In this article, I will provide my personal views and have an open discussion with you on the recently launched bond ETF: Nikko AM SGD Investment Grade Corporate Bond ETF.
If haven't heard of it, this is a new product created by Nikko AM and you can find more information about the bond ETF over here.
1. IOP of an ETF is unlike IPO of a stock
There is no need to rush to subscribe the bond ETF during IOP (Initial Offering Period). For subscription of the bond ETF during the IOP, you will get all units for the amount that you subscribe. This is because ETF is a fund.
The fund manager will create new units of the fund for the investment amount that you put in. There is no need to ballot like IPO of a stock, where there is a limited number of shares for investors to subscribe.
Also, the price movement of an ETF after listing depends on the underlying asset price in the ETF. In this case, it is the price of the bonds that the ETF is holding.
Unlike stocks, where price may be quite volatile after IPO, as there are limited number of shares for subscription and the price movement is largely based on market sentiment for the stock.
2. Bond ETF has no maturity date
If you are buying individual bond, it is most likely that the bond has a maturity date. If you buy the bond at $100, you will get back your capital at $100 on the maturity date. Assuming that there is no default, your capital is guaranteed by the issuer.
However, for bond ETF, as the bond ETF has no maturity date, the only way for you to get back your capital is to sell your holding. The amount of capital that you will get back depends on the price that you sell. Hence, you have no certainty in terms of the return of your capital.
3. Rising interest rate vs Bond Investment
As you know, when interest rates go up, bond prices go down. This is a general statement that you can apply to bond investment. However, it is very much dependent on how you invest into bonds. I am listing down three possible ways for bond investment as follows:
#1. Passive managed bond fund like ETF. There is no maturity on the bond ETF. Assuming that there is no change to other factors, when bond price goes down, the bond ETF price will go down.
#2. Active managed bond fund like unit trust. Fund manager may use derivative to hedge the interest rate risk. Fund price may not be affected by interest rate. One good indicator that you can check is the duration of the fund. Duration is a measurement for sensitivity of the bond fund against interest rate. If the duration is low or negative, the fund price should not be affected by the interest rate. You can find this duration number in the fund fact sheet.
#3 .Buying individual bond with maturity date. Bond price may go down during the holding period if interest rate goes up. But when the bond matures, you will get your capital back at par value.
Thus, unless you sell the bond before the maturity and sell at a lower price, your return should not be affected by interest rate changes.
In the rising interest rate environment, I will prefer to hold bonds with short maturity date. This is because the bond will mature at an earlier date, you can then use the maturity proceeds to invest in bond with higher yield.
#4. Comparison with other low risk investment instruments. At the time of writing, the yields of low risk investment instrument are as follow:
- Nikko AM Bond ETF ~ 3%
- ABF bond ETF = 2.62%
- SSB (10 years holding period) = 2.57%
- CPF OA interest = 2.5%
- Phillip Money Market Fund = 0.96%
Final Thoughts On Portfolio Diversification
As a Certified Financial Planner, I can’t go away from the concept of portfolio diversification.
The investment tool that you should use is depending on your investment objective and existing portfolio exposure. If your existing portfolio is very concentrated on high risk investment like stock, then you may want to allocate some to lower risk instruments like bond.
In the past, we have very limited retail bonds to invest, but with this new bond ETF, you can now diversify your investment to bond.
Do note that in the rising interest rate environment, bond prices tend to go down. This is especially true for lower yield bonds like investment grade bonds.
My current portfolio is about 70% in stocks and 30% in cash. The 30% cash that I have is in Phillip MMF that give about 0.96%. This is my opportunity fund, I will invest from time to time whenever I see the opportunity in the stock market. With this new bond ETF, I may allocate 10% of my portfolio to get better return for my opportunity fund and for portfolio diversification purpose.
That’s all for the article.
Now comment below and tell me what do you think about Nikko AM SGD Investment Grade Corporate Bond ETF.
Louis Koay is a dual-licensed representative at a top financial firm. He graduated from the National University of Singapore with First Class Honours and he is a CFA charterholder as well as a Certified Financial Planner. He is currently managing a team of 6 advisors and servicing more than 1,000 clients with asset under advisory of more than $20 million. As a trainer at Dr Wealth, Louis developed the Personal Finance Mastery Course and he is a key trainer in the Intelligent Investors Immersive Program. He has trained more than 10,000 retail investors in analysing stocks and on personal financial planning.