First active bond ETF to debut on SGX by end-September

SINGAPORE – Retail investors in Singapore have another avenue to invest in fixed income, via an actively managed bond fund that will be traded daily on the Singapore Exchange (SGX).

An actively managed bond fund is one where the fund manager selects and manages the bonds in the portfolio. It is not listed.

Lion Global Investors, an asset manager wholly owned by OCBC Bank, has wrapped one such fund, the LionGlobal Short Duration Bond Fund, into an exchange-traded fund (ETF).

The ETF version of this fund, known as an active bond ETF, can be bought and sold during trading hours on an exchange.

It will be the first active bond ETF on SGX when it lists on Sept 29.

The only other active ETF currently on SGX was launched on Jan 31, 2024, after Lion Global partnered with Japan’s Nomura Asset Management to introduce an actively managed equities ETF.

Investors in the bond ETF will have access to the same portfolio of Singapore and global bonds as that managed by the unlisted unit trust.

Mr Teo Joo Wah, chief executive of Lion Global Investors, said this gives investors a cost-effective way to earn income and diversify their investment portfolios.

The management fee is 0.25 per cent a year, up to a maximum of 1 per cent of the net asset value of the fund.

The unlisted version of the fund has a higher management fee of 0.5 per cent, up to a maximum of 1 per cent of the net asset value of the fund.

The ETF, like its unlisted version, intends to make a payout every quarter.

Mr Alvin Chow, assistant director of investment advisory at financial advisory firm iFast Global Markets, said this bond ETF could “fill a useful niche”, drawing investors who want higher yields than Treasury bills or fixed deposits but are hesitant to take on equity risks.

Its product highlights sheet has a yellow heading band, which is the default indicator for non-complex products.

A check of its prospectus showed that, as at July 31, the weighted average yield to maturity, which is an estimate of the total return investors can expect if they hold the bonds to maturity, is 3.18 per cent. 

The weighted average duration, or the average length of time until the bonds mature, is 2.25 years. 

Lion Global also stated in its prospectus that this is a “short duration bond fund whereby duration of the portfolio is generally kept under four years”.

The US Federal Reserve is meeting on Sept 17, and a rate cut of at least 25 basis points or 0.25 percentage point is widely expected.

Mr Chow said the Fed primarily controls short-term interest rates, so a Fed cut will affect short-term bonds.

However, bonds with shorter maturities are also less sensitive to changes in rates and macroeconomic swings, he added.

This means that investors will see smaller price swings in these bonds when rates rise or fall, and they are therefore less volatile.

On the other hand, long-term rates are driven by market forces, Mr Chow noted. 

In fact, long-term yields have risen from a year ago on concerns over the US fiscal deficit, he said, adding that investors face more uncertainty with long duration bonds since they are more sensitive to interest rates and macroeconomic swings.

Mr Chu Toh Chieh, senior portfolio manager for the LionGlobal Short Duration Bond Fund, noted that the fund’s active strategy meant that the fund manager is regularly reviewing its portfolio holdings to manage interest rates and look for income opportunities.

Interested investors can subscribe to the bond ETF with cash during the offer period from Sept 8 to 23. 

Each unit is priced at $1. The minimum subscription quantity is 1,000 units.

Investors can either buy the units with cash or with money from their supplementary retirement scheme accounts after the bond ETF starts trading on the SGX.

Former financial journalist-turned-novelist Frederick Lim said he is not buying into this active bond ETF as he has enough funds allocated to lower-risk fixed income instruments.

“Bond funds diversify over just bonds. I prefer to diversify across various financial instruments,” he said, adding that he plans to allocate some funds into the upcoming real estate investment trust listing by accommodation provider Centurion Corp for “higher reward”.

That said, the LionGlobal Short Duration Bond ETF is not without risks.

Mr Kyith Ng, founder of financial blog Investment Moats, said fixed income can still default even though the probability has been very low historically.

He added that if one or a few bonds default, the fund will take losses depending on how much of that portfolio is invested in the affected bonds.

A diversified portfolio therefore lessens the impact of a default as the risk is spread out across more bonds.

In the case of the LionGlobal Short Duration Bond ETF, the risk is spread out across its portfolio of 227 bonds.

As at July 31, the fund has about 40 per cent exposure to Singapore bonds. In terms of sector allocation, it is most exposed to the financial and real estate sectors.

Lion Global also stated in its prospectus that while it “generally invests in bonds with investment-grade quality”, it may “invest or expose the fund to sub-investment-grade bonds”.

Mr Chow said this is not a concern for now as the majority of the holdings are in investment-grade credit.

He added that the ETF’s current weighted average credit rating is A-, which sits comfortably within the investment-grade category.

The credit rating will have to be cut by at least three notches, BBB+, BBB and BBB-, before it falls into the high-yield or junk bond category.

Mr Ong Xun Xiang, head of ETFs at Lion Global Investors, said the fund has demonstrated its resilience over the past 14 years when it switched to a short duration strategy in 2012.

It has delivered positive returns in 13 years, even after assuming a one-off maximum initial sales charge of 5 per cent.

The only exception was during the 2022 Fed rate hike cycle, when the fund had a negative 4 per cent return. 

The total return, which refers to the overall gain since April 1, 2012, is 38.1 per cent, with the one-off maximum initial sales charge of 5 per cent factored in.

The annualised return, or the average return a year since April 1, 2012, is 2.4 per cent.