Invesco has launched two exchange traded funds (ETFs) that track UK government bonds and have ongoing charges of 0.06 per cent. They are the cheapest ETFs tracking these kinds of assets available to private investors.
Invesco UK Gilt 1-5 Year UCITS ETF (GLT5) tracks Bloomberg Barclays UK Gilt 1-5 Years index and has lower exposure to interest rate risk because it invests in lower duration bonds, which have become more popular as expectations increase that the Bank of England will raise interest rates. Invesco UK Gilts UCITS ETF (GLTP) tracks Bloomberg Barclays UK Gilt index, and they both buy the bonds they track rather than getting their exposure via derivatives like some ETFs.
iShares, Vanguard and Lyxor also offer ETFs that track UK government bonds. The cheapest of these three is Lyxor Core FTSE Actuaries UK Gilts UCITS ETF (GILS) with an ongoing charge of 0.07 per cent. iShares Core UK Gilts UCITS ETF (IGLT) has the most assets under management with £1.6bn, but it has a higher ongoing charge of 0.2 per cent.
WisdomTree, meanwhile, has launched WisdomTree USD Floating Rate Treasury Bond UCITS ETF (USFR). Floating-rate bond coupons rise and fall in line with the US central bank, the Federal Reserve's base rates, meaning they are less exposed to interest rate rises, which can erode the capital value of a bond. As the US central bank has been raising its base rates, this type of fund could provide exposure to rising income while maintaining its capital value. The ETF has an ongoing charge of 0.15 per cent.
And UBS has launched UBS Bloomberg Barclays TIPS 10+ UCITS ETF (T10G) which tracks Bloomberg Barclays US Government 10+ Year Inflation-Linked Bond index. UBS says having exposure to US government inflation-linked bonds could help to counter rising inflation in the US, which can also erode the value of bond coupons. This ETF hedges back into sterling, thereby removing currency risk. It has an ongoing charge of 0.25 per cent.
Yields on US government bonds peaked at over 3 per cent in September last year. The 3 per cent yield on US government bonds was considered to be a sign that the bond market was returning to normal after years of quantitative easing. This prompted many investors to invest in these again because a 3 per cent yield was seen as good value.
However, yields on US government bonds have since dropped to 2.4 per cent after the Federal Reserve said it would slow its rate increases, meaning they now offer less value in terms of yield and the best of the capital value gains have already been made.
Ben Seager-Scott, chief investment strategist at wealth firm Tilney, said the long lead time for ETF launches can mean that new products arrive too late to take advantage of particular market conditions.
“These bond ETF launches will have been in train for much of last year when the fixed income space was starting to look less expensive," he said. "Now that central banks have turned markedly more dovish, fixed income looks like a harder asset class from which to make attractive returns, but there will still be demand for the asset class as part of a balanced portfolio."
There is also uncertainty over the value of the UK government bond market, but Peter Sleep, senior investment manager at Seven Investment Management, said a wider choice of bond ETFs is important for investors.
“The bond market is bigger than the equity market, yet there is far more money in equity ETFs than bond ETFs," he explained. "Historically, many investors felt bond ETFs would not work as they have been slower to catch on and a lot of ETF development has focused on equity funds. But this is gradually changing and investors are more open to investing in bond ETFs.”
This comes as the Investment Association (IA), the trade body that represents UK asset managers, reports that in January that best-selling active fund sector was Sterling Strategic Bond, with net retail sales of £801m. The next most popular fund sectors were Mixed Investment 20-60% Shares, with net retail sales of £424m, and Mixed Investment 40-85% Shares, with net retail sales of £217m. These types of funds hold both bonds and equities.
Chris Cummings, chief executive of the IA, said that investors remained cautious “The threat of a no-deal Brexit, eurozone instability, and international trade tensions, combined to dampen investor appetite [in January so they looked to] mixed asset funds to spread their risk.”
Priyesh Parmar, associate at Numis Securities, added that: “Investor risk aversion often leads to periods of outflows from equity funds while bond funds experience inflows, as investors seek safe haven assets.”
Overall net retail sales of UK authorised and recognised funds were negative in January with outflows of £859m.