Bond ETFs for the risk averse
BENEFITS: BONDS CAN PROTECT SPENDING POWER OR OFFER A GUARANTEED INCOME
If you are in a high tax bracket, use bond ETFs with caution.
If you are looking for a savings vehicle that returns at least your original investment amount plus inflation, you might be in the market for bonds. Some bonds protect spending power by offering returns linked to inflation. Others offer a guaranteed income regardless of market events or inflation.
This asset class offers investors a degree of certainty over the returns. South African investors can choose between five bond ETFs, including inflation-linked bonds, global bonds and T-Bills.
Bonds allow us to lend money to governments and corporations for a fixed period. In return, they pay us interest (called “coupons” in the case of bonds). By the end of the investment period, we are guaranteed our money back and we receive income the entire time our money is invested.
Bond ETFs offer some benefits that ordinary bonds do not. For one, they can be traded like ordinary shares, unaffected by the date of maturity of the bonds within the index. Most bond ETFs reinvest income received from the bonds instead of paying coupons to the investor. Although you will not receive regular cash payments the way ordinary bond holders would, this strategy increases the value of your bond holdings over time. Bond ETFs can be bought within the tax-free investment environment. The income you get from bonds is added to your annual income and taxed.
The performance of these bonds and ETFs are linked to inflation. When the bonds mature, investors receive their principal investment amount plus inflation for the investment period.
The coupon payments are also linked to inflation, expressed as inflation plus a percentage. Within some of these ETFs, these coupons are reinvested in more bonds, increasing the underlying value of the index.
Investors who want a guaranteed return regardless of the inflationary environment or market conditions can opt for the NewFunds Govi.
This ETF tracks the South African Government Bond Total Return Index. The bonds return a fixed coupon, expressed as a percentage. These coupons are reinvested in the ETF monthly.
You can also widen your bond net to include investments in developed market bonds. The Ashburton World Government Bond ETF invests in the FTSE World Government Bond Index.
This ETF pays quarterly coupons.
This article was first published on Just One Lap