• ETF-inzichten

    The Most Boring Column Ever

    Martijn Rozemuller, CEO – Europe

    Investors often think that bonds are boring. Indeed, some investors wish that bonds could be more like equities, with larger price appreciation potential.

    Indeed, bonds are nothing like equities. While equity holders have a stake in the future of a business, bond holders simply loan money to the company, for which they receive interest over an agreed period, after which the bond nominal is repaid. In unpredictable times, though, bonds’ predictable cash flows can be a strength.

    We are increasingly fielding questions from individual investors worried that despite their unexciting nature, bond ETFs have fallen in value. However, in the currently unfolding market turmoil, headlined by the Russian invasion of Ukraine on 24 February and increased expectations of rate hikes to combat inflation, they generally have not lost nearly as much value as equities - even if they have not been entirely invulnerable.

    Fund Performance, %

    Fund Performance, %

    Source: VanEck. Data from 31 May 2021 to 13 June 2022, Gross Return in EUR. Past performance is not a reliable indicator of future returns.

    In particular, well-heeled investors value bonds for their regular income and relatively low price volatility. Bonds are issued by governments or companies, which are effectively borrowing from investors over a fixed period and, usually, paying fixed1 coupon income in return.

    In times of rising interest rates, newly issued bonds usually pay higher coupons than existing bonds and provide more attractive income opportunities. Hence, existing bonds have less value for investors and their market value falls. However, it is important to realise that the issuer still pays the pre-set coupons and repays the bond when it matures, so an investor’s cash flows do not change. Conversely, bond prices tend to converge to their issue prices the closer they are to maturity. Moreover, any cash from maturing bonds can be reinvested in higher yielding bonds, which can benefit the investor.

    I always recommend that investors take a prudent approach. They should have diversified portfolios of equities and bonds, with the bonds acting as stabilisers. Think back to the global financial crisis about fifteen years ago: global equities fell more than 50% by some measures yet having part of your portfolio in bonds would have cushioned against losses.

    Of course, there are different types of bonds with differing risk profiles. At VanEck, we have a range of bond ETFs to suit individual investors’ appetites for risk and return. They are summarized in the table below.

    VanEck bond ETFs: a range of returns and risks

    Bond ETF Investment Goal Yield2 SRRI3 / Risks
    VanEck iBoxx EUR Sovereign Capped AAA-AA 1-5 UCITS ETF Highest quality EUR sovereign bonds, with relatively short maturities 1.55% 2 of 7 / Credit Risk, Liquidity Risk and Interest rate Risk
    VanEck iBoxx EUR Sovereign Diversified 1-10 UCITS ETF Most liquid Eurozone sovereign bonds 2.3% 3 of 7 / Credit Risk, Liquidity Risk and Interest rate Risk
    VanEck iBoxx EUR Corporates UCITS ETF Largest and most liquid euro-denominated corporate bonds, with Investment Grade rating 2.7% 3 of 7 / Credit Risk, Liquidity Risk and Interest rate
    VanEck Global Fallen Angel High Yield Bond UCITS ETF Sub-investment grade corporate bonds, which were Investment grade when issued 6.8% 4 of 7 / Foreign Currency Risk, Emerging Markets Risk, High Yield Securities Risk
    VanEck J.P. Morgan EM Local Currency Bond UCITS ETF Sovereign bonds issued by emerging countries in local currencies 8% 4 of 7 / Foreign Currency Risk, Emerging Markets Risk, Credit Risk
    VanEck Emerging Markets High Yield Bond UCITS ETF Sub-investment grade bonds, issued by companies in emerging markets 8.9% 4 of 7 / Foreign Currency Risk, Emerging Markets Risk, High Yield Securities Risk

    Alternatively, an investor could buy one of our multi-asset ETFs, which already have a mix of equities, bonds and real estate4. Designed to diversify risk and return, they come in three blends – higher, medium and lower risk.

    Overall, though, it’s wise to remember at volatile and difficult times that boring predictability can be surprisingly attractive.

    1 Some entities can also issue bonds with coupons linked to inflation or interest rates, but such structures are less common.

    2 Source: VanEck. Data as of 13 Jun 2022. Measured as weighted-average Yield-to-Worst of the portfolio. The Coupon and Yield to Worst do not represent the performance of the Fund. These statistics do not take into account fees and expenses associated with investments of the Fund. Past performance is not a guarantee of future returns.

    3 The synthetic risk and reward indicator (SRRI) is calculated according to European regulatory requirements and ranks the historical volatility of the fund on a scale from 1 to 7. Funds with a lower SRRI typically exhibit lower volatility and therefore a lower probability of temporary capital losses. Funds with a high SRRI are expected to experience greater fluctuations and a greater risk of capital loss. The fund category is not a reliable indication of future performance and may change in the course of time.

    4 In the form of real estate stocks.

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