

The chart below shows the return of Active Bond Mutual Funds, in excess of the return of passive funds and ETFs. The different bars are the excess return for different kinds of Active Bond Mutual Funds against their passive peers.

Morningstar’s Active/Passive Barometer (December 2019). Data is for the 10-year period to 31 December 2019. Intermediate Core Bonds refer primarily to government and asset-backed securities with moderate duration

For bonds, there are a few reasons why active managers may outperform.

• With regard to ETFs that track indices, a bond index’s construction methodology might not be optimal. This is because many bond indices are market value weighted, which means a company with more debt will feature more heavily in the index and the corresponding ETF that tracks it. As a bond investor, all things equal, my preference would be to invest in companies that are less indebted.

• Active mutual funds have the ability to manage risk proactively. If a bond’s credit fundamentals is deteriorating but still held within the bond index, the ETF will likewise have to keep holding onto the bond. An active manager who sees such risk may sell off the bond preemptively.

• Active mutual funds can participate in bond IPOs, which are often underpriced to attract sufficient investor demand. As a bond Index is usually rebalanced only at specific timing intervals, a newly issued bond will not feature on the Index immediately and hence the ETF will likely not be able to participate in underpriced bond IPOs.

To cater to Singapore investors, a number of fund managers have set up mutual funds with a SGD-denominated Investment-grade Corporate Bond focus. I have included a few of the commonly marketed ones in the table below, summarizing their latest published bond portfolio details alongside comparable SGX-listed bond ETFs.

Latest Fund house and ETF monthly factsheets, as of Oct-Dec 2020. Net yield to maturity has been computed by deducting the fund/ETF’s total expense ratio from gross portfolio yield to maturity. *Note: Average credit rating is IQ’s estimate, based on the specific mutual fund or ETF’s portfolio’s credit rating distribution and/or IQ’s understanding of the fund’s mandate

What stands out in the above table is that most of the actively managed mutual funds tend to take on slightly lower portfolio duration compared to the bond ETFs. This makes sense to me given that for investors with a longer time horizon, there should be an expectation for interest rates to normalize higher from currently depressed levels. While no one can pinpoint when that might happen, having a lower portfolio duration can then help to mitigate adverse price impact on bond portfolio values when it does.

Separately, these mutual funds tend to also hedge their non-SGD investment exposure. So if you think that USD will weaken against the SGD in upcoming years, these funds will benefit relative to the SGD-denominated ETFs that are not FX-hedged.

Having a shorter bond portfolio duration and SGD-hedged investment vehicle make sense to me at this juncture. I have included the historical performances of the mutual funds against the bond ETFs in the below table, with the 5-year annualized return highlighted in grey.

Bloomberg, retrieved 21 January 2021.

The InvestQuest’s View for Corporate Bond Exposure

• For investors who have a view that A) interest rates will increase from current levels, B) SGD will strengthen relative to USD, C) credit selection is important in a recession, Corporate Bond Mutual Funds might make sense compared to the Corporate Bond ETFs.

If you found this article useful, do feel free to check out our other ETF and Mutual Fund related articles too!

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2. SGX-listed Stock ETFs: Which are good enough for our readers?

3. Best ETF to buy for China Stock Exposure

4. Ultimate List of LEVERAGED Stock ETFs

5. When to use Active Mutual Funds vs Passive ETFs

6. Ultimate List of Mutual Funds for SG Investors