How Can Singapore Investors Buy Bonds?

February 16, 2023

Singapore bonds ETF

Globally, investors are more attuned to buying stocks when investing. That’s because they’re easy to access in terms of buying and selling.

That’s true, whether we talk about the Singapore Exchange (SGX) or New York Stock Exchange (NYSE).

Yet, bonds (also called “fixed income”) are a large part of the investment mix for global investors. In 2021, the total value of the global bond market was around US$125 trillion.

That was slightly ahead of the total value of all stocks listed in 2021 – US$121 trillion. Yet in 2022, stock markets globally took a hit so, in theory, global bonds’ lead in terms of value is probably now bigger today.

But buying bonds has always been the preserve of large pension funds and institutional investors. Why is this the case? And can Singapore investors easily buy bonds if they want to?

Bond markets are typically less liquid

For Singapore investors, I’ve previously touched on both Singapore Savings Bonds (SSBs) and Singapore T-bills.

Effectively, they’re two types of bonds. But they differ from most bond instruments in that they’re readily accessible to retail investors (like you and me) and you can redeem them easily without any penalties – at least in the case of SSBs.

For most bonds, however, whether they’re corporate (so issued by companies) or sovereign (issued by countries), the bond market is relatively illiquid.

What that means is that it’s not easy to buy or sell individual bonds freely on a market, like it is with stocks.

For example, stocks trade on a stock exchange, such as the SGX, whereas a lot of bonds trade on Over-the-Counter (OTC) markets.

What this means is that you need a bank relationship manager, or bond dealer, to help you execute your buy or sell order.

And that usually comes with minimum orders of at least S$100,000, if not S$250,000 or more.

Access bonds through ETFs

So, given the illiquidity aspect of individual bonds, how can regular Singapore investors buy bonds if they wish to have them as part of their portfolio?

Like accessing many other illiquid assets, the answer is an exchange-traded fund (ETF).

The “wrapper” of an ETF allows investors to buy into a listed vehicle that holds specific types of bonds, all for a nominal annual fee, or expense ratio.

In Singapore, we’re able to buy two large, well-recognised bond ETFs that are listed on the SGX. These are the Nikko AM Investment Grade Corporate Bond ETF (SGX: MBH) and the ABF Singapore Bond Index Fund (SGX: A35).

The former invests in corporate bonds issued by some of Singapore’s biggest companies while the latter holds Singapore dollar bonds issued by the Singapore government or government-linked entities.

Both are relatively stable bond options for investors here and they can use either cash, CPF or Supplementary Retirement Scheme (SRS) funds to purchase these two ETFs.

With expense ratios of around 0.25%, these two bond ETFs are also considerably cheaper than other specialised ETFs – like S-REIT ETFs – listed on the SGX.

How about overseas bond ETFs?

Obviously, the clear winner in this segment would be to look to the deep and liquid stock markets in the US – where an array of various bond ETFs are listed.

As long-term investors, building up a fixed income part of our portfolio should also be part of the consideration as responsible financial planning.

In that respect, one of the biggest and most accessible bond ETFs in the US is the Vanguard Total Bond Market ETF (NYSE: BDN).

It provides broad exposure to the US dollar investment-grade bond market and offers a current yield to maturity of 4.3%. The ETF also has an extremely competitive annual expense ratio of just 0.03%.

Elsewhere, if you wanted exposure to the bond market in the rest of the world a good option would be the Vanguard Total International Bond ETF (NYSE: BNDX).

This ETF has 55% of its holdings in Europe with another 23% in Asia Pacific. Yield to maturity comes in at 5.3% but its annual expense ratio is slightly more (0.07%) than the US-focused bond ETF.

Finally, both of the above bond ETFs actually make distributions monthly, which is ideal for those looking to build a passive income stream from bonds.

Look at building a truly diversified portfolio

When we buy stocks, we talk about diversification. That also applies to general portfolio and asset exposure, too.

While the typical “60:40” split of stocks and bonds may no longer be completely relevant, it is worth having some bond exposure as you get older.

That’s because the two main asset classes don’t tend to be too tightly correlated over the long term.

For Singapore investors looking to gain exposure to bonds and build out their fixed income portion, there are attractive options both at home and abroad.

Disclaimer: ProsperUs Head of Content & Investment Lead Tim Phillips doesn’t own shares of any companies mentioned.

Tim Phillips

Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.

He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.

In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.

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