Are bond ETFs a good complement to T-bills?

We compare bond ETFs to Singapore T-bills to find out if they are a good complement for investors looking to earn an attractive yield.

Demand for T-bills has been very strong recently.

Thereafter, I started receiving questions on whether there are instruments that allow us to gain exposure to a diversified portfolio of Singapore government bonds, and some potential capital appreciation should interest rates start to fall.

In this post, I will be sharing more about bond Exchange Traded Funds (ETFs) and find out if they are worth considering as a complement to my investment in T-bills.

Bond ETFs allow you to gain exposure to a diversified basket of bonds in a single trade.

In the same way that a stock ETF may offer you the ability to own many stocks with one trade, a bond ETF allows you to diversify your bond holdings in a simple way.

It aims to track the iBoxx ABF Singapore Index, which comprises Singapore dollar bonds issued by the Singapore Government or Singapore Government-linked entities. This would include entities such as HDB, Temasek and Land Transport Authority. (as of 31 March 2024)

The Index may also include Singapore dollar bonds issued by other Asian governments or entities linked to the government from time to time, such as the Export-Import Bank of Korea.

As of 31 March 2024, its top 10 holdings consist entirely of Singapore government bonds. These bonds have various maturities ranging from 2025 to 2036.

In total, bonds issued by the Singapore government represent about 80% of the fund holdings as of 31 March 2024. This is followed by HDB (12%), LTA (5%) and Temasek Financial (2%). ^

This will allow you to gain exposure to the bond issuances of Singapore blue chip companies as well as highly rated bonds issued by foreign companies such as AIA Group, ABN AMRO, Commerzbank etc, as of 31 March 2024. ^

The ETF’s holdings as of 31 March 2024 include the bonds issued by DBS, UOB and Singtel.^

As interest rates have moved up over the past 12 months, some investors may also like to look at the yield to maturity of bonds held in the portfolio currently.

There are differences between these bond ETFs and the T-bill we need to be aware of.

I have summarised some of these differences in the table below.

Due to expectations of a Fed rate cut, long-term interest rates are now lower than short-term interest rates.

The price of the bonds held by the bond ETFs may go up should interest rates decline.

Returns are calculated on a NAV-NAV basis and assuming all dividends and distributions are reinvested, if any. Returns for period in excess of 1 year are annualised. Past performance is not indicative of future performance. Benchmark is iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index.

The iBoxx ABF Singapore Index has performed well during previous episodes of financial uncertainty.

This is due to the high credit quality of Singapore government bonds.

Did you know that Singapore is the only Asian country that has the highest AAA credit rating awarded by all 3 major credit rating agencies?

Singapore has maintained the AAA credit rating in the last 25 years, including during the Asian Financial Crisis of 1997 and the Global Financial Crisis of 2008.

In fact, the Singapore government bond has been given a similar or higher rating when compared to the US government bond by credit rating agencies.

On the flip side, your initial investment into bond ETFs will be subject to greater capital risk compared to a similar portfolio of bonds.

Unlike individual bonds, a bond ETF does not have a maturity date where you will be repaid their initial investment.

As such, there is no guarantee that you will be able to get back your initial investment.

Here, it is important to note interest rate risks once again. Remember that the price of a bond goes down when interest rates go up.

Hence, the price of a bond ETF may go down when interest rates are rising. This means that you may suffer some capital loss if you were to sell the bond ETF.

We shared earlier how you can construct a portfolio of T-bills or SGS bonds by using a bond ladder to build a passive income.

*Weighted Average Yield to Maturity (%) is an average yield calculated by weighting each security presently held by the Fund at time of calculation with capitalisation and duration. Yield to Maturity and Yield to Call measures are used in the calculation for non-callable and callable bonds respectively. The figure is for reference only and would vary from time to time due to market conditions and it does not represent the fund/sub-fund’s distribution yields or actual rates of return.

^ Reference to any particular securities is purely for portfolio information as at indicated date only and does not constitute a recommendation to buy, sell or hold any securities or to be relied upon as financial advice in any way.

[1]ABF Singapore Bond Index Fund: Distributions are not guaranteed and are at the absolute discretion of the Manager. Distributions will only be paid to the extent that they are available for distribution pursuant to the Trust Deed and covered by income received from the underlying investments of the Fund. Any distribution is expected to result in an immediate reduction of the Fund’s net asset value per unit. Past payout yields and payments do not represent future payout yields and payments. Please refer to the Fund prospectus and product highlights sheet for further details.

Nikko AM SGD Investment Grade Corporate Bond ETF: Distributions are not guaranteed and are at the absolute discretion of the Managers. If the investment income is insufficient to fund a distribution for the Fund, the Managers may determine that such distributions should be paid from the capital of the Fund. Any distribution is expected to result in an immediate reduction of the Fund’s net asset value per unit. Where distributions are paid out of capital, investors redeeming their Fund units may receive an amount less than their initial investment. Past payout yields and payments do not represent future payout yields and payments. Please refer to the applicable fund prospectus and product highlights sheet for further details.

[2]Weighted Average Duration (years) is an average duration weighted with capitalisation, and the figure is for reference only and would vary from time to time due to market conditions.

This document is purely for informational purposes only with no consideration given to the specific investment objective, financial situation and particular needs of any specific person. It should not be relied upon as financial advice. Any securities mentioned herein are for illustration purposes only and should not be construed as a recommendation for investment. You should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you. Investments in funds are not deposits in, obligations of, or guaranteed or insured by Nikko Asset Management Asia Limited (“Nikko AM Asia”).

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The performance of the ETF’s price on the Singapore Exchange Securities Trading Limited (“SGX-ST”) may be different from the net asset value per unit of the ETF. The ETF may also be suspended or delisted from the SGX-ST. Listing of the units does not guarantee a liquid market for the units. Investors should note that the ETF differs from a typical unit trust and units may only be created or redeemed directly by a participating dealer in large creation or redemption units.

The Central Provident Fund (“CPF”) Ordinary Account (“OA”) interest rate is the legislated minimum 2.5% per annum, or the 3-month average of major local banks' interest rates, whichever is higher, reviewed quarterly. The interest rate for Special Account (“SA”) is currently 4% per annum or the 12-month average yield of 10-year Singapore Government Securities plus 1%, whichever is higher, reviewed quarterly. Only monies in excess of $20,000 in OA and $40,000 in SA can be invested under the CPF Investment Scheme (“CPFIS”). Please refer to the website of the CPF Board for further information. Investors should note that the applicable interest rates for the CPF accounts and the terms of CPFIS may be varied by the CPF Board from time to time.

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The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index are marks of Markit Indices Lmited and have been licensed for use by Nikko Asset Management Asia Limited. The Markit iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index referenced herein is the property of Markit Indices Limited and is used under license. The Nikko AM SGD Investment Grade Corporate Bond ETF is not sponsored, endorsed, or promoted by Markit Indices Limited.

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