10X now offers a Bond ETF that enables investors to gain exposure to the highest-yielding South African government bonds, mirroring an established unit trust offering the same exposure: the CoreShares Yield Selected Bond ETF (share code CSYSB).
The product tracks a proprietary index developed with S&P Dow Jones Indices that selects just the eight highest-yielding liquid nominal bonds issued by the South African government out of the 12 nominal state bonds available.
‘Clients are looking for exposure to the bond market, but they want to specifically target the long end of the yield curve,’ Head of Client Solutions, Chris Rule, said during an interview.
According to Rule, the proprietary index currently yields 12.5% compared to 11.6% for the standard GOVI index.
‘The fund effectively cuts off the short end of the yield curve. In most market environments, you end up buying bonds from the longest duration to the eighth longest duration. You get a pickup in the duration of approximately 15% and a pickup in yield of a similar quantum. Naturally the ETF has higher capital volatility, however investors are comfortable that they are being sufficiently compensated for the added risk in the yield pick-up.’ Rule said.
The eight bonds included in the new fund currently have weightings from 12.2% to 12.9%. The fund has a maximum weighting of 15% devoted to any one bond – given the homogenous nature of the issuer risk (All SA Government Bonds) this capping measure is to control for the liquidity profile of individual bonds.
“We launched the unit trust equivalent on 25 August 2022 and the fund has gathered R400m in assets due to its unique positioning.”
The CoreShares Yield Select Bond ETF only includes government bonds, with no parastatal or corporate paper exposure.
Rule said that the fund’s methodology was unique in two respects.
“Firstly, the methodology is based on a bond’s yield, not on issuance size, where the bonds included in the fund are weighted based on their yield. Secondly, the fund explicitly targets the long end of the bond index in a rules-based framework.”
‘We use yield to maturity as the selection criteria. We select the eight bonds with the highest yield to maturity and weigh them based on their yield to maturity. The bonds with the highest yield will get the highest weight in the fund’s index,’ he added.”
‘In all instances over the past 12 years, the bonds with the highest yield have been the eight bonds with the longest duration. However, you can have a scenario where the yield curve inverts. If the short end of the curve is compensating investors more than the long end, then we will select those instruments,’ Rule said.
Rule said that 10X has mainly targeted the ETF at private client securities businesses, aggregators of assets and builders of solutions where an ETF of this nature forms a part of the total fixed income and income generating assets in a client’s portfolio.
The new fund falls in the South African interest-bearing variable term ASISA category. Its retail management fee is 25 basis points, excluding VAT, with a targeted TER of 0.30% basis points, including VAT and has R240m in assets.
The chart below shows where the SA government bond curve is at the moment and the green highlighted bond are what the CSYSB ETF holds.
ETF Quick Facts
Listen to Chris Rule in conversation with Simon Brown unpacking this topic in more detail from 12:27 minute to 18:25 minute in this recent podcast here: