Bond ETFs are Exchange Traded Funds that allow investors, whether individual or institutional, to buy shares of a managed fund that follows the returns of an underlying index.
Bond ETFs’ primary function is to provide low-risk investments opportunities for income generation through investing in government bonds and corporate bonds. They are beneficial for those who do not have the time to identify potential companies/debt instruments on their own or wish to diversify their investment portfolio by using them as trading vehicles.
The advantages to investing in bond ETFs
- Their market value changes throughout the day so that investors can sell them anytime they want.
- They offer greater liquidity than other fixed-income instruments since they can be readily traded on an exchange.
- They are an excellent addition to a diversified portfolio as they provide a steady income stream with historically lower volatility than equities.
Trading bond ETFs in Singapore
In Singapore, several companies offer bond ETFs such as iShares, SPDR and Van Eck. Investors should take note of charges or fees before investing in bond ETFs as it might affect their returns and the overall return from bond ETFs in Singapore.
The Singdollar bond market is growing in Singapore, with increasing investor participation. There are many types of bonds available for trading in Singapore, including government bonds and corporate bond ETFs.
The most popular bond ETF listed on SGX is the ABF-OCBC US Treasury 5 Year Bond Index Fund ETF (AFF). It replicates the performance of a portfolio of the United States treasury securities that have been issued or will be issued over five years and have a remaining maturity of more than one year and less than five years.
Some advantages of this fund include its high liquidity, low fees and tax efficiency. It has an AUM amounting to S$11 million and an annual expense ratio of 0. 09% or S$90 per annum. It has a YTD return of 4.28%.
The main difference between trading US treasuries and bonds ETFs
The main difference between trading US treasuries and bonds ETFs is that with bond ETFs, investors pay brokerage fees to trade them, which are taxed as income for the seller. Several costs are involved when investing in treasury securities; most importantly, there is no initial brokerage fee; however, there is a stamp duty of 0.1% payable on the purchase price.
Stamp duty applies only to first-timers buying on secondary market transactions, not applicable to all issuers. However, no broker fees are payable until you sell your shares which means brokerage can be deferred.
Risks associated with bond ETFs
With bond ETFs becoming more and more popular, investors seem to turn a blind eye toward the dangers that come with reckless trading. Especially in Singapore where people are investing in risky products like penny stocks and forex, they should understand that all investments hold an element of risk. If you fail to assess these risks properly, you could end up losing all your money one day.
Here are five reasons why bonds and bond ETFs can be bad for your portfolio
- Exposure Risk: Loss hurts more than gains
- No understanding of markets: Without knowledge of markets, losses could happen easily
- Other investment holdings required: To protect against rising interest rates or falling bond prices, you may need to allocate a portion of your portfolio to other products
- Fees: ETFs charge fees, so you can’t expect returns on par with buying and holding bonds
- No diversification: If investors purchase bond ETFs instead of whole bonds, then they are not genuinely diversifying their investment holdings across the spectrum
If you are not an accredited investor, it is essential to consider your risk tolerance when trading bond ETFs. These funds expose investors to the creditworthiness of both the issuer and market liquidity levels. Some bond ETFs may have higher volatility than others, so care must be taken when comparing different issuers. Beginner traders should use a reputable online broker from the Saxo bank group and trade on a demo account before investing real money.
Click here to see btc liquidity provider.