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Top 50 ETFs: Government bonds

Our selection of the best government bond ETFs
May 24, 2018

Government bonds play an important role  in investors’ portfolios. Their ability to act as a diversifier remains strong and they are useful for capital preservation. However, the market is changing as interest rates rise around the world and so there are things to consider. Duration – which measures a bond’s sensitivity to rises in interest rates – is now an important factor. In addition, government bonds aren’t necessarily safe-haven assets: emerging markets countries with expanding economies also offer government debt with a higher yield or the potential for capital growth. This selection has been rejigged, bringing in emerging markets debt from a now removed high-yield bonds category, but also includes core funds for UK and US government debt options.

Dropped from 2017 selection

UBS ETF – Barclays USD Emerging Markets Sovereign GBP Hedged UCITS ETF (SBEG)

The ETF remains a strong choice should investors want dollar-denominated emerging markets debt hedged back into sterling, however the panel felt this strategy was too esoteric and could be too volatile for investors given there are a variety of underlying currency factors at play – including sterling versus dollar and then dollar versus emerging markets currencies.

 

New list

Lyxor Core FTSE Actuaries UK Gilts UCITS ETF (GILS)

For core UK government bond exposure the panel overwhelmingly recommended holding on to this ETF, which offers low-cost exposure to the broad gilt market. Its assets keep growing and it manages over £200m – almost doubling since last year’s ETF selection – meaning its bid/offer spread has narrowed, too. Meanwhile, with an ongoing charge of 0.07 per cent it remains by far the cheapest route for gilt exposure. It is worth remembering, though, that this ETF invests in the whole gilt market and so will be affected if interest rates rise quickly. But as a broad core gilt ETF it is very good value.

 

Lyxor Core FTSE Actuaries UK Gilts 0-5Y UCITS ETF (GIL5)

For those investors who are concerned about the effect of interest rate rises on UK government bonds, Lyxor also offers this core short duration ETF. It tracks the FTSE Actuaries Government Securities UK Gilts under 5 Yr, which keeps the length of time until a bond matures below five years. The longer the time, the more likely a bond will lose capital value if interest rates go up. This product has also grown and has broken the £100m mark, making trading costs more palatable. And at 0.07 per cent, if offers excellent value for money.

 

NEW: iShares £ Index-Linked Gilts ETF (INXG)

Given the outlook for inflation is ever-changing, the panel recommended including this inflation-linked gilt fund, with coupon payments to investors rising in line with the retail prices index. This ETF provides cost-effective access to inflation-linked UK government bonds. It has over £800m in assets, with a large secondary market and low bid/offer spread. With a 0.25 per cent ongoing charge, INXG is overall the best ETF for buying into this market. However, inflation-linked bonds tend to have a higher duration, so this is worth considering if buying into this fund.

 

Lyxor Core iBoxx $ Treasuries 1-3Y UCITS ETF (U13G)

It’s always good for investors to diversify, even within assets they believe are already providing safety. In that sense, including US government debt could be beneficial. The panel recommended sticking to short-duration bonds in this sector, given the regularity with which the Federal Reserve is raising the country’s base interest rates. Lyxor has rivals in the fixed-income ETF market, but its 0.07 per cent ongoing charge makes this the cheapest product. The bid/offer spread is higher for this smaller ETF than a rival product from iShares, but that has an ongoing charge of 0.2 per cent, so Lyxor wins  overall.

 

iShares Global Government Bond UCITS ETF (SGLO)

For investors who do not want to take targeted exposure to the government bond market, this ETF offers straightforward passive exposure to the major global developed sovereign bond issuers and is a cheap ETF that has tracked efficiently. SGLO tracks the Citigroup G7 index, comprised of bonds from the G7 nations – the US, Japan, Germany, France, the UK, Italy and Canada. The iShares ETF carries an ongoing charge of 0.2 per cent, a fee matched by a similar, slightly larger product from Xtrackers. However, the panel recommended keeping the iShares product based on its track record, index use and tighter spread.

 

SPDR Bloomberg Barclays Emerging Markets Local Bond UCITS ETF (EMDL)

Emerging market government bonds can be issued in both dollars and the country’s local currency, with the latter traditionally seen as higher risk. However, they do offer higher yields as a result. EMDL tracks the Barclays Emerging Markets Local Currency Liquid Government Index, which gives investors exposure to more liquid local currency markets. The panel felt this was a better index for this exposure than broader market-cap weighted choices. iShares also offers an ETF tracking local emerging market bonds for a lower ongoing charge, but EMDL, which has an ongoing charge of 0.55 per cent, has been less volatile and has better tracking.

 

To view the IC Top 50 ETFs 2018 by category, please click on the links below:

UK equities (four ETFs)

US equities (six ETFs)

European equities (six ETFs)

Japanese equities (four ETFs)

Global equities (six ETFs)

Asian equities (three ETFs)

Emerging market equities (four ETFs)

Ethical equities (three ETFs)

Government bonds (six ETFs)

NEW: Sterling corporate bonds (two ETFs)

NEW: Global bonds (three ETFs)

Commodities and precious metals (three ETFs)

 

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