International Bond ETFs Could Outperform U.S. Treasuries
Some the largest money managers are expecting European debt to outpace U.S. Treasuries ahead. Investors can also capitalize on potential fixed-income opportunities overseas with international bond exchange traded funds.
BlackRock, Pacific Investment management Co. and Prudential Financial Inc. all believe riskier peripheral European country debt will outperform as the European Central Bank extends its bond purchasing program, reports Eshe Nelson for Bloomberg.
Similar to what happened in the U.S. after the Federal Reserve’s quantitative easing policy, falling yields in fixed-income assets could push investors to riskier and higher-yielding assets in the Eurozone. In contrast, money managers are more pessimistic about U.S. Treasuries with the Fed normalizing interest rates ahead.
Observers anticipate that the tepid growth and deflationary pressures in the Eurozone could force the ECB to expand stimulus in 2016, which J.P. Morgan Chase & Co. will help Europe outperform the U.S., despite the myriad of debt problems that the region has faced.
“A lot of these credits that were feared to be disasters like the peripherals from Spain all the way down to Greece, had events for years and there’s going to be political and economic challenges going forward but those have been the best performers,” Robert Tipp, the chief investment strategist at the fixed-income unit of Prudential, told Bloomberg.
Investors can also gain exposure to European debt through international bond ETFs. For instance, the SPDR Barclays International Treasury Bond ETF (BWX) includes 6.8% Italy, 6.5% France, 4.7% Netherlands, 4.7% Germany, 4.7% Belgium, 4.6% Spain, 3.4% Austria and 1.7% Ireland. The iShares International Treasury Bond ETF (IGOV) includes 6.8% France, 6.5% Italy, 5.6% Germany, 5.0% Belgium, 4.9% Austria, 4.5% Portugal, 4.4% Spain, 4.4% Netherlands and 4.3% Ireland.
However, an appreciating U.S. dollar could weigh on these international bond ETFs since the funds do not hedge currency risks.
Alternatively, the Vanguard Total International Bond ETF (BNDX) provides broad exposure to international debt, including foreign investment-grade government, corporate and securitized debt while hedging currency exposure, which can diminish volatility attributed to the Forex risks. BNDX includes a 56.9% tilt toward European countries.
Moreover, the recently launched iShares Core International Aggregate Bond ETF (IAGG) , which tracks a group of investment-grade international bonds, also hedge against fluctuations between the value of component currencies and the U.S. dollar. IAGG includes a 61.6% weight toward European debt.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
