Bond ETF's

noclaf

I recently re-introduced bonds into my S&SISA using the following ETF:

iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (Dist) (AGBP)

Admittedly I don't fully understand Bonds as a product but at a high level from an investor standpoint aware they can be used as a defensive element in a portfolio alongside equities (aside from the 2022 shenanigans).

I compared performance between AGBP and the following GILTS and TIPS ETF's, over the last 1/3/5 yr period, each has different returns:

iShares UK Gilts 0-5yr UCITS ETF GBP (Dist) (IGLS)

iShares $ TIPS 0-5 UCITS ETF GBP Hedged (Dist) (TI5G)

Appreciate not comparing apples to apples here as different underlying products and hedged Vs non-hedged but interested to know if it is worthwhile holding all 3 ETF's for my bonds allocation or am I simply overlapping for bond coverage and over-complicating?
FWIW, rest of my S&SISA portfolio is split between SWLD/EMIM/CUKX for Equities.

masonic

There may be good reasons to combine bond funds, such as to blend different geographies, issuer type (corporate/government), duration, credit quality. A global aggregate bond fund will take care of the first two and you'll end up with a duration a little under 10 years and a fairly high average credit quality. Adding those short duration government funds would have the effect of reducing duration (which would tend to reduce volatility and returns somewhat over the long term). The TIPS fund will give you some US inflation linking (not UK inflation). An ETF like AGBP can be held as a standalone fund for bond exposure, since it is pretty well diversified. What it is missing is inflation-linked gilts, if you'd want those.

Linton

noclaf said:

I recently re-introduced bonds into my S&SISA using the following ETF:

iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (Dist) (AGBP)

Admittedly I don't fully understand Bonds as a product but at a high level from an investor standpoint aware they can be used as a defensive element in a portfolio alongside equities (aside from the 2022 shenanigans).

I compared performance between AGBP and the following GILTS and TIPS ETF's, over the last 1/3/5 yr period, each has different returns:

iShares UK Gilts 0-5yr UCITS ETF GBP (Dist) (IGLS)

iShares $ TIPS 0-5 UCITS ETF GBP Hedged (Dist) (TI5G)

Appreciate not comparing apples to apples here as different underlying products and hedged Vs non-hedged but interested to know if it is worthwhile holding all 3 ETF's for my bonds allocation or am I simply overlapping for bond coverage and over-complicating?
FWIW, rest of my S&SISA portfolio is split between SWLD/EMIM/CUKX for Equities.

You say you don’t really understand bonds and it would appear you don’t have a clear specific reason for wanting to hold them.

So It would seem you have 2 rational options. Firstly stick to cash for your non-equity, or short duration gilts which behave in a similar way.

If you just feel you should hold bonds as a long term asset class I suggest you keep to global aggregate bonds so holding bits of everything rather than buying something specialised like a US TIPS fund.

But I would not use a hedged version. The reason is that holding unhedged foreign bonds gives you some protection against local inflation. Without hedging If the £ decreases in value your foreign currency bonds become more valuable in £ terms. With hedging you lose this benefit

 

noclaf

Thanks Masonic and Linton, really helpful.

@masonic - I will look into the inflation-linked gilts, seen a few ETF's that provide this coverage.

@Linton - Just to pick up a couple of your responses:

- I don't fully understand Bonds yet meaning not having an in-depth understanding but working on it, I added the bond etf to act as a 'dampening' part of the portfolio if Equities suffer a downturn...the hope is that if that happens (and it will eventually) that the bonds don't fall as much (I know reality doesn't always work this way). 
- In regards to the hedging you learn something new everyday and reflects my lack of knowledge as I thought that for global bonds specifically, hedged versions of the ETF or Fund should be held so will revisit this.

Overall I want simplicity so if I can use 1 or 2 bond ETF's alongside the 3 equity ETFs I currently hold that should work well hopefully.

masonic

noclaf said:
@masonic - I will look into the inflation-linked gilts, seen a few ETF's that provide this coverage.

Be wary of duration. Typically these bonds are most useful during periods of high inflation, but rising inflation correlates with rising interest rates. Rising interest rates push bond prices down, especially long duration bonds. I'm not aware of any short-dated ETF, but there is now a short duration open-ended fund (iShares Up to 10 Years Index Linked Gilt Index). Alternatively you could buy individual index linked gilts if your platform supports that.

OldScientist

noclaf said:

I recently re-introduced bonds into my S&SISA using the following ETF:

iShares Core Global Aggregate Bond UCITS ETF GBP Hedged (Dist) (AGBP)

Admittedly I don't fully understand Bonds as a product but at a high level from an investor standpoint aware they can be used as a defensive element in a portfolio alongside equities (aside from the 2022 shenanigans).

I compared performance between AGBP and the following GILTS and TIPS ETF's, over the last 1/3/5 yr period, each has different returns:

iShares UK Gilts 0-5yr UCITS ETF GBP (Dist) (IGLS)

iShares $ TIPS 0-5 UCITS ETF GBP Hedged (Dist) (TI5G)

Appreciate not comparing apples to apples here as different underlying products and hedged Vs non-hedged but interested to know if it is worthwhile holding all 3 ETF's for my bonds allocation or am I simply overlapping for bond coverage and over-complicating?
FWIW, rest of my S&SISA portfolio is split between SWLD/EMIM/CUKX for Equities.

I'd reiterate the point @masonic has made about duration. Shorter duration tends to mean lower volatility (i.e., price changes with changes in yields) and lower long-term returns. Roughly speaking, the duration quoted for funds indicates the percentage change in price with a 1 percentage point change in yield (so a fund with a duration of 10 will reduce in price by about 20% for a two percentage point increase in yield and vice versa). Cash savings or STMMF have a very low duration (it depends fir the former and is typically under 0.25 for the latter), AGBP currently has a duration around 6.4 while the other two funds you mention have durations around the 2.5 mark.

There is no 'optimum' duration, but those in accumulation and a long way from retirement may be willing to stand more volatility and hence hold longer durations, while those in retirement might prefer lower volatility and, hence, lower duration.

FWIW, I am in retirement and target an overall duration for my fixed income of somewhere between 1 and 2 with a mix of overlapping one-year fixed term cash accounts (duration about 0.5), a short term global bond fund (https://www.morningstar.co.uk/uk/funds/snapshot/snapshot.aspx?id=F00000SK60, duration around 2.6), and the vanguard fund similar to AGBP (duration around 6.5).

noclaf

@OldScientist - thanks for the detailed explanation and highlighting the 'duration' element...haven't looked at this in detail previously but if I recall correctly, longer dated bond/gilt funds took a bigger hit during 2022. 

I looked up AGBP and VAGS on Morningstar and both have a similar duration listed of 6.55/6.52.

I am at least 15 years away retirement (early 40's) and for now only looking to use bonds in my S&SISA as believe SIPP/Pensions are better off in 100% Equities to focus on growth....only time will tell if that turns out to be optimum.