Bond funds - short term

incus432

I have held the Vanguard Bond fund VGOV for many years as the counterbalance to my equity holding.  Of course the price of this took a big hit in 2022 but the yield is now a respectable 4.15%. I note its effective duration is 9.34 years

Even so, now in retirement I'd like to add less volatile funds and bonds to deliver income so I've been looking at shorter duration gilt funds and I wonder if anyone has any views on the following?

GLT5  - Invesco UK GILT 1-5 YEAR UCITS ETF /cost 0.06% /yield 4.38% / effective duration 2.84yr

IGLS - Ishares Iii PLC ISHRS UK GILTS 0-5YR ETF GBP 0.07% / 3.67% / 2.17yr

UKG5 - LG UK GILT 0-5 YEARS ETF  0.06% / 3.66% 4.11%/ no duration given 2.39 yr

GLTS - SPDR BLOOM 1-5 YEAR GILT UCITS ETF (GLTS) 0.19% / 2.73% 4.21% / 2.83yr

I am wondering why the yield on GLTS is lower than others and why so much dearer? 

Why can I not find duration figures on UKG5?

Would holding a selection of gilts to maturity be a better option?

Any comments gratefully received

FIGS ABOVE EDITED

InvesterJones

incus432 said:

Would holding a selection of gilts to maturity be a better option?

Any comments gratefully received

If the aim is reduce volatility then yes - the return if held to maturity is fixed so there is no volatility at all. Not the same as no risk mind - in particular opportunity and to some extent, inflation, risk, however if the return is enough for your needs then why not take the no-volatility route to getting there?

masonic

incus432 said:

I am wondering why the yield on GLTS is lower than others and why so much dearer?

According to https://www.ssga.com/uk/en_gb/intermediary/etfs/spdr-bloomberg-1-5-year-gilt-ucits-etf-dist-syb5-gy the YTM is 4.21%, which is similar to the others. The running yield is misleading when the holdings are priced below par.

The cost will be down to a number of factors, including the size of the fund, licencing costs for the index, the profit margin the fund house wants to make, etc.

incus432 said:

Why can I not find duration figures on UKG5?

According to the factsheet, the modified duration was 2.39 years as of November and the YTM was 4.11%.

incus432

InvesterJones said:

incus432 said:

Would holding a selection of gilts to maturity be a better option?

Any comments gratefully received

If the aim is reduce volatility then yes - the return if held to maturity is fixed so there is no volatility at all. Not the same as no risk mind - in particular opportunity and to some extent, inflation, risk, however if the return is enough for your needs then why not take the no-volatility route to getting there?

So what are the circumstances when it would be sensible to choose to hold bond funds instead of single gilts?  Is it ease of selling if you may not be able to hold to maturity? Possibility of unit price rises if government borrowing increases?

incus432

masonic said:

incus432 said:

I am wondering why the yield on GLTS is lower than others and why so much dearer?

According to https://www.ssga.com/uk/en_gb/intermediary/etfs/spdr-bloomberg-1-5-year-gilt-ucits-etf-dist-syb5-gy the YTM is 4.21%, which is similar to the others. The running yield is misleading when the holdings are priced below par.

The cost will be down to a number of factors, including the size of the fund, licencing costs for the index, the profit margin the fund house wants to make, etc.

incus432 said:

Why can I not find duration figures on UKG5?

According to the factsheet, the modified duration was 2.39 years as of November and the YTM was 4.11%.

Thanks for that. Was no info I could see on the brokers' summaries and their yields are clearly out

GLTS still looks dear though cf the others

InvesterJones

incus432 said:

InvesterJones said:

incus432 said:

Would holding a selection of gilts to maturity be a better option?

Any comments gratefully received

If the aim is reduce volatility then yes - the return if held to maturity is fixed so there is no volatility at all. Not the same as no risk mind - in particular opportunity and to some extent, inflation, risk, however if the return is enough for your needs then why not take the no-volatility route to getting there?

So what are the circumstances when it would be sensible to choose to hold bond funds instead of single gilts?  Is it ease of selling if you may not be able to hold to maturity? Possibility of unit price rises if government borrowing increases?

Access to markets you can't buy directly and continued investment at a fixed duration range rather than having to keep buying. Selling individual gilts is as easy as selling fund units.

masonic

incus432 said:

masonic said:

incus432 said:

I am wondering why the yield on GLTS is lower than others and why so much dearer?

According to https://www.ssga.com/uk/en_gb/intermediary/etfs/spdr-bloomberg-1-5-year-gilt-ucits-etf-dist-syb5-gy the YTM is 4.21%, which is similar to the others. The running yield is misleading when the holdings are priced below par.

The cost will be down to a number of factors, including the size of the fund, licencing costs for the index, the profit margin the fund house wants to make, etc.

incus432 said:

Why can I not find duration figures on UKG5?

According to the factsheet, the modified duration was 2.39 years as of November and the YTM was 4.11%.

Thanks for that. Was no info I could see on the brokers' summaries and their yields are clearly out

GLTS still looks dear though cf the others

IGLS would be my pick, given that it is much larger and therefore will have better liquidity than the others, and is also cheap.

incus432

masonic said:

IGLS would be my pick, given that it is much larger and therefore will have better liquidity than the others, and is also cheap.

Good point. Is the actual yield on IGLS higher than the 3.67% given on Morningstar and AJ Bell ? Cannot see it in KID

masonic

incus432 said:

masonic said:

IGLS would be my pick, given that it is much larger and therefore will have better liquidity than the others, and is also cheap.

Good point. Is the actual yield on IGLS higher than the 3.67% given on Morningstar and AJ Bell ? Cannot see it in KID

It's there in the factsheet, you might find it easier to use justetf to compare these. YTM 4.13% on 9th December.

Bonds, filtered by country: UK, type: Government, maturity: 3-5 years... https://www.justetf.com/uk/search.html?search=ETFS&assetClass=class-bonds&country=GB&bm=3-5&bondType=Government

Hoenir

incus432 said:

masonic said:

IGLS would be my pick, given that it is much larger and therefore will have better liquidity than the others, and is also cheap.

Good point. Is the actual yield on IGLS higher than the 3.67% given on Morningstar and AJ Bell ? Cannot see it in KID

Yields are historic and based on distributions made. Whereas capital gains or losses realised when Gilts reach their maturity date made will be reflected in the unit price. 

OldScientist

incus432 said:

InvesterJones said:

incus432 said:

Would holding a selection of gilts to maturity be a better option?

Any comments gratefully received

If the aim is reduce volatility then yes - the return if held to maturity is fixed so there is no volatility at all. Not the same as no risk mind - in particular opportunity and to some extent, inflation, risk, however if the return is enough for your needs then why not take the no-volatility route to getting there?

So what are the circumstances when it would be sensible to choose to hold bond funds instead of single gilts?  Is it ease of selling if you may not be able to hold to maturity? Possibility of unit price rises if government borrowing increases?

Bond fund. Any contributions to or withdrawals from are made proportionately from all the bonds held. Where the yield to maturity is greater than the coupon, the price will be less than par and vice versa. Taking the former case since it reflects the current situation, then withdrawals from the bond fund will sell some bonds at less than par, but contributions will buy bonds at less than par. Future developments depend entirely on (unknown) changes in yield, but short duration funds like these will not change in price much (roughly 2.5% for each percentage point change in yield)

Rolling bond ladder. Assuming you held bonds in the range 0 to 5 years (to match the funds under discussion), you would periodically receive coupons and every so often a bond would mature. Assuming you don't want to spend all the proceeds from the maturing bond (otherwise your bonds will be gone in 5 years), then you will need to reinvest some portion in a gilt close to 5 years maturity which may (or may not) be close to par (currently there are 5 gilts with maturities from 4 to 6 years, 3 of which have low coupons and are priced well under par and two of which are close to par). Whether this is 'better' than the bond fund depends on future (unknown) changes in yield, but (currently unpublished) historical modelling indicates that the differences in returns were variable and relatively small (typically less than about 10bp in annualised returns).

The advantages of the ladder
1) No fees (although fund fees are small) and (possibly) lower transaction fees (remembering to include the potentially poorer bid-ask spreads for retail clients)
2) Known yields and returns for the next year or so (reinvestment will change the projected yield to maturity and return). Long-term yields and returns are unknown since reinvestment yields and prices are also unknown.
3) If rungs are depleted, then withdrawals will need to be taken from non-maturing rungs.
4) No capital gains tax in a GIA (makes no difference in SIPP and ISA)

The disadvantages
1) Slightly more complex to operate (e.g., rebalancing between equities and bonds needs some careful thought - there are several ways to go about it)
2) Performance may be worse or better than the equivalent fund.

A collapsing ladder where coupons and maturing bonds are all spent is a different discussion.