An amendment to the fixed-income categories sees last year’s corporate bond category, which included three ETFs, renamed and focused entirely on funds investing in sterling-based debt. Sterling corporate bonds offer investors a higher yield than government debt, or, if markets are turning against equities, the benefits of diversification. There is, of course, slightly more risk involved than government debt. The two ETFs selected offer broad and short-duration strategies.
New list
iShares Core £ Corporate Bond UCITS ETF (SLXX)
While Lyxor has built a name for itself for government bond ETFs, the panel could not look beyond the quality of iShares products in the corporate bond arena. This ETF has an ongoing charge of 0.2 per cent and substantial assets, with over £1.5bn under management, keeping the bid/offer spread relatively low for a fixed-income ETF. The SLXX is a behemoth compared with its rivals from SPDR and Lyxor. However, investors must consider the overall exposure. Sterling-denominated corporate bonds tend to have longer duration than euro-denominated fixed income and this ETF has an average duration exposure of nine years, meaning it can be vulnerable to losses if interest rates rise quickly. The ETF tracks the performance of the Markit iBoxx GBP Liquid Corporates Large Cap index, which offers exposure to the 40 largest and most liquid sterling-denominated corporate bonds with investment-grade rating. It only includes bonds that have a remaining maturity of at least one year and a minimum outstanding of £300m, and caps a single issuer at 4 per cent.
iShares £ Corporate Bond 0-5yr UCITS ETF (IS15)
Given the relatively high duration exposure of the SLXX product, iShares also offers a short-duration version. IS15 is of a similar size and liquidity with the same ongoing charge of 0.2 per cent. The panel recommended keeping this ETF as it tracks the index well. Income is distributed to investors on a six-monthly basis, with the last reported yield being 2.2 per cent. It tracks the Markit iBoxx GBP Corporate 0-5 index, which includes a broad 50:50 split between financials and non-financials issuers. Average duration is low at 2.7 years. SPDR does offer a similar product, with a 0.2 per cent ongoing charge, but it is a fraction of the size.
To view the IC Top 50 ETFs 2018 by category, please click on the links below:
Emerging market equities (four ETFs)
NEW: Sterling corporate bonds (two ETFs)
NEW: Global bonds (three ETFs)
Commodities and precious metals (three ETFs)
