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ABF Singapore Bond Index Fund ETF Review: 3 Ways Your Portfolio Can Benefit From It

Bonds, ETFs, Investments

Written by:

Alvin Chow

ABF Singapore Bond Index Fund was one of the earliest Exchange Traded Funds (ETFs) listed on the Singapore Exchange (SGX). Since its inception on 31st Aug 2005, the ETF has grown significantly and now has Assets Under Management (AUM) of S$983 million as of 31 Mar 2021.

Over the course of 16 years, the ABF Singapore Bond ETF has gained about 55% or 2.79% per year. This return would have beat most of Singapore fixed deposit rates and even our CPF Ordinary Account’s 2.5% p.a. interest while maintaining its investments in AAA rated bonds.

It is one of the five ETFs that is currently approved under the CPF Investment Scheme. This allows retail investors to invest in the ETF via their CPF Funds. On top of that, the ABF Singapore Bond Index Fund is also an Excluded Investment Product. Investors do not need to be pre-qualified before they can make purchases.

Being a relatively low-risk product, I see 3 groups of investors who would benefit from having the ABF Singapore Bond Index Fund in their portfolios.

#1. The Cautious Investor

You are risk averse but yet want to grow your money.

If the gyrations of the stock market are too much for you to bear, you might want to consider less volatile bond investments. Although your expected returns would be slightly lower, the peaceful night’s sleep you can get in return will more than make up for it. Bonds are generally deemed safer than stocks because of the following reasons:

Comparison of Stocks and Bonds

StocksBonds
Volatility is a measure of riskHigher volatilityLower volatility
ObligationsNo legal obligation to pay dividends and repay investment capitalLegal obligation to pay interests and repay principal at maturity
Hierarchy of claims in the event of liquidationLast to claimHigher claim hierarchy than shareholders

A financial advisor would typically recommend a bond product if you cannot afford to lose much of your investment capital. With a myriad bond investment options available, it can be a challenge to compare and decide. Here is a quick summary of the products available.

Comparison of Other Singapore Bonds Investment Options

Advantages Disadvantages
Government BondsCan be very high investment grade due to excellent credit rating.Interest rates are low especially for high investment grade bonds.
Quasi-Government BondsHigher interest rates than government bonds without much more credit risk.May only be available to institutions and not individuals. Examples are HDB and Temasek Holdings Bonds.
Corporate BondsUsually higher interest rates than quasi-government bonds.Mostly for accredited investors. The quantum is large at $250,000. This makes diversification difficult for retail investors.
Bond Unit TrustsProfessionally managed bond portfolio. With a competent manager, there is a possibility of achieving better-than-market returns.Higher fees to buy and own the Unit Trusts. Selecting good managers can be as difficult as selecting the right bonds.
Bond Exchange Traded Funds (ETFs)Low fees to get access to bonds only available to institutions. Professionally managed.Match market returns with no outperformance.

A wealthy person may turn to a private banker for advice and to manage his or her portfolio of Government and Corporate Bonds. Unfortunately only a fraction of bond options are available to the retail investor. In that case, a Bond Unit Trust or Bond ETF would be more suitable because he can achieve diversification with a smaller amount of capital.

Comparatively, I prefer a Bond ETF over a Bond Unit Trust because fees of the former are several times lesser than the latter. If compounding effects can work for you, compounding costs can also work against you!

The ABF Singapore Bond Index Fund is classified as a low risk product because it invests largely into sovereign and quasi-sovereign bonds issued or guaranteed by the government of Singapore or any government of People’s Republic of China, Hong Kong SAR, Indonesia, Korea, Malaysia, Philippines or Thailand.  The snapshot of the portfolio holdings as of 30 Apr 2017 were predominantly Singapore Government bonds, which has been rated AAA across all 3 major credit rating agencies consecutively for at least 19 years (Standard & Poor’s, Moody’s and Fitch). Moreover, Singapore Government Bonds are one of the world’s highest-yielding AAA-credit rated government bonds. The Fund also invests in quasi-government bonds issued by entities such as HDB, Temasek, and LTA. Both these Singapore Government and Quasi-government Bonds are placed in the risk-free category.

All in all, the ABF Singapore Bond Index Fund is a great instrument for the cautious investor who is not in a rush and prefers slow and steady gains.

Weightage of ABF Singapore Bond Index Fund’s holdings as of Feb 2021 [Source: Nikko AM Asia, ABF Singapore Bond Index Fund Factsheet]

#2. The Equity Investor

You have a huge exposure to stocks and you want to lower your risk.

Modern Portfolio Theory states that diversification is the only ‘free lunch’ in the world. Why is that so?

Studies have shown that a portfolio made up of stocks and bonds could achieve higher returns and lower risks, than a portfolio holding purely stocks or bonds. This diversification works best when the stock and bond prices move in opposite directions.

Risk-reward profiles of 3 different portfolios

The ABF Singapore Bond Index Fund has a tendency to be negatively correlated to stocks. This relationship is appreciated during stock market corrections and crashes. Take the example of Covid-19 where the stock market witnessed one of the fastest crash in history.

When their movements diverge significantly, investors are presented with a chance to rebalance their portfolio by selling the asset class that has gone up and buying the other asset class that has gone down. In doing so, investors are in effect buying low and selling high. This act alone is able to generate additional returns.

Hence, if you are 100 percent in stocks, it might be timely to consider adding some bonds into your portfolio to lower your risks.

The good news is that the ABF Singapore Bond Fund is traded on the Singapore Exchange. An investor can easily buy and sell the ETF, just like he or she would with any stock. Unlike a Unit Trust for which a valuation is only derived at the end of the day, the ABF Singapore Bond Fund is priced throughout the entire trading day. As a result, it is more transparent and convenient. You can choose to rebalance your stocks and bonds immediately on the same trading day and decide on the price you want to buy and sell via your internet trading platform. There is no need to go through an agent, which you would have to if you are buying or selling a Unit Trust.

Finally, having both your stocks and bonds investments on the same platform would facilitate your monitoring and rebalancing of your portfolio.

#3. The Beginner Investor

You have little capital but see the need to start investing right now.

Most people have the impression that they need a large capital to be able to invest in Bond products. This is true if you are investing in Over-the-Counter corporate bonds which would typically require a minimum of S$250,000. These bonds are often illiquid when you want to sell them before maturity. On the other hand, affordable retail corporate bonds are limited and give very little choices for an investor to build a diversified bond portfolio. Thus ABF Singapore Bond Index Fund offers the beginner investor a low risk bond portfolio at affordable investment amounts and having the ease of buying and selling the units over the Singapore Exchange (SGX).

Since 2015, the lot size has been reduced to 100 shares / units on the SGX. In 2019, the lot size for ABF Singapore Bond Index Fund was further reduced to just 10 units per lot. This means that if the ABF Singapore Bond Index Fund is trading at $1, the minimum investment is only $10! However, I would caution against investing such a small amount each time because your broker usually charges a minimum brokerage fee, which may be substantial cost in terms of percentage of the amount invested. Typically, I would prefer to keep transaction fees below 1% of my investment amount.

If you are only looking to invest in small amounts regularly, fret not. There is a simple way to get around it. For amounts as little as S$50 per month, POSB charge only 0.5% for their regular investment plans. A $50 investment would only cost $0.25 in fees, making it highly affordable for just about anyone. There is no excuse not to start investing now!

Below is a comparison among the monthly investment plan providers with the ABF Singapore Bond Fund as one of the offerings.

FeaturesDBS / POSBPhillip Securities
Minimum Investment Per MonthS$50S$100
Buying Fees0.5%< 2 counters $6
≥ 3 counters $10
InterestsCredit into DBS/POSB bank accountAuto Reinvestment
1% charge (cap at $50)
Selling FeesNo sales chargeNormal brokerage fee applies (0.28% to 0.5%)

Table 3: Comparison of ABF Singapore Bond Index Fund Monthly Plan Comparison. 

If you have just finished school and started working, this is one of the best ways to get started.

Risks of investing in ABF Singapore Bond Index Fund

As I have shared the benefits of the ABF Singapore Bond Index Fund, I must also share some of the risks I would be concerned about. The following is not exhaustive and you should read the Product Highlight Sheet, Factsheet and Prospectus for more information. You should also seek professional advice or contact the issuer Nikko Asset Management when in doubt.

  • Interest rate risk – bond prices can be sensitive to interest rate changes. Higher interest rates may result in lower bond prices.
  • Tracking error – the Fund may not be able to closely replicate the index it is tracking and result in deviations in the performance of the Fund.
  • Credit rating downgrade – a downgrade in the credit rating in any of the bonds held by the Fund may result in lower bond prices.

Conclusion

Whether you are someone who prefers a higher level of certainty in your investments, or an equity investor looking to diversify your portfolio, or even someone new to the workforce, the ABF Singapore Bond Index Fund presents a secure, easily accessible and affordable investment option.

This article is written in collaboration with Nikko Asset Management. The author aims to share his views about how he would find the product useful and he is not recommending you to buy. You are responsible for your own investment decisions and their outcomes.

11 thoughts on “ABF Singapore Bond Index Fund ETF Review: 3 Ways Your Portfolio Can Benefit From It”

  1. Posb invest saver only charges 0.5% for ABF bond fund; 1% for Nikko STI ETF.

    So that’s another reason to diversify and invest in the ABF bond fund.

    Reply
  2. Dear Alvin,

    Thank you for the great post, it has been of much insight.

    I have been searching up the performance / record for iBoxx ABF Singapore Bond Index which the ETF tracks for hours but with no luck. It will be of great help if you could point me to the right way pretty please.

    Thanks in advance!

    Reply
  3. This fund has been a complete disaster — i.e. wealth destroyer — due to the upsurge in inflation. Anyone who invested in the past five years has lost money. Much better to have kept your dollars in CPF — or even under the bed.

    Reply

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