The FNB World Government Bond ETF
Equity markets around the world have had a tough year thus far, as evidenced by high volatility. The FNB World Government Bond ETF is also in the red year-to-date, albeit at a lower magnitude compared to equities. The fund is down 5.15% year-to-date compared to the S&P 500, which is down more than 20% over the same period.
The underlying index invests in bonds that are within the FTSE World Government Bond Index. For a country to be included in the index, it needs to be rated as investment grade by either Moody’s or S&P Global.
The rating agencies assess a sovereign’s ability to repay debt. They look at several indicators, such as government revenue and expenditure, unemployment, current account balance, the strength and independence of financial systems, exchange rate volatility and political stability. Countries that have their debt listed on the index reach a greater investment community as there are certain funds that are mandated to hold only investment-grade bonds, which leads to lower interest payments for those countries.
Most countries in the index are developed, such as the US, Japan, France, the UK and Italy. These countries have a low risk of default. However, the UK experienced turmoil in September when the government announced its intention to cut taxes. This decision raised concerns about the country’s ability to raise revenue and repay its debt. Accordingly, S&P threatened to downgrade the country’s debt. The country reversed its decision to cut taxes in early October, but S&P maintained that it will not reverse its negative outlook on the country’s ability to repay its debt as the economics behind its decision have not changed.
The fund is designed to provide investors with cost-efficient exposure to the global bond market by tracking the FTSE World Government Bond Index. It has a tracking error of 1.21% and a total expense ratio of 0.47%.
Fund suitability
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This ETF is ideal for investors seeking diversified exposure to investment-grade government bonds in the global fixed-income market in rand.
Fees
- The fund has a total expense ratio of 0.47%.
Analysis of the fund’s strategy
- The FNB World Government Bond tracks investment-grade bonds in developed
countries.
Top holdings
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The fund holds bonds that have a lower risk of default and are issued by developed countries such as the US, Japan, Germany and France.
The FNB World Government Bond ETF (JSE:FNBWGB)
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Background: Exchange-traded funds (ETFs)
Exchange-traded funds (ETFs) are passively managed investment funds that track the performance of a basket of pre-determined assets. They are traded the same way as shares and the main difference is that whereas one share gives exposure to one company, an ETF gives exposure to numerous companies in a single transaction. ETFs can be traded through your broker in the same way as shares, say, on the EasyEquities platform. In addition, they qualify for the tax-free savings account, where both capital and income gains accumulate tax free.
Benefits of ETFs
- Gain instant exposure to various underlying shares or bonds in one transaction
- They diversify risk because a single ETF holds various shares
- They are cost-effective
- They are liquid – it is usually easy to find a buyer or seller and they trade just like shares
- High transparency through daily published index constituents
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