Buying into bonds is not as straightforward as buying shares, which is why many investors opt for a bond fund rather than direct investment. Funds entail paying management charges, of course, and given the current enthusiasm for corporate bonds, it seems only a matter of time before the relatively limited choice of exchange-traded funds and trackers is expanded.
Buying direct
Large minimum deal sizes and limited choice are likely to be the biggest impediments to the private investor looking to put bonds into a portfolio.
The main buyers of bonds are pension funds and other institutional investors, and minimum deal sizes are accordingly large. More recent bond issues have the added problem of the Prospectus Directive to contend with. This well-intentioned piece of European legislation is intended to harmonise levels of investor protection throughout the EU by requiring new issue prospectuses to be vetted by the appropriate regulatory authority. But there is a exemption for investment instruments with a minimum deal value of €50,000. Not surprisingly, many new bond issuers have set their minimum deal value at or above this level to avoid the red tape of prospectus scrutiny, and in so doing, put their bonds beyond the reach of the private investor market.
Because bonds aren't traded on formal exchanges like shares are, the choice of instruments you are offered will be largely up to your broker, although many stock brokers now offer a universe of sterling-denominated corporate bonds from UK and global issuers
Information on prices, yields and maturity is available on the internet, but not as widely as information about equities is. Prices are rarely in anything approaching real time - updated daily is about as up-to-date as you're likely to get. And when it comes to dealing, expect to have to pick up the telephone rather than just buy or sell online - with commensurately higher dealing costs.
Finally, be aware that accrued interest on bonds is settled separately. Most bonds pay interest semi-annually, and if you buy mid-way between payments, you'll have to compensate the seller for interest accrued but not yet paid. Your broker will usually calculate this liability before you deal, and lump the nominal cost and interest together. You'll be taxed on the interest when it's paid to you, though.
| BOND PRICES AND DATA ON THE IC WEBSITE |
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| We have just launched a new bond prices and data service on the IC website. You can get prices, yield data and charts for gilts, index-linked gilts, popular sterling-denominated corporate bonds and Pibs. The data is supplied by FixedIncomeInvestor and sourced from Bondscape, a service provided by Barclays Stockbrokers and Winterfloods. |
Bond ETFs
Given the growth in exchange-traded funds generally, it might come as a surprise to see how under-represented bonds are. The biggest corporate bond ETF is the iShares € Corporate Bond ETF, with assets under management of around €1.3bn. If you want a sterling-based ETF, then there's also the iShares sterling corporate bond ETF, which tracks the Market iBoxx Sterling Liquid Corporate Long-dated Bond index. It's much smaller than its euro-based equivalent, though.
The big problem with both these ETFs is that the underlying indices they track are stuffed with bank and financial bonds (around 54 per cent for the euro one, and 70 per cent for the sterling one). If you subscribe to the view that bank bonds are effectively guaranteed by the government, that might not be a problem. But if you think bank bonds run a high risk of default, then it most certainly is.
| DATA ON CORPORATE BOND ETFs |
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| iShares € corporate bond |
| iShares £ corporate bond |
| iShares $ corporate bond |
Bond funds
By contrast, there's no shortage of choice when it comes to corporate bond funds; there are over 150 on offer. The big problem here is charges - you really have to make sure you pay as little as possible, because high initial fees and/or annual management charges will eat into returns from a fund that derives most of its returns from income, rather than capital growth. The best way to avoid initial charges is to use a fund supermarket, which will often discount them to zero.
Look too at the investing style. Default rates for junk bonds (often euphemistically referred to as 'high-yield') are predicted to rise sharply, so watch what portion of the portfolio is invested in them. And check the fund manager's stance on banks and financials - whether to buy bank bonds is a matter of personal risk appetite and assessment of the political climate (see our Big Question for more on this).
See the top ten performing £ corporate bond funds in our Fund Data Centre.
You can read more about bond funds and ETFs in
If you're only looking to ride the bull market in corporate bonds for a few months or so, a spread bet could be the cheapest and most profitable way to do so, writes Dominic Picarda.
Through IG Index - the UK's largest spread betting firm - you can speculate on the movements of exchange traded funds (ETFs), such as the iShares £ Corporate Bond (SLXX) for the UK, as well as the iBoxx $ Investment Grade Bond and Ishares $ Corp Ishares USD Corporate Bond for the US.
Getting corporate bond exposure via a spread bet has numerous advantages. You don't pay any stamp duty, nor brokers' commission. Spread bets are geared, meaning you can turn small price movements into big profits. Even if you're trading a foreign market, your profits will always be in pounds, so you don't have worry about currency risk. Best of all, any profits you make are completely tax-free. For more about spread bets, see our free investment guide to spread betting.
If your aim is to catch a rally in corporate bonds and sell up within a month or so, a "rolling daily" spread bet will probably work out cheaper. For periods of longer than this, one of the various "futures" bets would make more sense.
At the same time, if you're negative about corporate bonds, spread bets allow you to short-sell them as easily as buying them.
