Bonds vs Bond ETFs – What are the differences and benefits?
By Kristal .AI, Last updated: 2022-06-08 (originally published on 2021-04-05)
The differences between Bonds and Bond ETFs
What are Bonds?
Bonds are debt securities usually issued to raise money from investors willing to lend their money for a specified period of time. Issuing bonds is a common method for entities to raise funds, whether it is a government, corporation or municipality.
When you purchase a bond, you are “lending” to the bond issuer or “borrower”. In return, the borrower promises to pay you a specified rate of interest over the life of the bond and to repay the principal amount, otherwise termed as the “face value”.
There are a few different types of bonds, but the main ones are:
- Corporate bonds – issued by private and public corporations.
- Municipal bonds – issued by states, cities, counties and other government entities.
- Treasury bonds – issued by the U.S. Department of the treasury on behalf of the federal government.
Why invest in bonds?
People tend to prefer buying bonds as they provide a predictable income stream. Bonds typically pay interest twice a year. They are typically regarded as a safe haven for one’s money.
When bonds are held to maturity, bondholders are able to get back the entire principal, hence it is a good way to preserve capital while investing. It can also act as an offset exposure to more volatile stock holdings.
Bonds are able to contribute an element of stability to almost any diversified portfolio, acting as a safe and conservative investment. When stocks perform poorly, they are great savings vehicles for when you want to preserve your capital.
What are some benefits of investing in bonds?
- Capital preservation
- Earning predictable returns – can function as steady streams of income
Difference between Bonds and Bond ETFs?
While Bonds constitute single security with a Corporate, Financial Institution, or Government as a borrower, ETFs invest in a basket of bonds or debt instruments. They pool funds from capital invested, often tracking an index of bonds with the main objective of matching the returns from that underlying index.
While both have similar attributes, a Bond ETF typically offers better risk-adjusted returns at a lower cost compared to buying individual Bonds. Bond ETFs also allow for a smaller investment size for investors who wish to construct and own a diversified portfolio of bonds.
Another difference is that Bonds have a fixed maturity date and coupon, while a Bond ETF does not have a maturity date but often pays dividends that mirror the received coupons in the strategy, or re-invest those proceeds at the prevailing market price.
Advantages of Owning Bond ETFs over Bonds
Disadvantages of Owning Bond ETFs over Bonds
When charted against equity indices such as the Straits Times Index, the price action for the ABF Singapore Bond Index Fund and Nikko AM SGD Investment Grade Corporate Bond ETF has been relatively more stable.
ABF Singapore Bond Index Fund (stock code: A35)
The ABF Singapore Bond Index Fund is the first ETF bond fund listed in Singapore, which invests in the constituents of the iBoxx ABF Singapore Bond Index. This index tracks a basket of high-quality bonds issued primarily by the Singapore government and quasi-Singapore government entities.
The Fund boasts a 16-year track record in demonstrated resilience and performed well even during volatile market conditions for over a decade. This performance can be attributed to the fact that is an investment in Singapore government bonds, which is one of the world’s highest-yielding AAA-rated government bonds. It is commonly perceived as a safe haven for assets.
SGD Investment Grade Corporate Bond ETF
The Nikko AM SGD Investment Grade Corporate Bond ETF is the first to offer investors easy access to Singapore Dollar-denominated, investment-grade corporate bonds in affordable units. The Fund aims to replicate the performance of the iBoxx SGD Non-Sovereigns Large Cap Investment Grade Index, allowing investors to diversify their portfolios with corporate bonds from high-quality issuers.
Since 2012, Singapore Corporate Bonds have provided better returns compared to Singapore Government Bonds and more stable returns versus Singapore equities. The fund still channels focus on the big names to invests in – HDB, LTA, UOB, NTUC (top 10 holdings source: Nikko Asset Management Asia as of 31 Dec 2020).
Disclaimer: The materials and data contained herein are for information only and shall in no event be construed as an offer to purchase or sell or the solicitation of an offer to purchase or sell any securities in any jurisdiction. Kristal Advisors does not make any representation, undertaking, warranty or guarantee as to the update, completeness, correctness, reliability or accuracy of the materials and data herein. All opinions, forecasts or estimation expressed herein are subject to change without prior notice. Kristal Advisors and its affiliates accept no liability or responsibility whatsoever for any direct or consequential loss and/or damages arising out of or in relation to any use of opinions, forecasts, materials and data contained herein or otherwise arising in connection therewith.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.
Article syndicated with permission from https://kristal.ai/blog/bonds-vs-bond-etfs-what-are-the-differences-and-benefits/
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