Bonds component of the Singaporean 3-fund portfolio - ABF Singapore Bond Index Fund

The Singaporean 3-fund portfolio is the Singapore version of the Boglehead 3-fund portfolio which is suitable for US citizens. The Boglehead 3-fund portfolio comprises of three components:

- Vanguard Total Stock ETF (home equity; the name is misleading but it comprises only US stocks)
- Vanguard Total World Stock ETF (global equity)
- Vanguard Total Bond Market ETF (home bond; similarly, this is made up of only US bonds)

The Singaporean 3-fund portfolio will be a replication, and thus be:

- Nikko AM Singapore STI ETF (home equity)
- Vanguard FTSE All-World UCITS ETF (global equity)
- ABF Singapore Bond Index Fund (home bond)

The ABF Singapore Bond Index Fund

The purpose of having a bond component is to give stability to the portfolio. Equity is more volatile, and having a bonds component in a portfolio have been proven to reduce overall risk of the portfolio, whilst giving more or less the same return.

There has been research done up that an 80/20 mix in a portfolio of stocks and bonds with rebalancing outperforms a full equity fund. However, the literature is little on this, and opinions are divided.

What does it comprise of?

The bond component should be made up of short term high-grade bonds. Longer term bonds are subjected to very heavy interest rate risk. 30 year treasuries, for instance, are almost as volatile as the S&P 500. We will need short-term bonds as we want the capital amount to stay more or less the same. In other words, the bonds component is for dividends (protection) than capital appreciation (return). Similarly, high grade bonds are needed in order for low credit risk, hence lower volatility in price.

This excerpt is taken from the website:

Gain access to one of the world’s highest-yielding AAA-rated government bonds with the ABF Singapore Bond Index Fund ("Fund"). The first exchange traded fund ("ETF") bond fund in Singapore, the Fund 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.

Although it is not really short term, but the AAA-rated bonds will give a very stable price throughout. I took the following snapshot from the website. Listed below is price stability, one of the benefits of the fund.


Holdings

These are the holdings in the fund. You can see that they are mainly government bonds. For the full holdings, you can refer here: link.




Dividend and capital appreciation

We are mainly looking for protection, and we achieved it through the preservation of capital. Dividends are given to compensate you for the opportunity cost of your money. I could not find the dividend yield around the website, but I did manage to find their annual report for the year ended 30 Jun 2015. This is a snapshot.


I put in the weightage and the coupon rate into a spreadsheet, and theoretical derived a weighted average coupon rate of 2.81%. On their website, listed as one of the benefits is a theoretical higher rate of return compared to savings deposits. The rate they used was 2.9%, which is around the same as what I got.


Thus, I am inclined to think that the dividend yield will likely be around this figure.

Expense ratio

Expense ratio is stated to be 0.25% of the fund. I would deem it to be low on absolute, but high on relative. The Vanguard Total Bond Market Fund, which tracks US investment grade bonds, has an expense ratio of 0.07%.

Conclusion

To reiterate, holding a bond component in the Singaporean 3-fund portfolio is to give a stability to the portfolio. The price of the bond fund shouldn't change much, and continue to provide a steady stream of dividends even in adverse market conditions.

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Unknown
AUTHOR
18 March 2018 at 00:22 delete

Hi. I am looking at ABF Singapore Bond Index Fund but it has low liquidity which will make rebalancing hard. Did that come across as a concern for you?

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18 March 2018 at 07:16 delete

Hi, not really actually. You can put in a limit order and the trade usually clears within 1 week.

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Anon
AUTHOR
4 April 2018 at 08:15 delete

Hello for the sti spdr and abf bond component, as for a now which local broker do you use? For the world index fund, you are using standard chartered still? Any monthly fees for holding your stocks for the brokers you use?

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4 April 2018 at 09:02 delete

Yes, I use standard chartered as my broker for both ETFs. The broker doesn't charge any monthly fees.

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14 April 2018 at 13:31 delete

Hi,
Thanks for this helpful post. I also have ABF Singapore bonds in my portfolio but I'm a bit worried because there are many long term bonds inside.It is said only short term bonds are effective to stabilize a portfolio. Could be betterto buy a short term bond etf in another country. May be UK to avoid taxes on divident ?
Guillaume

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15 April 2018 at 08:42 delete

Short term bonds are effective to stabilise a portfolio because they are more sensitive to interest rate fluctuations. However, if you take a look at the holdings in ABF SG Bonds ETF, you will notice that (i) there is a bond ladder of different maturity periods and (ii) the bond issuers are mostly blue chip companies. This causes the ETF to be more stable (and also lower returns) than normal long term bonds.

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18 April 2018 at 18:01 delete

Good bonds increases when stock decrease. So when can sell some and buy cheap stocks etf. But in january both have decreased. May be because interest rate has increased.

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