Bond diversification

Manesova83

Hi all,

I'm looking to invest in a globally diversified bond ETF, to balance out my investment in equities, but my broker only seems to offer specific bond ETFs, e.g. Gilts, US treasuries, corporate bonds, etc.

Is it necessary to diversify in bonds in the same way as with equities? If not, are government bonds a better balance for equities than corporate ones?

I'm trying to keep things simple, so I'd rather not end up with a load of bond ETFs to cover the whole market. Would having, say, one ETF covering Gilts and one covering US treasuries be sensible?

Thanks in advance.

Edit: Also, does anyone here not bother with bonds at all? Given the lower returns and potential for loss, isn't it better to hold more cash at 1.5% or whatever the going rate is these days?

londoninvestor

Manesova83 wrote: »

Edit: Also, does anyone here not bother with bonds at all? Given the lower returns and potential for loss, isn't it better to hold more cash at 1.5% or whatever the going rate is these days?

I largely take that view for my unwrapped holdings - but you can't get those rates in an ISA or mainstream SIPP. (I should qualify that by saying that some specialist SIPPs can access savings accounts, and you can get closer with a cash ISA, but it then becomes a pain dividing between cash and S&S ISAs.)

londoninvestor

To your first question, here's an example of a single ETF which is diversified across a broad range of global investment grade bonds.

https://www.ishares.com/uk/individual/en/products/291771/ishares-core-global-aggregate-bond-ucits-etf-fund

IShares is a pretty mainstream ETF provider and this is one of the Dublin-based UCITS-compliant (i.e. Europe-friendly) funds - does your broker not have this one available?

dunstonh

Is it necessary to diversify in bonds in the same way as with equities?

Is it necessary? no
Is it sensible? yes

Generally, we split between gilts, index-linked gilts, overseas bonds, High Yield bonds and corporate bonds. The weightings vary depending on where we are in the cycle.

Also, does anyone here not bother with bonds at all?

Bonds are a way to control risk and volatility. So, unless you are very high risk, its likely that you would use bonds.

masonic

There isn't as much choice in ETFs as there is in open ended bond funds. Ideally you would use a strategic bond fund to get targeted exposure to the various flavours of bonds over the market cycle.

Having said that, you could get by with a single ETF if your equities allocation is high, for example an 80:20 portfolio could use a single long dated Gilt ETF. Holding cash is probably preferable to bonds in the current environment - at least to the extent that you can.

A_T

IGLH (iShares Global Govt Bond UCITS ETF GBP Hedged) is an ETF which covers the world sovereign bond market without currency risk. Or there is SGLO if you prefer unhedged.

Manesova83

londoninvestor wrote: »

To your first question, here's an example of a single ETF which is diversified across a broad range of global investment grade bonds.

https://www.ishares.com/uk/individual/en/products/291771/ishares-core-global-aggregate-bond-ucits-etf-fund

IShares is a pretty mainstream ETF provider and this is one of the Dublin-based UCITS-compliant (i.e. Europe-friendly) funds - does your broker not have this one available?

I'm afraid not!

Audaxer

dunstonh wrote: »

Generally, we split between gilts, index-linked gilts, overseas bonds, High Yield bonds and corporate bonds. The weightings vary depending on where we are in the cycle.

Do you vary the weighting percentages of the different bond types by much during a cycle?

bostonerimus

A multi-asset fund, say VLS60, will give you bond diversification or you could buy a global bond index

https://www.vanguardinvestor.co.uk/investments/vanguard-global-bond-index-fund-pound-sterling-hedged-accumulation-shares/portfolio-data?intcmpgn=fixedincomeglobal_globalbondindexfund_fund_link

Interest rate risk is something to consider and so in the US you can actually buy bond funds that have a specific maturity date and use them to construct a highly diversified bond ladder.

dunstonh

Audaxer wrote: »

Do you vary the weighting percentages of the different bond types by much during a cycle?

Surprisingly yes. Unlike equities, there does seem to be a larger change in the weightings for bonds. Sometimes, the weightings go to zero. The only equity sector where I have seen that happen is Emerging Markets.

The economic cycle is part of it but another part is the risk level. As equity risk increases through the cycle, you tend to find the corporate bond weighting falls and the gilt weighting increases.

short_butt_sweet

Manesova83 wrote: »

I'm afraid not!

what stock market(s) does your broker give you access to? i think you said you're currently not in the UK?

is sterling still your "home currency" for investment purposes? i.e. are you likely to come back before drawing on investments? this may affect whether you want bonds hedged to sterling, or to something else, or an unhedged mixture of global currencies.