Is Bharat Bond ETF–2023 set to match its launch yield?


Come April, and Bharat Bond ETF– 2023, among the first in the Bharat Bond series to be launched by Edelweiss MF, will hit maturity.

At its launch in 2019, the Bharat Bond ETF–April 2023 had provided for a pre-tax portfolio yield of 6.83% in its presentation (or rather 6.8295%, if we deduct the expense ratio of 0.0005%) for subscribers who remained invested till maturity. This 6.83% was the yield to maturity (YTM) of the index and not the fund.  

Today, with just four months to its maturity, the Bharat Bond ETF– 2023 is showing 6.44% return (CAGR, or compound annual growth rate, since its inception). What explains the difference from the starting yield for those who had invested in the ETF?

One, what matters for investors is the yield at the time of fund deployment. With a few weeks’ lag between when the fund was launched and when the money was fully deployed, the yields were down to 6.6%.

As of today, the fund return also reflects the impact of mark-to-market loss. Bond yields have risen sharply over the past year and this has impacted the fund’s net asset value (NAV). But this is only a paper loss unless you redeem your investment.

Also, investors need to account for some degree of deviation between the fund and the index YTM, especially so in case of bond indices. Given the lack of adequate liquidity (trading volumes) in the bond market at all times, the index replication cannot be exact.

The re-investment risk also needs to be factored in. YTM calculations are based on the assumption that coupons from the underlying bonds will get re-invested at the same yield. In reality, the coupons get re-invested at the yields (can be higher or lower) prevalent when the fund receives these coupon payments.

That said, one needs to wait until April when the Bharat Bond ETF matures to know what the fund can finally deliver.

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