Bond ETFs Question

[kingboonz]

Too good to be true.

 

[Shiny Things]

Hi all, I am a low risk investor looking to get a yield better than SSBs. I am a low risk investor looking to get a yield better than SSBs recommended me bond ETFs. But I am very confused, so I have some questions to ask.

#1: How safe are bond ETFs? If the underlying bond is investment grade.
#2: What specific ETFs should I look at? I am a low risk investor looking to get a yield better than SSBs.
#3: How do bond ETFs pay out their coupons?
#4: What platforms can I use to buy bond ETFs?
#5: In a great depression style of economy collapse, will bond ETFs still hold their value?

Great questions all of them.

Let's start with what a bond ETF actually is. I'm guessing you're familiar with unit trusts? A bond ETF is just like that—like a unit trust that owns a bunch of bonds underneath. The only difference is that you can buy and sell an ETF on the stock exchange, instead of having to go to the fund manager.

The price of the ETF goes up and down with the price of the bonds that it owns; and it pays out dividends that are just the coupons of the bonds that it owns.

So, going to your questions:

1) Bond ETFs aren't capital-guaranteed. The bonds underneath the ETF can default; and even if they don't default, the price can go down between the time you buy the ETF and the time you sell it (for example, if interest rates go up in the meantime). That said, if the underlying bonds are investment-grade, they're pretty safe; you might not make a ton of money, but you won't lose much money either.

To be fair, most bonds aren't capital-guaranteed either! SSBs are a special case, because the government promises to always buy them back at their face value; most bonds aren't like that.

2) The only bond ETF worth looking at in your case is A35, which owns Singapore-dollar-denominated government bonds.
3) They get paid out exactly like stock dividends.
4) You can buy them through any stockbroker, or (my personal favorite method) through POSB Invest-Saver if you like making regular monthly contributions.
5) Bond ETFs didn't exist in the great depression; but in 2008, A35 dropped about 5% in value (a much smaller drop than the stock market), and recovered all its losses relatively quickly, within a couple of months.

 

[sgdividends]

Hi Shiny,

Is there an alternative ETF that holds similar assets to the A35 that i can buy from IB?

A35 cant buy from IB( Singaporean), so was wondering if there was one listed elsewhere that is eligible.

Similar risk, yield and without the taxes ( witholding tax) is any..

 

[BBCWatcher]

Is there an alternative ETF that holds similar assets to the A35 that i can buy from IB? A35 cant buy from IB( Singaporean), so was wondering if there was one listed elsewhere that is eligible.

No, but you can buy Singapore Government Securities and Singapore Savings Bonds at original issue. Assuming you're starting from Singapore dollars in Singapore, the former has zero transaction costs at original issue and if held to maturity. The latter (SSBs) are purchasable for a S$2 flat transaction fee and, if redeemed prematurely, redeemable for a flat S$2 transaction fee.

SSBs are issued monthly, and they are subject to a maximum holding of S$100,000 per person. Lately they've been oversubscribing, so it hasn't been possible to buy S$100,000 worth (for one person) within a single month.

The next SGS to come to auction is the 5 year bond, a reopen, issue code NX13100H. It's actually 2013's 10 year bond (the "13" in the first part of the issue code), but at this auction next month (May, 2018) it'll have about 5 years to maturity. If interest rates don't change much between now and then noncompetitive bidders should get about 2.2% nominal yield. For reference, A35's most recent 5 year annualized nominal return has been 1.20%. Since fund inception (2005 I believe), 2.46%. A35 provides convenience in terms of trading, but you don't necessarily need that convenience. (It depends.)

SGSes and SSBs are Singapore government bonds (and t-bills), backed by the full faith and credit of the AAA rated Singapore government. They are the safest Singapore dollar denominated assets available. You can buy them at original issue from any of the three primary dealers (DBS/POSB, OCBC, UOB). You must have a (free) CDP account to hold them. If you don't have a CDP account yet, and if you're interested in the May purchase opportunities, please open a CDP account now since it takes a little while (as much as a couple weeks).

SGSes can be sold on the secondary market before maturity, but there is a trading cost to do that with no particular guarantees about what price your bond will fetch.

 

[Maeda_Toshiie]

Hi Shiny,

Is there an alternative ETF that holds similar assets to the A35 that i can buy from IB?

A35 cant buy from IB( Singaporean), so was wondering if there was one listed elsewhere that is eligible.

Similar risk, yield and without the taxes ( witholding tax) is any..

The closest alternative is a bond fund that holds US Treasuries, or USD denominated investment grade bonds.

 

[BBCWatcher]

Keep in mind that A35 has total holdings of under S$750 million, and that's onshore in Singapore where investor interest in Singapore government bonds should be highest. By global standards that's not a big fund. Foreign investors can already access A35 through their brokers, including through Interactive Brokers. So can residents of Singapore for that matter, just not through Interactive Brokers (or through other offshore brokers) specifically. There's just not any good demand-driven reason to have an equivalent to A35 within some other domicile.

If you want some foreign (non-Singapore dollar) government bonds, there are plenty of options available through IB. As Maeda points out, U.S. government bonds are available. There are also government bond funds, regional and global, that are available through IB.

 

[sgdividends]

The closest alternative is a bond fund that holds US Treasuries, or USD denominated investment grade bonds.

Thanks BBc and Maeda.

My intention is to buy via IB .

Maeda, is there any witholding taxes in this bond fund and may I know the ticker?

 

[Maeda_Toshiie]

IUAA iShares US Aggregate Bond UCITS ETF:
https://www.ishares.com/uk/individual/en/products/287339/


AGGU iShares Global Aggregate Bond UCITS ETF (contains JP Govvies which may be a drag on returns):
https://www.ishares.com/uk/individual/en/products/291772/



I have not been able to find definitive information on the withholding tax application on US bonds (ETFs). The tax (if levied) is unavoidable. Buying Irish domiciled ETFs is the best thing that NRAs can do.

 

[BBCWatcher]

You don't have to go to Ireland to buy U.S. dollar denominated bonds. You can buy them in U.S. markets in a variety of forms, and they are generally U.S. income tax exempt. Unless you care deeply about the U.S. estate tax, which might apply to certain assets, I'd take advantage of the lower commissions and management fees available with direct U.S. investing in U.S. bonds and bond funds.

You need to make sure you have IRS Form W-8BEN on file with your broker since that's the key requirement for foreign investors (non-U.S. persons) to avoid withholding tax on such vehicles.

U.S. municipal bonds and municipal bond funds, such as Vanguard's VTEB, are U.S. income tax exempt for everyone, including U.S. persons. The yields reflect that tax advantage, of course, so foreign investors might be less interested in them. But they are available to U.S. and non-U.S. persons alike.

 

[Shiny Things]

Thanks BBc and Maeda.

My intention is to buy via IB .

Maeda, is there any witholding taxes in this bond fund and may I know the ticker?

Hang on hang on hang on. An SGD govvy bond fund and a USD govvy bond fund aren't direct substitutes; they've inherently got USDSGD currency risk between them.

BBCW's answer is closer to the mark: no, there is no substitute for A35 available through IBKR to Singaporean investors. They don't offer Singapore govvies, and there's no offshore-listed Singapore govvy bond fund.

 

[Shiny Things]

U.S. municipal bonds and municipal bond funds, such as Vanguard's VTEB, are U.S. income tax exempt for everyone, including U.S. persons. The yields reflect that tax advantage, of course, so foreign investors might be less interested in them. But they are available to U.S. and non-U.S. persons alike.

I'd say "definitely less interested" rather than "might be less interested". Right now, AAA munis yield less than US treasuries at every point on the yield curve (though it's pretty close to parity out in the long end, give or take about 10bps of yield). But if you're a US taxpayer, that might still be a pretty sweet deal.

Quick muni-bond-splainer for anyone who hasn't run across them before: US tax law has a special carve-out for "municipal bonds", that is, bonds issued by state and local authorities. The interest on those bonds is exempt from US income tax; and, if you pay tax in the state where the bonds are issued, they're exempt from state tax as well.

For example, leaving aside credit risk, a US taxpayer would rather own a 30yr Florida muni bond yielding 2.95% than a 30-year US treasury yielding 3.13%. Why? Because if you're paying a common-or-garden-variety 28% marginal tax rate, that 3.13% yield on the US treasury becomes about 2.25% after tax; but the Florida bond's interest payments are tax-free, so you get the full 2.95%.

I live and pay tax in California, so it's even more of a no-brainer for me. In California, there's a 10-ish percent state tax on top of the 28-ish percent federal marginal tax rate; so if I bought a 30-year treasury yielding 3.13%, I'd lose 38% of that to tax, leaving me with 1.94% yield after tax. But a 30-year California state government muni bond yields 3.7% tax free. No contest. (And yep, I own California munis as part of my bond allocation.)

(Obvious disclaimer: California's economy is pretty swingy, and hugely leveraged to the tech sector. As recently as 2009, everyone was convinced California was going to default because its tax revenues had collapsed so badly, and that sort of fear will almost certainly happen again sometime in the next thirty years. So, these are not a rock-solid bet; like any other bond, they have some risk, and the price will inevitably move around.)

But if you're not a US taxpayer, there's not really a great reason to own munis, because you can't benefit from the tax break; you don't pay tax on regular US treasuries, so in our previous example you get the full 3.13% on the US treasuries. Why would you buy a Florida bond yielding 2.95% instead?

----

That said, weirdly enough, there is apparently some offshore demand for US munis, even though offshore buyers don't get any tax advantages from them! A little bit of googling around says that about 4% of the US muni bond market is held by offshore investors: it's a mix of Asian life-insurance companies buying California (which they like because it's got a relatively high yield for a AA-minus credit, though personally I think they're a bit blind to California's economic volatility, see above), and hedge funds and vulture investors chucking it around in the cesspit that is the Puerto Rico muni market.

 

[Maeda_Toshiie]

Hang on hang on hang on. An SGD govvy bond fund and a USD govvy bond fund aren't direct substitutes; they've inherently got USDSGD currency risk between them.

BBCW's answer is closer to the mark: no, there is no substitute for A35 available through IBKR to Singaporean investors. They don't offer Singapore govvies, and there's no offshore-listed Singapore govvy bond fund.

Absolutely, it ain't a direct substitute (that's why I said close, but it ain't really close thanks to the exchange rate).


Is there a difference in tax treatment for US bond ETFs and individual US govies? I am pretty sure that the latter isn't subject to taxes. If the former isn't, then isn't it better to buy US listed ones (with higher volume and lower TER) like BND than Irish dom LSE listed ones?

 

[BBCWatcher]

A global bond fund plus direct SSB and/or SGS investing can be a reasonable substitute for a Singapore government bond fund (A35). With a global bond fund you’re not subject to a specific currency pair’s swings, e.g. Singapore dollar to U.S. dollar. Your currency risk with a global bond fund would be the risk that the Singapore dollar appreciates and stays appreciated against other major currencies.

 

[BBCWatcher]

Is there a difference in tax treatment for US bond ETFs and individual US govies?

Upon further checking, it appears there’s no difference in U.S. income tax treatment. Before about 2004, U.S. mutual funds and ETFs, even if they held assets (such as U.S. government bonds and t-bills) that were withholding tax exempt, had to withhold income tax for their foreign (non-U.S. person) investors. There was a tax law change in 2004 that allowed U.S. mutual funds and ETFs to pass through the income tax benefit, but that tax law change had an expiration date. The U.S. Congress (with the President’s agreement) kept pushing the expiration date out until the PATH Act of 2015 made this tax law change permanent.

So, to net it out, you should be OK from a U.S. income tax perspective (zero withholding) if you’re investing in U.S. government bonds/t-bills directly or in U.S. mutual funds/ETFs that hold U.S. government bonds and t-bills. Same thing with U.S. corporate bonds (from 1984 and later) and bond funds, as I understand it. Any of the U.S. mutual funds and U.S. ETFs that invest in U.S. bonds of any sort should be withholding tax exempt if you’re a non-U.S. person. (Only U.S. municipal bond funds are U.S. federal tax exempt for U.S. persons.)

Stock funds are different. You’ll still likely want to use the Irish domiciled funds, even if they’re a slightly higher cost, in order to reduce the effective income tax on dividends from 30% to 15%. I can think of one exception: stock funds that specialize in “capital appreciation” stocks, i.e. stocks that pay no dividends. The withholding tax on zero dividends is zero.

U.S. estate tax liability is a separate question, and I would have to do some more research on that. If you care.

 

[sgdividends]

Thanks all,

Kinda complicated for a noob like me.
Will take my weekend to digest and probably I will just choose the KISS way

 

[limster]

https://forums.hardwarezone.com.sg/money-mind-210/how-buy-bonds-singapore-5278285-8.html

For withholding tax questions, just read this thread.

 

[kingboonz]

A global bond fund plus direct SSB and/or SGS investing can be a reasonable substitute for a Singapore government bond fund (A35). With a global bond fund you’re not subject to a specific currency pair’s swings, e.g. Singapore dollar to U.S. dollar. Your currency risk with a global bond fund would be the risk that the Singapore dollar appreciates and stays appreciated against other major currencies.

How do I invest in a global bond fund?

 

[BBCWatcher]

How do I invest in a global bond fund?

Blackrock has a bunch of them (“iShares”) traded on the London Stock Exchange, for example symbol CORP.