Exchange-traded fund investors have searched high and low for safe havens over the past couple of years. As a consequence, ETFs tracking perceived safe havens such AAA-rated government bonds have been major beneficiaries, soaking up inflows.
But when it comes to safe havens, one market stands out: the Swedish government bond market.
According to ING Investment Management, it is the world’s safest when looking at sovereign credit risk factors such as solvency risk, external dependency and governance.
“Sweden’s debt-to-GDP ratio stands below 40% and is one of the lowest in the world. The country is amongst the few high-income countries that in its recent past have been able to generate government surpluses,” said Thede Ruest, fund manager at ING.
Sweden’s external dependency is very low due to its large and sustained current account surpluses, most recently at around 7% of total GDP. Sweden, unlike members of the Eurozone, has its own country-specific policy framework (fiscal, monetary and macro prudential) and its own currency – the Swedish Krona – that allows for substantial flexibility to control funding costs.
“The Swedish government bond market will remain the default safest in the world for the foreseeable future.” added Ruest.
However, despite the country’s ultra-safe status, the lone ETF to offer exposure to this market, the XACT Sweden All Bond ETF, has mostly slipped under investors’ radars, accumulating assets of only SEK 295.5 million (£28.7m) since its launch in March 2011. Issued by Handelsbanken’s ETF unit, Xact, the Nasdaq OMX-listed fund is the sole ETF providing dedicated access to the Swedish bond market. On paper, it should be bulging with assets.
The fund is benchmarked to the Handelsbanken Sweden All Bond Tradable Index, a market value-weighted index consisting of Swedish government, municipal and covered mortgage bonds. Although the index is not comprised entirely of government bonds, approximately 35% of constituents are direct AAA-rated Swedish government bond obligations. The index’s non government-guaranteed bonds are mainly covered mortgages bonds. While these are higher risk, they nevertheless still maintain a triple-A rating and are perceived as very high quality. Moreover, the extra yield they contribute boosts the fund’s appeal.
Overall, the fund offers investors an interesting alternative to more widely held safe-haven ETFs and could prove a useful addition to low-risk wealth preservation portfolio baskets that might also contain, for example, Treasuries, gilts and bunds, as well as Finish, Australian and Canadian government bonds.
The index has 44 constituents with an average maturity of 4.28 years and a yield to maturity of 1.76%. The duration is 3.79.
The fund is UCITS III-compliant and comes with an annual management fee of 0.19%.