ABF Singapore Bond Index Fund and Nikko AM Singapore STI ETF are popular and quality investment funds in Singapore. They both serve different investors with different investing styles and goals.
ABF bond fund invests in bonds from the iBoxx ABF Singapore index. The investments include government and quasi-government agencies’ bonds like Housing Development Board, Temasek. The fund provides stable investment income streams for conservative investors.
Nikko AM Singapore STI ETF invests in companies from the Straits Times Index and aims to provide long-term capital growth and fits ambitious investors.
I will show you how to choose the right one based on the fund’s nature. Find out more on how to start your investment in Singapore.
What is an Exchange-Traded-Fund(ETF)?
An ETF is a popular investing tool in a modern investment portfolio. If you plan to invest your hard-earned savings for retirement, education, or other goals, you should know the natures and mechanisms before putting your money into it.
The features of ETFs:
- A basket of securities: The full name for an ETF is “Exchange-traded Fund.” It collects all specified securities and issues units to investors.
- It invests based on the components of an index: A NIKKO AM STI fund manager invests in the thirty companies from the Singapore Strait Times index. Similarly, an ABF Singapore Bond Index fund invests in the iBoxx ABF Singapore Bond index components.
- An ETF, unlike mutual funds, is a passively managed investment fund: The fund manager acts to do two critical things:
- He invests only in the companies, bonds, or commodities from an index and no more.
- He rebalances the investment proportions specified if any changes occur due to deletions or proportional changes from the index.
- Investors buy into the shares of an ETF, not the shares or bonds, or commodities directly: Apart from a conventional shareholder, an exchange-traded fund investor is a shareowner investing a small part of all the stocks and bonds in a fund pool.
- An ETF, like a stock, is tradable in the Singapore stock exchange. You can buy it during business hours. ETF prices go ups and downs.
- The costs of investing in an ETF are low compared to a unit trust or mutual fund.
- The main types of exchange-traded funds comprise stock ETFs, bond ETFs, currency ETFs, and commodity ETFs, e.g., SPDR gold shares ETF.
What is the iBoxx ABF Singapore Index?
The iBoxx ABF Singapore Index constitutes quality bonds issued by the Singapore Government, Singapore Government-linked agencies, to name a few: Housing Development Board, Temasek, Land Transport Authority.
They are all Singapore dollar-denominated bonds. Besides, the index also includes bonds from other Asian governments, quasi-government, or supranational organizations. e.g., the Import-Export Bank of Korea.
An independent index company, Markit Indices Limited, complies with and calculates and ensures the index is accurate and objective. Markit also re-balances the index to reflect every component’s ratings and outstanding amounts each month.
Singapore has the highest financial strength in Asia. The highest are three rating agencies – Standard & Poor’s, Moody’s, & Fitch-rated Singapore, the AAAs & Aaa. Therefore, the bond issued by the sovereign institutions must be of the highest quality in the index.
Why People are Investing in the ABF Singapore Bond Index Fund
1. Quality investments
Tracking the iBoxx ABF Singapore index invests the ETF in government and quasi-government bodies ‘ securities. They belong to the highest-quality bonds of investment grade.
Investors are almost certainly free of bankruptcy or default risks caused by bonds because they are behind the government’s full support. The bankruptcy risk cites an institution dissolved under the law, and the default risk pertains to a company not paying the debt on time.
2. Protection against market volatility
A bond index fund can be a hedge against market reversals. The modern portfolio theory states investors can reduce market losses by including quality bond funds in their portfolios. According to the past performance, the ABF bond fund performs well during market fluctuations.
An equity investor may find it profitable by including the index fund as a part of his portfolio to fend off unforeseen market risks from severe falling prices. If you want to protect your portfolio, you should first talk to a financial advisor.
3. Risk-averse investments
You may have another option to a bank deposit. The index provides an interest rate better than a bank deposit related to a close to zero deposit rate.
More than a 2% yield has the fund returned for investors over the past 10 years. The ETF share price, however, may fluctuate in the future.
4. A guide to beginner investors
The ABF bond ETF serves as an excellent guide to a beginner investor learning to invest. The fund has generated over 5% yield and 1.72% growth over the past 5 years.
If you are new in the investing world, you may use the fund as a stepping stone on the path to sophisticated investing. The ETF provides stable income streams and moderate capital growth.
5. Regular income streams
Investors who prefer stable and regular income over aggressive growth may utilize the fund to complement increasing revenue and return to the portfolio. Passive income investors may find the ABF Bond ETF a vehicle for a steady income and conservative capital growth.
Risks of Investing in the ABF Singapore Bond Index Fund
Life is a risky adventure, so is investing. Though bonds have less pricing volatilities than stocks and commodities, you should know potential loss may occur from investing in bonds.
1. Rating downgrade
A rating downgrade of a borrower increases the cost of interest payments. The price of a bond decreases as a result of increasing yield. Bond investors may suffer from the loss of bond prices.
2. Interest rate risk
Bond prices are sensitive to interest rate changes. When interest rates are up, the bond prices are down. Bond investors may lose due to the swings of the bond prices.
3. Tracking error risk
The fund may not invest based on the component weightings and number of bond issuers. The deviation error occurs as a result of changes in portfolio rebalancing.
The ADF fund advocates full replication of the components from the index.
4. Prepayment risk
If you are an investor of the fund, like a bondholder, you may face a bond issuer who prepays the principal earlier than the expiry dates. You may lose the interest supposed to be paid by the bond issuer. And also, you may wonder how to dispose of the funds prepaid.
Fortunately, unlike a bondholder, the fund manager will do the job for you. He will re-invest the funds in other bonds from the index. However, an impact on the fund performance is inevitable.
5. Default risk
A loss may occur due to the default risk like the prepayment risk. But the chance of loss is still remote owing to the solid financial strength of the bond issuer.
6. Inflation risk
Inflation risk is a bond investor’s greatest challenge. When the bond fund grows less than the inflation, an investor loses the real value of money.
His asset worth of money by holding a bond fund may erode by the rise of inflation. Therefore, you should diversify some parts of your portfolio into growth assets like stocks.
What is the Straits Times Index?
The Straits Times Index is a market capitalization-weighted stock index. It comprises the top 30 companies in Singapore and represents the country’s economy and general equity market.
Three international groups calculate and re-balance the components so that the index is more accurate in representing the stock weight in the equity market. They are the Singapore Press Holdings, the Singapore Stock Exchange, and the FTSE group of the UK.
Apart from representing the general economic situation of Singapore, the index comprises domestic and regional business entities and has a more than 3% dividend yield from the index.
The well-known component companies include DBS, Capitaland, Fraser Logistics, Singapore Airlines, Singapore Exchange Limited, Wilmar International, OCBC, Singtel, Mapletree, UOB.
Who Should Invest in the Nikko AM Singapore STI ETF
1. Confidence in Singapore economy for growth-oriented investors
For the past 20 years, Singapore’s GDP has recorded more than 4% growth. It’s still the stunning growth performance for a developed economy in the region.
The economy is forecast to continue the growth path post-pandemic.
Nikko AM STI ETF, run by Nikko asset management Asia, has grown over 8% every day, and the yield is about 2.5% per annum on average. You have more reasons to invest in Nikko’s ETF.
2. Hands-free investing for busy investors
It is an exchange-trade fund investing in the components from the straits times index. The ETF is a passively managed fund in which regular reviews and portfolio re-balancing are not mandatory for investors. Therefore, it fits busy and novice investors taking part in equity investing.
3. Long-term investing for goal investors
Investing professionals advocate stocks are the best investment tool for retirement and other longer-term savings goals. You may eliminate short-term fluctuations and benefit from the dividends through longer-term investing in the stock market.
4. Reducing risks for conservative investors
Nikko STI ETF covers most parts of the Singapore economy. The enterprises come from major industries domestically and represent the country’s overall economy. You gain the diversification benefits from investing in the index companies.
5. Highly liquid investments for active investors
The fund is traded on the Singapore stock exchange. You can buy or sell the ETF share without any restriction during business hours. The highly liquid status reflects the actual value of an ETF and makes it a popular investment tool.
Risks of Investing in Nikko AM Singapore STI ETF
1. Business risk
Businesses should have sustainable and profitable models for generating revenues and profits in the long term. Besides, they can adapt and react pro-actively to changes and develop successful profit-making models. If they fail, stockholders lose in the company stocks.
2. Pricing risk
Listed on stock exchanges, the prices of an ETF may change due to market demand and supply. Investors suffer losses due to the price falls and benefit from price rises.
3. Tracking errors
Fund managers must match the return in line with the index. The tracking error may result from the wrong strategies used by a fund manager. Fund managers review and re-balance the portfolio to keep pace with the performance. Investors should view the deviation from an index performance as a warning sign.
4. Fund size risk
A small ETF may have more liquidity risks than a bigger one. A small ETF fund manager may be forced to sell significant stakes in the investment portfolio if many investors request redemptions at the same time.
The fund’s liquidity may dry up, and the fund price may go south steeply by being forced to convert the existing portfolio into cash during the market stress.
5. Market risk
An abrupt change in the domestic and global markets may quickly affect stock prices. Investors should get ready for short-term price fluctuations, especially in investing in stocks.
Which is better: ABF Singapore Bond Index Fund vs. Nikko AM Singapore STI ETF
|ABF Singapore Bond Index Fund(A35)||Nikko Singapore AM Singapore STI ETF(G3B)|
|Default risks||Investors suffer losses interests and principal due to company default in debt payment.||N/A|
|Interest risk||The ETF may decrease in price due to interest rate rises.||N/A|
|Business risk||N/A||It has a high impact on business as it cannot generate revenue and profit.|
|Inflation risk||Bond prices may fall as inflation increases.||N/A|
|Investment horizon||mid-to-long term||mid-to-long term|
|Fund size risk||When the fund size becomes small, the fund manager has to sell the assets in the portfolio for cash if clients request redemptions. The fund price may fall steep if the market goes sour.||When the fund size becomes small, the fund manager has to sell the assets in the portfolio for cash if clients request redemptions. The fund price may fall steep if the market goes sour.|
|Fund management style||Passive management||Passive management|
|3-year tracking errors||0.29%||0.15%|
|Expenses||Expense ratio: 0.24%||Expense ratio: 0.30%|
Our Verdict: Which One Should You Choose?
We think both funds invest in stocks and bonds of the highest quality. The ABF Singapore Bond Index focuses on stable income streams via investing in AAA government or quasi-government bonds. Capital appreciation is minimum as the investment holdings are all government or supranational debts.
However, the bond ETF is subject to interest rate and price risk. When the general interest rate rises, the ETF price fluctuates and will likely decrease. Besides, inflation is increasing due to the supply chain issue and the post-pandemic demand worldwide, and the bond prices are under pressure and may retreat.
We may expect global Governments will issue more bonds to prop up the economy. As such, the bond price is likely to lose ground again. The cautious and risk-averse investors should wait for investing opportunities after probable market declines.
Most worldwide stock markets have gained a lot this year, and the Singapore stock market is no exception due to monetary policies.
But governments worldwide are tightening their finances, particularly in the following year. The Singapore stock market may continue to grow at albeit a slower pace. The Nikko AM Singapore STI ETF is suitable for aggressive investors willing to take more risks.
ABF Singapore Bond Index Fund(A35) is fit for risk-averse investors, and they should wait for incoming opportunities post-decline. Aggressive investors may choose the Nikko AM Singapore STI ETF for further capital growth.
- ABF Singapore Bond Index Fund is suitable for risk-intolerant investors preferring to receive steady income streams but can forfeit capital appreciation opportunities.
- Nikko AM Singapore STI ETF is an excellent investment fund for aggressive investors preferring to take risks for capital appreciation but with fewer steady income streams.
- Both are passively-managed funds for hassle-free investors opting for long-term investing.
- The ABF Singapore Bond Index focuses on stable income streams via investing in AAA government or quasi-government bonds.
- The cautious and risk-averse investors should wait for investing opportunities after probable market declines.
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