How-to-lower-your-risk-with-fixed-income-ETFs

How to lower your risk with fixed income ETFs and ride the rise of China

Alvin Chow
Alvin Chow

It is common to assume that fixed income products are for risk-averse investors. But stock investors can also benefit from having fixed income instruments in their portfolio as such instruments can cushion the drop in portfolio value during a stock market rout.

We do not need to look far to see the benefits of fixed income products, Covid-19 created a lot of fear among investors which resulted in a stock market sell down.

The Singapore equities (represented by STI ETF) tanked almost 35% in Mar 2020 while three other fixed income products saw a slight dip before rising up again (see chart below).

While the STI ETF is still down about 22% year-to-date (23 Oct 2020), the three other fixed income ETFs – Nikko AM Investment Grade Corporate Bond ETF, ABF Bond Fund and Xtrackers SG Govt Bond ETF are up 2%, 6% and 7% respectively.

Figure 1- Chart from Yahoo! Finance

Hence, it makes sense for investors to include fixed income as an asset class in their investment portfolio as it offers them diversification during a stock market rout. Of course, this relationship may not always hold and past performance is not indicative of future performance.

SGX offers a myriad of fixed income ETFs and you should find one that suits your investment objectives/needs–

  • AAA rated to high-yield
  • Government to corporate
  • Country specified (Singapore and China) and Asia region

Below is a list of fixed income ETFs available on SGX with their corresponding historical yields:

Both the ICBC CSOP FTSE Chinese Government Bond ETF and Phillip Money Market ETF are new kids on the block.

The Phillip Money Market ETF invests in short term, high quality money market securities and deposits of established institutions to track the performance of the FTSE SGD 3-month Singapore Dollar Swap Offered Rate (SOR) Index. In short, this is a suitable ETF for investors who are looking to keep their funds liquid while generating interest at the same time. The indicative interest was about 0.52% during the launch.

For investors who are looking to diversify or increase bond allocations to their existing portfolio, the ICBC CSOP FTSE Chinese Government Bond ETF provides easy access to investing in the Chinese government bonds, which would otherwise be hard to get access to. The ETF is the world’s largest Chinese pure government bond ETF (source: SGX, 2020) and has a current fund size of over S$1 billion, suggesting strong market demand.

The rise of China

China is the second largest economy in the world and the size of her supernatural, sovereign, and agency (SSA) bond issue ranks second too at almost US$20 trillion, just behind the US.

China’s influence has grown over the years and I believe that adding more China exposure to our investment portfolios is necessary to participate in this new trend.

Credit rating and currency risks

The Chinese government bonds are rated A1 and A+ by Moody’s and Standard & Poor. These are still investment grade even though they are not AAA rated.

Singaporeans are often worried about currency risks as our Singapore Dollar tends to strengthen against many other currencies over time. Historically, the relative strength between Chinese Yuan and Singapore Dollar has been range bound (between 4.4 and 5.3). The exchange rate was 4.84 seventeen years ago and it is at 4.92 recently (on 23 Oct 2020, according to Yahoo! Finance) – the difference is minute and thus I think the currency risk for CNY is low in this case.

Figure 2 – Chart from Yahoo! Finance

In addition, the Monetary Authority of Singapore (MAS) benchmarks the Singapore Dollar exchange rate against a basket of currencies that belongs to our trading partners. I expect the Chinese Yuan to be one of the pillar currencies that are currently being tracked by MAS since China is a major trading partner to Singapore. Hence, in my opinion, the exchange rate is likely going to be pretty much moderated.

Decent yields in a low yield environment

We all know that interest rates have been low for many years and we can expect it to remain so as central banks have employed monetary easing policies to combat the effects of Covid-19. It is hard to invest for decent yields nowadays.

This is why I find the ICBC CSOP FTSE Chinese Government Bond ETF, which has an indicative yield of 2.98%, relatively more attractive than other fixed income ETFs.

The China bond yield really stood out relative to other major countries’ bond yields (6x higher than US government bond yields!)

  • FTSE Chinese Government Bond Index (USD): 2.98%
  • FTSE US Government Bond Index (USD): 0.5%
  • FTSE UK Government Bond Index (USD): 0.49%
  • FTSE Japan Government Bond Index (USD): 0.17%
  • FTSE European Monetary Union Government Bond Index (USD): 0.03%

ICBC CSOP FTSE Chinese Government Bond ETF

The ICBC CSOP FTSE Chinese Government Bond ETF tracks the FTSE China Government Bond Index which includes government bonds issued in Mainland China but excludes zero-coupon bonds, saving bonds, bonds with maturity greater than 30 years from issuance, and bonds issued prior to 1 Jan 2005.

It currently holds 28 bonds with varying maturities as at end of Oct 2020. About a third is in short term bonds (1-3 years), half in medium term bonds (3-10 years) and the remainder in long term bonds. Below is a more detailed breakdown (as at 30 Oct 2020).

The effective duration is at 5.5 years. The ETF would behave like a medium-term bond and would move moderately as interest rates changes – bond prices move in opposite direction of stock prices in general. Long term bond prices are more volatile while short-term bond prices are rather stable.

CSOP Asset Management is the fund manager of this ETF. While you might not have been familiar with CSOP, the company is the world’s largest Renminbi Qualified Foreign Institutional Investor quota manager. Headquartered in Hong Kong in 2008, CSOP facilitates foreign investment into China’s capital market. It is no surprise that CSOP is the first asset manager to launch a Chinese Government Bond ETF here.

Currently the manager charges a 0.25% management fee which is fair in my view.

There are two listings with different currency denominations:

  • USD Counter Stock Code: CYB
  • SGD Counter Stock Code: CYC

Personally, I would prefer the SGD since I am based here and I don’t have USD lying around to deploy.

The weighted average coupon is 2.98% and the ETF pays out interest two times a year (in June and December).

Lower your risk with fixed income ETFs and ride on the rise of China at the same time

Fixed income ETFs have shown their value in crises and Covid-19 was no different – stocks prices tumbled while most of the fixed income ETFs have held their value and gone up higher subsequently.

You can lower your risk exposure by including fixed income products into your portfolio and using ETFs is the most convenient way. SGX has a range of fixed income ETFs to choose from such that you can find something that suit your needs.

The ICBC CSOP FTSE Chinese Government Bond ETF is the most interesting to me as it wasn’t easy to invest in China government bonds prior to the availability of this product. China is already the second largest economy in the world and her growth isn’t slowing down anytime soon. I think investors can benefit by investing in China and this ETF is a safe way to dip your toes into as you would experience less volatility than a Chinese equity ETF.

You can easily buy the ETFs via your brokerage platform – remember the stock code, CYB, is for USD denomination while CYC is for SGD denomination.

You can find out more about the ETF from CSOP’s website.

This is a sponsored post. The views belong to the author.

Alvin Chow
Alvin Chow
CEO of Dr Wealth. Built a business to empower DIY investors to make better investments. A believer of the Factor-based Investing approach and runs a Multi-Factor Portfolio that taps on the Value, Size, and Profitability Factors. Conducts the flagship Intelligent Investor Immersive program under Dr Wealth. An author of Secrets of Singapore Trading Gurus and Singapore Permanent Portfolio. Featured on various media such as MoneyFM 89.3, Kiss92, Straits Times and Lianhe Zaobao. Given talks at events organised by SGX, DBS, CPF and many others.
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2 thoughts on “How to lower your risk with fixed income ETFs and ride the rise of China”

  1. “The weighted average coupon is 2.89% and the ETF pays out interest two times a year (in June and December).”

    Do you mean to say 2.98% since that’s the number on the picture shown above?

    Thanks.

    Reply

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