Is Bharat Bond ETF-2023 ready to match the launch yield?

When launched in 2019, the Bharat Bond ETF-April 2023 in its presentation provided a pre-tax portfolio yield of 6.83% (or rather 6.8295%, if we subtract the expense ratio of 0.0005%) to clients who till then Stay invested. maturity. This 6.83% was the Yield to Maturity (YTM) of the index and not the fund.

Today, with only 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 does the difference in initial yield tell investors in ETFs?

One, what matters to investors is the returns at the time the funds are deployed. With a lag of a few weeks between when the fund was launched and when the money was fully deployed, yields were as low as 6.6%.

As of today, fund returns also reflect the effect of mark-to-market losses. Bond yields have risen sharply in the last one year and this has impacted the Net Asset Value (NAV) of the fund. But this is only a paper loss until you redeem your investment.

Also, investors need to account for some degree of divergence between fund and index YTMs, especially in the case of bond indexes. Given the lack of sufficient liquidity (trading volume) in the bond market at all times, index replication may not be exact.

Reinvestment risk also needs to be factored in. The YTM calculation is based on the assumption that the coupons from the underlying bond will be reinvested at the same yield. In fact, when the fund receives these coupon payments, the coupons are reinvested at the prevailing yield (which may be higher or lower).

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