With the stellar performance of the US stock market over the past few years, investors are starting to feel jittery about just how long a good thing can last. If all your profits are making you nervous, lucky you! At this point you might be thinking about moving some of those profits into a safer asset class to wait out the impending chaos.*
Bonds are generally considered a good idea to smooth out stock market volatility, since they aren’t correlated to the stock market (in theory—desperate investors are generally not discerning about which assets they sell during an epic crash). Bonds are basically loans to governments and companies. You lend them the money at an agreed-upon interest rate (confusingly and unnecessarily called a “coupon”) for an agreed-upon period of time. The interest is paid as you go and at the end of the period you get your original investment back. It’s like lending money to a friend, but better because it’s hard for a government to run away without paying you back.
The 1nvest Global Bond ETF (ETFGGB) is a feeder fund that invests in developed market bonds. It tracks the G7 Government Bond Index, which includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States. If you had to lend money to a country, you’d probably feel okay lending it to one of those countries. Unfortunately that’s also true for everyone else seeking a safe place to invest, which means you can’t expect this ETF to blow your hair back.
This ETF pays a dividend every quarter, but at a dividend yield of 0.5%, this is probably not your only retirement plan. Don’t forget income from bonds is considered interest income (even though it’s confusingly and unnecessarily called a “coupon”). This income is added to your annual income and taxed at your marginal tax rate after your R23,800 annual interest exemption. Of course, a tax-free investment account is a nice way to avoid that.
*The risk, of course, is that the impending chaos is another ten years away, in which case you might feel a little silly.
JSE code : ETFGGB
ETF issuer : 1nvest
Issue date : 14 March 2018
Total investment cost : 0.5%
ETF benchmark : FTSE G7 Government Bond Index
Tax-free savings account : Investment allowed
ETF major holdings : See the full list here.
Market cap : R16.2m
Performance 1 year : +15.9%
Performance since listing : +28.4%
Dividend yield : 0.5%