Short-term debt investments comparison

jake_jones99

For a while I've held cash in Royal London Short Term Money Market Fund, which returned an annualized 3.5% tax free in the last 6 months. It mainly consists of certificates of deposit, and very few bonds. To diversity, I found an ETF ISHARES IV PLC GBP ULTRASHORT BOND UCITS ETF (ERNS) that contains ultrashort bonds, as the name says. They are highly rated bonds. It seems around 90% of the bonds are "covered" but I am not sure what it means exactly. The returns are marginally higher than Royal London (close to 4% annualised). The advantage is also that it's an ETF, so trading is faster, and my broker has a cap on custody charges for ETFs. I have the following questions:

What would you say the disadvantage of the ETF could be relative to the Royal London one? Certificates of deposit sounds more likely to be insured?
Another problem with Royal London is it's highly opaque and you need to struggle a lot to find portfolio details, while for iShares it's easy to learn anything you want. 
Do any of you know what they mean by "covered" bonds in the portfolio of the ETF? What are your opinions generally when comparing the two investments?
Thank you!

redux

I can't really answer your questions about closely comparing these. One is cash and one seems to be corporate bonds. There are other corporate bond vehicles besides this one, some as ETFs, OEICs, investment trusts. If there are more replies here maybe some people will comment on their relative merits.

jake_jones99

Thanks. I liked this one as it contains ultra short ones, and it seems to follow interest rates pretty closely. 
If there are any comments from anyone on advantages/disadvantages of each would be great. Especially in terms of risk. 
By the way, when they say the fund owns "cash", I assume the cash is lent via deposits right?

Linton

jake_jones99 said:

For a while I've held cash in Royal London Short Term Money Market Fund, which returned an annualized 3.5% tax free in the last 6 months. It mainly consists of certificates of deposit, and very few bonds. To diversity, I found an ETF ISHARES IV PLC GBP ULTRASHORT BOND UCITS ETF (ERNS) that contains ultrashort bonds, as the name says. They are highly rated bonds. It seems around 90% of the bonds are "covered" but I am not sure what it means exactly. The returns are marginally higher than Royal London (close to 4% annualised). The advantage is also that it's an ETF, so trading is faster, and my broker has a cap on custody charges for ETFs. I have the following questions:

What would you say the disadvantage of the ETF could be relative to the Royal London one? Certificates of deposit sounds more likely to be insured?
Another problem with Royal London is it's highly opaque and you need to struggle a lot to find portfolio details, while for iShares it's easy to learn anything you want. 
Do any of you know what they mean by "covered" bonds in the portfolio of the ETF? What are your opinions generally when comparing the two investments?
Thank you!

Covered bonds are insured against the issuer going bust so they are pretty safe.  Presumably it was not possible or it was too expensive for Royal London to insure the 10% of the holdings which are not covered.

According to https://www.thebalancemoney.com/short-term-bonds-funds-vs-money-market-funds-416961 ultra-short bond funds underlying investments are longer term than money market funds ( a small number of months rather than days/weeks).  Also I believe they can invest in riskier debt than money market funds.  So money market funds should be safer than ultra short bond funds but with lower returns though both are much safer than equity.

jake_jones99

Linton said:

jake_jones99 said:

For a while I've held cash in Royal London Short Term Money Market Fund, which returned an annualized 3.5% tax free in the last 6 months. It mainly consists of certificates of deposit, and very few bonds. To diversity, I found an ETF ISHARES IV PLC GBP ULTRASHORT BOND UCITS ETF (ERNS) that contains ultrashort bonds, as the name says. They are highly rated bonds. It seems around 90% of the bonds are "covered" but I am not sure what it means exactly. The returns are marginally higher than Royal London (close to 4% annualised). The advantage is also that it's an ETF, so trading is faster, and my broker has a cap on custody charges for ETFs. I have the following questions:

What would you say the disadvantage of the ETF could be relative to the Royal London one? Certificates of deposit sounds more likely to be insured?
Another problem with Royal London is it's highly opaque and you need to struggle a lot to find portfolio details, while for iShares it's easy to learn anything you want. 
Do any of you know what they mean by "covered" bonds in the portfolio of the ETF? What are your opinions generally when comparing the two investments?
Thank you!

Covered bonds are insured against the issuer going bust so they are pretty safe.  Presumably it was not possible or it was too expensive for Royal London to insure the 10% of the holdings which are not covered.

According to https://www.thebalancemoney.com/short-term-bonds-funds-vs-money-market-funds-416961 ultra-short bond funds underlying investments are longer term than money market funds ( a small number of months rather than days/weeks).  Also I believe they can invest in riskier debt than money market funds.  So money market funds should be safer than ultra short bond funds but with lower returns though both are much safer than equity.

Thanks. It's what I suspected but glad to receive confirmation. 
The ones that hold "cash" are expected to be 100% covered? 

Are you aware of an index showing how likely it is for a bond owner to lose their money? I keep reading it's very unlikely, and that bond holders get money before shareholders, but nowhere could I see a statistic. Thanks!

GeoffTF

jake_jones99 said:
Are you aware of an index showing how likely it is for a bond owner to lose their money? I keep reading it's very unlikely, and that bond holders get money before shareholders, but nowhere could I see a statistic.

That is what the rating agencies (S&P, Moody etc) do. AFAIK, you have to pay for up to date information for individual bonds. Funds often give a credit quality breakdown for the bonds that they hold. Vanguard does that every month.

jake_jones99

GeoffTF said:

jake_jones99 said:
Are you aware of an index showing how likely it is for a bond owner to lose their money? I keep reading it's very unlikely, and that bond holders get money before shareholders, but nowhere could I see a statistic.

That is what the rating agencies (S&P, Moody etc) do. AFAIK, you have to pay for up to date information for individual bonds. Funds often give a credit quality breakdown for the bonds that they hold. Vanguard does that every month.

That's a good point thanks but all they're saying is stuff like "An insurer rated 'AAA' has extremely strong capacity to meet its financial commitments. " without putting actual numbers on it. Strong could mean 90% chance or 99.999999% 

GeoffTF

jake_jones99 said:

GeoffTF said:

jake_jones99 said:
Are you aware of an index showing how likely it is for a bond owner to lose their money? I keep reading it's very unlikely, and that bond holders get money before shareholders, but nowhere could I see a statistic.

That is what the rating agencies (S&P, Moody etc) do. AFAIK, you have to pay for up to date information for individual bonds. Funds often give a credit quality breakdown for the bonds that they hold. Vanguard does that every month.

That's a good point thanks but all they're saying is stuff like "An insurer rated 'AAA' has extremely strong capacity to meet its financial commitments. " without putting actual numbers on it. Strong could mean 90% chance or 99.999999% 

Here is one article:

https://www.livewiremarkets.com/wires/quantifying-the-risk-of-bonds-with-s-p-credit-ratings

Google will find you more statistics of past default rates.

jake_jones99

GeoffTF said:

jake_jones99 said:

GeoffTF said:

jake_jones99 said:
Are you aware of an index showing how likely it is for a bond owner to lose their money? I keep reading it's very unlikely, and that bond holders get money before shareholders, but nowhere could I see a statistic.

That is what the rating agencies (S&P, Moody etc) do. AFAIK, you have to pay for up to date information for individual bonds. Funds often give a credit quality breakdown for the bonds that they hold. Vanguard does that every month.

That's a good point thanks but all they're saying is stuff like "An insurer rated 'AAA' has extremely strong capacity to meet its financial commitments. " without putting actual numbers on it. Strong could mean 90% chance or 99.999999% 

Here is one article:

https://www.livewiremarkets.com/wires/quantifying-the-risk-of-bonds-with-s-p-credit-ratings

Google will find you more statistics of past default rates.

Cool, around 0.5% defaults at the peak of the financial crisis for investment grade. Given most bonds in my fund are also covered, basically the risk is close to non-existent. Thanks!

jake_jones99

In addition to the article suggested by @GeoffTF I add the following from S&P Global, which I find very comprehensive (probably the inspiration source of the other article above).