How Fixed Income ETFs Might help Protect Your Investment Portfolio In Singapore

Most people recognise that fixed income assets are usually safer than equities. Throughout an economic crisis, fixed income assets for example bonds can retain their timid player than equities. This helps investors to protect their portfolio against unexpected volatility like what we should have experienced in 2021.

Similar to purchasing equities, we also need to purchase the right mix of high-quality fixed income assets. Suppose we just invest all our money into just a few bonds. We face the danger that the performance of our fixed income portfolio will be impacted heavily if the companies issuing these bonds run into difficulty repaying the borrowed money.

It's impractical to anticipate retail investors to diversify their fixed income investments in 10 or more high-quality bonds on our own. Not only would the transaction costs to purchase each of these bonds be quite high, however, many government and corporate bonds also need a minimum investment amount that can be quite high.

For example, if each bond requires a minimum investment of $10,000, investing in ten separate bonds will definitely cost at least $100,000.

With fixed income ETFs, retail investors who have a smaller portfolio can still purchase a wide variety of high-quality bonds for asset allocation reasons.

Gaining Exposure To Bonds Via Fixed Income ETFs

Currently, on the Singapore Exchange (SGX), there are several fixed income ETFs that people can invest in.

Screenshot from SGX taken on 11 Nov 2021

As an investor, we are able to choose to invest in various fixed income ETFs based on the type of market or sector we would like exposure to. Some of the fixed income ETFs for auction on SGX are traded in both Singapore Dollar (SGD) and US Dollar (USD) so investors have a choice on which currency they would like to invest in. Here is a highlight of a few of the fixed income ETFs:

ABF Singapore Bond Index Fund (SGX: A35)

The ABF Singapore Bond Index ETF invests in SGD-denominated bonds from the Singapore government and quasi-government entities. These bonds have a “AAA” ratings and are extremely safe.

XTrackers Singapore Government Bond UCITS ETF (SGX: KV4)

If we want to only invest in the triple-A bonds issued by the Singapore government, the XTrackers Singapore Government Bond UCITS ETF is the ETF that we are looking for. Like the ABF Singapore Bond Index Fund, this is as safe as any investment you can make on the SGX.

Nikko AM SGD Investment Grade Corporate Bond ETF (SGX: MBH)

If you want to invest in corporate bonds that exist by quasi-sovereign entities in Singapore and high-quality companies, we are able to consider the Nikko AM SGD Investment Grade Corporate Bond ETF.

ICBC CSOP CGB ETF (SGX: CYC) – New!

Launched in September 2021, the ICBC CSOP CGB ETF is the world’s largest China pure government bond ETF. It invests inside a diversified basket of bonds that is issued by the Chinese government. On 26 October, AUM for the landmark ETF has crossed the US$1 billion mark.

Phillip SGD Money Market ETF (SGX: MMS) – New!

Launched in October 2021, the newest ETF on the SGX is the Phillip SGD Money Market ETF. It is the first Singapore-domiciled money market ETF on SGX and also the only money market ETF in East Asia. As a money market ETF, the Phillip SGD Money Market ETF invests only in short-duration debt instruments for example fixed deposits, government and company bonds and commercial bills by having an average of 90 days to maturity.

One point important to note is that most of these fixed-income ETFs have experienced a positive year-to-date (YTD) gain in 2021. This is not surprising as well as in stark contrast to the Straits Times Index (STI) which has declined by about 16% from three,252 (2 Jan) to 2,712 (11 Nov).

During a time of crisis, investors will flock to safer fixed income instruments and purchasing fixed income ETFs can provide stability for our portfolio even throughout a recession.

Also, income-seeking investors can continue enjoying passive income since fixed-income ETFs also provide regular coupon payouts, unlike investments in equities, which may decide to hold more cash in times of uncertainty or see significant business disruption.

According to the SGX, the historical weighted average yield for that ABF Singapore Bond Index ETF reaches 1.28% p.a. as the Nikko AM SGD Investment Grade Corporate Bond ETF provides a yield of about 2.40% p.a.

Besides allowing you to gain fixed income exposure inside a hands-off manner, fixed income ETFs also provide an advantage over investing in individual bonds because of superior liquidity. While individual bonds are subject to market demand and supply – and some bonds may not have daily transactions, fixed income ETFs tend to be more liquid and can be easily traded anytime during market trading hours – even if the underlying bonds themselves are illiquid.

As an experienced investor would tell you, asset allocation is a critical component for long-term investing. By gaining exposure to a wide range of bonds via fixed income ETFs, we can ensure that our investment portfolio can weather through challenging market conditions while still allowing us to enjoy growth during good times.

Based on a recent market update from SGX, Singapore bond ETFs have outperformed Singapore equity ETFs amidst the economic slowdown caused by COVID-19, with the “AAA” investment-grade ABF Singapore Bond Index ETF and Xtrackers II Singapore Government Bond UCITS ETF averaging a YTD return of 8.6%.