A reader asks which is better: the government’s low-cost retail bonds, or a listed bond ETF?
11 August 2022 - 05:00
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What advantage, if any, is there in investing in a local JSE-listed government bond ETF, as opposed to buying RSA retail savings bonds directly?
— Fat Wallet community member
There is actually a lot of difference and that is because buying the retail bond directly is essentially buying in the primary market. In other words, you buy directly from the government and then hold until expiry, when your capital is returned to you. Of course you also get the regular coupon (interest) payments. You are locked in for the term (with early exit penalties applicable) and you get a set interest rate. In the case of the RSA retail savings bond, the two-year rate is currently 9.25%, the three-year bond offers 9.75% interest and the five-year bond will pay you 11%.
A bond fund, however, buys and sells in the secondary market where bonds trade. This market is exactly like the share market, but for bonds. This means there is a risk of capital loss if the rates rise and the bond value decreases, or even just due to supply and demand, as we see in share markets. The interest rate fluctuates as the fund buys and sells bonds with different maturities and coupon rates. So while not nearly as volatile as a share, you will see price changes up and down, as well as different interest payments.
Support our award-winning journalism. The Premium package (digital only) is R30 for the first month and thereafter you pay R129 p/m now ad-free for all subscribers.
READER LETTER OF THE WEEK
YOUR MONEY: Retail bonds vs bond ETFs
A reader asks which is better: the government’s low-cost retail bonds, or a listed bond ETF?
What advantage, if any, is there in investing in a local JSE-listed government bond ETF, as opposed to buying RSA retail savings bonds directly?
— Fat Wallet community member
There is actually a lot of difference and that is because buying the retail bond directly is essentially buying in the primary market. In other words, you buy directly from the government and then hold until expiry, when your capital is returned to you. Of course you also get the regular coupon (interest) payments. You are locked in for the term (with early exit penalties applicable) and you get a set interest rate. In the case of the RSA retail savings bond, the two-year rate is currently 9.25%, the three-year bond offers 9.75% interest and the five-year bond will pay you 11%.
A bond fund, however, buys and sells in the secondary market where bonds trade. This market is exactly like the share market, but for bonds. This means there is a risk of capital loss if the rates rise and the bond value decreases, or even just due to supply and demand, as we see in share markets. The interest rate fluctuates as the fund buys and sells bonds with different maturities and coupon rates. So while not nearly as volatile as a share, you will see price changes up and down, as well as different interest payments.
— Your Money team
Send us your questions to yourmoney@fm.co.za
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