Don't Miss The IPO Of Singapore's First SGD Corporate Bond ETF By Nikko AM

With the Nikko AM SGD Investment Grade Corporate Bond ETF, retail investors can access the corporate bond market for as low as SGD 100!

The benefits of the Nikko AM SGD Investment Grade Corporate Bond ETF includes: easy access to the corporate debt market with a small capital outlay, diversified exposure, higher yields than savings/fixed deposits and low costs.

In a rising interest rate environment, interest rate risk for bond ETFs can be mitigated by taking a longer term perspective, collecting interest payments while riding out the rate cycle.

Huge Minimum Investment Traditionally A Hurdle For Retail Investors

Singapore is one of the region’s leading debt markets. Data from the Monetary Authority of Singapore (MAS) shows that since 2007, total corporate debt issuance grew at a CAGR of 7.5%, hitting SGD 325 billion in 2016 (Chart 1).

Chart 1: Singapore’s Corporate Debt Market Continues To Enjoy Strong Growth

(Related Article: A Smarter Way To Invest In Bonds)

Despite experiencing tremendous growth over the years, retail participation in the corporate bond market is still severely limited. In 2016, retail investors only accounted for less than 2% of total investments within the corporate debt market, while institutional investors made up the lions share.

The paltry retail participation in the corporate debt market isn’t a sign that investors aren’t interested in bonds. Figures published by the Monetary Authority of Singapore revealed that since February 2018 every issue of Singapore Saving Bonds (SSB) was oversubscribed with the exception of the month of March (Table 1).

Table 1: Oversubscription of SSBs Shows Strong Demand For Higher Yields

And even more recently, the retail tranche of Astrea IV private equity retail bonds issued by Azalea Investment Management, a wholly owned subsidiary of Temasek, was 7.4 times oversubscribed! This goes to show that there is actually robust demand for bonds, but due to the SGD 250,000 minimum investment for corporate bond issues, they are virtually inaccessible to the average retail investor.

With the impending launch of Singapore’s first investment-grade corporate bond ETF, investors will now have access to the corporate bond market which was previously inaccessible to them.

Singapore’s First Investment Grade Corporate Bond ETF

The Nikko AM SGD Investment Grade Corporate Bond ETF, which is the first ever investment-grade corporate bond ETF to be listed in Singapore, will be making its debut on the SGX on 27 August 2018. The objective of this ETF is to provide investors with investment returns that correspond closely to the Markit iBoxx SGD Non-Sovereigns Investment Grade index (the index), which tracks the performance of SGD-denominated investment-grade corporate bonds.

The Nikko AM SGD Investment Grade Corporate Bond ETF contains over 100 issues from both the private sector and quasi-government agencies. This ETF employs a representative sampling strategy, which means it holds only a portion of all the bonds in the index. It has an estimated total expense ratio (TER) of about 0.3% (capped for the first three years).

The ETF is issued by Nikko Asset Management, one of the largest ETF managers in Asia and they are also the same company behind the popular Nikko AM Singapore STI ETF (SGX.G3B) and the ABF Singapore Bond Index ETF (SGX.A35).

We believe that this ETF will be an excellent complement to any fixed income portfolio, and here are four reasons why you should invest in this ETF.

1. Enjoy Higher Yields Compared To Savings/Fixed Deposit Rates

In a 2016 survey conducted by Blackrock, it was noted that 53% of Singaporeans placed saving money as their top priority over growing their wealth. This trend is substantiated by the fact that the portfolio of an average Singaporean investor consisted of nearly 50% cash. Bonds on the other hand only accounted for a pitiful 5%.

Data from the MAS showed that the average 12 month fixed deposit rates at local banks pays only 0.37% interest per annum. August’s issue of Singapore Savings Bonds (SSB) pays an average of 2.57% per year, but that’s assuming investors hold on to the bond for the full ten years.

With an estimated yield of greater than 3% per annum and the potential for capital appreciation, investing in the Nikko AM SGD Investment Grade Corporate Bond ETF is a better alternative to fixed deposits and SSBs when it comes to helping Singaporean investors achieve their financial goals.

2. Buying Corporate Bonds With As Little As $100

Until now, one of the ways to access Singapore’s corporate bond market is to buy individual bonds. Given the hefty minimum sum of SGD 250,000 just for a single issue, buying individual bonds is simply not feasible for the average retail investor. With the Nikko AM SGD Investment Grade Corporate Bond ETF, investors can easily gain access to a wide variety of investment-grade corporate bonds for as low as SGD 100 (based on the minimum lot size and indicative price).

While unit trusts can also provide investors with access to Singapore’s corporate bond market, most of them have a substantial portion of their assets invested in SGS bonds, and thus do not provide pure exposure to SGD-denominated corporate bonds.

3. Obtain Diversified Exposure To Investment Grade Corporate Bonds

A single lot of the Nikko AM SGD Investment Grade Corporate Bond ETF gives investors exposure to over 100 corporate bonds from over 50 companies, ensuring that a single default will not do much damage to an investor’s overall portfolio than it would to a portfolio holding individual bonds. As such, this ETF allows investors to enjoy diversified exposure to the corporate bond market at lower risk compared to holding an individual bond.

The constituents of this ETF include several well-known local organisations that have ample financial resources, such as DBS (SGX.D05), UOB (SGX.U11), and Singapore Airlines (SGX.C6L). In addition, at least 35% of this ETF is invested into quasi-sovereigns entities like Housing & Development Board (which is the largest issuer at 20%), Temasek and Land Transport Authority. These entities are implicitly backed by the government of Singapore, and their bonds are often perceived to be safer than corporate bonds.

With such a broad range of companies operating across different sectors, this ETF is a well-diversified representation of Singapore’s corporate bond market.

4. Low Cost Vehicle

Cost conscious investors will be happy to hear that the total expense ratio of this ETF is only 0.3%. This means that for every SGD 100 you invest, Nikko AM charges only SGD 0.30 per annum, a ridiculously small amount considering the wide spectrum of benefits this ETF provides.

Table 2 below illustrates the impact expense ratios have on total returns using a hypothetical investment of SGD 10,000 compounded at 3% annually over the course of 5 years. The investments are made in the Nikko AM SGD Investment Grade Corporate Bond ETF and a sample fund, which has expense ratios of 0.3% and 1% respectively.

Table 2: Higher Expense Ratios Dampens Total Returns

The benefits of low expense ratios cannot be understated. SGD 10,000 invested in the Nikko AM SGD Investment Grade Corporate Bond ETF will return -1.45% less than a fund with a 0% expense ratio. A similar investment in the Sample Fund will return -4.76% less! This shows that even a small difference in expense ratios can significantly lower your returns over the long run.

Interest Rate Risk

In a rising interest rate environment, the prices of bonds and bond ETFs will fall in general. In the case of individual bonds, interest rate risk can be eliminated by simply holding the bond to maturity, as the price will eventually converge to its par value.

With bond ETFs, investors should similarly take a longer term perspective. Although the price returns of the index has been relatively stable, investors who chose to stay invested for the 6 years between July 2012 and July 2018 would have realised average total returns of close to 3.1% each year (Chart 2).

This goes to show that interest payments play a significant role in the total returns of bond ETFs and thus it pays to stay invested for the long term. Also, as the underlying bonds within the ETF mature, the ETF manager will have to reinvest the proceeds into new bonds, which will carry higher interest rates, benefitting the ETF and its investors.

Chart 2: Over The Long Term, Interest Payments Make Up The Bulk Of The Returns For Bond ETFs

There is a lot to like about the Nikko AM SGD Investment Grade Corporate Bond ETF. Small capital outlay, diversified exposure to investment grade corporate bonds at a low cost are some of the key benefits of this ETF. With a 3% yield, the Nikko AM SGD Investment Grade Corporate Bond ETF is a great product for retail investors who seek higher yields compared to traditional savings products, and it also comes with an added perk of potential capital appreciation.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.

The Research Team is part of iFAST Financial Pte Ltd.