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Building a Balanced Retirement Portfolio for Conservative Investors with This Bond ETF

For long-term, young investors, it may be beneficial to go all-stock since the return of equity is superior to other traditional asset classes. However, for the elderly and retirees who can no longer tolerate high volatility and want a stable income stream, the bond is an essential part of their investment portfolio. The BMO Asia IBG ETF (SEHK: 3141) allows retirees to build a diversified, low-risk bond portfolio.

The 100-minus rule

Stocks and bonds are the two main traditional asset classes. While both are claims to the company’s interest, they are of very different natures: bondholders lend money to the company and receive periodic interests plus the principal at maturity date whereas equity holders enjoy profit sharing. On the contrary,  equity gives spectacular returns in the long run but it is inherently volatile. Bond can provide a stable income stream and conserve the capital but the long-term return is lower. Hence, allocating funds between these two asset classes can be tricky sometimes. A common rule of thumb is that individuals should hold a percentage of stocks equal to 100 minus their age. So for a typical 60-year-old, 40% of the portfolio should be equities. The rest would comprise of high-grade bonds, government debts, and other less volatile assets. The rationale is that as people age, their tolerance for volatility decreases while their need for stable income increases.

Similar to equity ETF, bond ETF provides a cheap and convenient way for passive investors to diversify their holdings and reduce risks of their investments.

BMO Asia IGB ETF v.s. PAIF

BMO Asia IGB ETF (SEHK: 3141) and PAIF (SEHK: 2821) are the two choices for investors to gain broad exposure to high-grade bonds across different Southeast Asian markets. BMO Asia IGB ETF holds investment-grade corporate bonds whereas PAIF holds government bonds. The former has a slightly higher net yield (yield minus expense ratio: 3.03% v.s. 2.85%) but the latter has a more diversified portfolio across all Southeast Asian markets (BMO Asia IGB ETF invests nearly half of its assets in Chinese corporate bonds) and also a safer portfolio (since sovereign bond is considered the highest-grade bond for a particular country).

As for liquidity, which is an important issue as both ETFs are thinly traded, the two ETFs have market makers (Deutsche and HSBC for PAIF and Flow Traders for BMO Asia IGB ETF) to ensure that the bid and ask prices of the ETFs are within narrow ranges of their respective net asset values (NAVs). Hence investors can have minimal worry about liquidity of both ETFs.

One critical difference, however, makes a choice between these two bond ETFs easy: BMO Asia IGB ETF invests in USD-denominated bonds whereas PAIF invests in government bonds denominated in local currencies. With Hong Kong Dollars’ link to the U.S. Dollar and the depreciation trends of all Southeast Asian currencies against U.S. Dollar in the past 20 years, focusing on USD-denominated bonds clearly makes Asia IGB ETF the preferred choice between the two as it takes away the currency risk for Hong Kong-based investors.


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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Hong Kong contributor Alex Ng has no position in any of the stocks mentioned.