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Fixed income ETFs – The 11th Wonder of The World

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By Allan Lane, Algo-Chain – If Albert Einstein once compared compound interest to the eighth wonder of the world then surely the invention of the world’s stock and bond markets should rank as the ninth and the tenth.

 Welcome to the world of global Investing as the European team at Goldman Sachs debut with their first foray into the Fixed Income ETF market with the launch of the Goldman Sachs Access China Government Bond UCITS ETF. Complete with its annual management fee of 0.35 per cent, the man, or indeed woman on the Clapham Omnibus, can access the bonds issued by the Chinese Government by investing in this ETF listed on the London Stock Exchange with ticker CBND. That’s what is meant by the democratisation of investing.

To say that China has been in the news of late, would be a bit of an understatement. While not all of that news has been good, one cannot deny the sheer force and willpower of the Chinese Government’s strategic planning. Some commentators suggest the ‘Belt & Road Initiative’ has a price tag in the multi-trillions in USD terms, a number that is so huge that it makes the UK’s Private Finance Initiatives seem like a mere footnote by comparison.

The financing of such a huge project is itself a monumental task, often including complex deals with other sovereign entities along the route, but net net it would seem reasonable to presume that the Chinese government will be needing to issue a lot more debt for many years to come. One should add that this is not the first ETF to offer the end investor the investor opportunity to invest in Chinese Sovereign bonds – both iShares and Xtrackers have similar offerings. What’s different now though, is the decision by a number of the key fixed income index providers to include China in several of the global indices. This fact, along with the Bonds Connect scheme, developed to facilitate the growth of the Chinese Bond market, will almost certainly see this less loved area within the ETF universe undergo substantial growth.

Is this a case of be careful what you wish for? Some recent commentary has suggested this asset class is best left to that small handful of specialists who know what they are doing. To be brutally honest I’m not so sure this isn’t over-egging the pudding. Believing in the benefits of diversification, then having a percentage of one’s fixed income exposure to Chinese Bonds would make sense, unless of course there is a level of idiosyncratic risk that comes with the structural set up of how this market operates. 

With an expected yield of 3.3 per cent, the question is whether this is adequate for that level of risk.  That risk, first and foremost is the risk that the RBM currency fluctuates against the investor’s, but as an emerging market currency, the cost of hedging can be quite expensive.  As ever, as an investor it will depend on what your personal view is, and with so much news relating to China, that sentiment could swing either way.

As the number of firms stepping into the fixed income ETF arena continues to grow, Goldman Sachs being the latest contender, it’s quite clear there is an increasing realisation that as a product fixed income ETFs is still seen as one of the biggest opportunities that fund management has to offer.  All in all, that is quite a remarkable position for the industry to find itself in and explains why this author thinks fixed income ETFs deserve the accolade as the 11th wonder of the world.

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