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Anonymous

20 Aug 2019

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General Investing

Is Fixed income UT better over Fixed Income Ireland domiciled ETF?

I am thinking to include more fixed income into my portfolio. (Currently, I am holding only DBS Global Income Note with USD because DBS recommended)

Is simply picking up UT such as Pimco Income Fund or Schroder Global Investment Grade Corporate Fund better?

or

Is selecting those Aggregate Global Bond ETFs, Developed countries Government Bond ETFs, or Investment Grade Corporate Bond ETFs (Ireland domiciled in LSE market) better? ( In this case, I should convert my SGD to USD)

Discussion (5)

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There is no strong statistical evidence to suggest that actively managed bond funds, whether in UT/mutual fund structure, will outperform their ETFs counterpart consistently over the long run.

Long run being 2-3 decades.
Most actively managed funds, be it equity or fixed income, consistently underperform their benchmark over the long run, on a gross and net-of-fee basis. Google ā€œSPIVA reportā€

Now assume we replace the benchmark with an efficient ETF that tracks the same underlying benchmark. Guess what, the result will not change. That is, most actively managed funds, be it equity or fixed income, will underperform an efficient ETF.

Efficient ETF is one where the NAV performance tracks almost perfectly to the benchmark performance net of fees.

Hence, it will not make ā€˜significantā€™ difference benchmarking an active fund to their ETF counterpart.
ETFs are often evaluated on its ability to track its underlying benchmark, known as Tracking Error (TE).

The TE of an efficient equity ETF should be less than 5 basis points whereas the TE of an efficient bond ETF should be less than 10-15 basis point.

See the article link below for an explanation as to why the TE for a bond ETF is ā€˜much higherā€™.

Note that some equity ETFs track the benchmark perfectly, in this case, you are ā€˜investing for freeā€™.

To be clear, ā€˜investing for freeā€™ means that the total expense ratio (TER) of the fund is 0% (excluding the transaction cost of purchase/sale of the ETFs).

TER is the issuerā€™s operating cost of managing a passive fund/ETF and the cost can potentially be offset by securities lending activities which generate revenues for the fund. ETFs with asset under management, of usually more than USD 10B partake in securities lending activities.

To gauge whether if you are investing for free, see if the NAV performance is equal to the benchmark performance, if they match exactly, it means that you are ā€˜investing for freeā€™.

If you are still hell bent on an active bond fund, it would be more optimal to go with an actively managed bond ETF.

The primary reason for the ETF is due to the tax efficiency/advantage of an ETF over the traditional fund structure (UT/mutual fund)

Check out this article https://www.etf.com/etf-education-center/21017-...

It explains quite comprehensively the reasons why an ETF is more optimal fund structure than the typical UT/mutual fund structure. By optimal, I am referring to the cost of investing.
Note that ETFs does have its pitfalls as well.

Check out this article https://www.etf.com/etf-education-center/21001-...

It explains the pros and cons of ETFs vs Mutual Funds/UTs

As always, do your own due diligence.

Hariz Arthur Maloy

20 Aug 2019

Independent Financial Advisor at Promiseland Independent

Actively managed fixed income funds tend to outperform their ETF counterparts by a considerable margin. Thus, I'd suggest a Global Fixed Income UT over an ETF in this case.

At the same time, do get the SGD Hedged share class to reduce currency risk.

And even with Fixed Income, you can choose to split between an Investment Grade Govt bond fund, Investment Grade Corporate Bond Fund, and a global High Yield bond fund to have more exposure to what the asset class has to offer.

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