The fixed income corner of the ETF industry has experienced tremendous growth in recent years, as investors have become increasingly comfortable with achieving bond exposure through the exchange-traded structure. In 2010 more than $26 billion flowed into bond ETFs, following a year that saw more than $42 billion in net inflows. During the first six months of 2011 bond ETF inflows topped $16 billion.
Despite these impressive growth figures, it seems that the potential for future expansion of the bond ETF arena is significant. Although bond ETFs have expanded considerably, the bulk of inflows has been to products focusing exclusively or primarily on debt of U.S. issuers. Most investors have gradually eased their “home country bias” on the equity side of their portfolios, embracing international stocks as a vital component of long-term strategies. But when it comes to bonds, many investors still limit their holdings to U.S. securities [see Are Bond ETFs Broken?].
Expanding the geographic scope can be a major improvement to long-term portfolios, especially in the current environment. International bonds generally offer opportunities to enhance current returns relative to comparable U.S. debt, and have the added bonus of diversifying exposure away from the U.S. government and American corporations. Moreover, debt denominated in local currencies provides a dollar hedge that could be beneficial if the greenback encounters the weakness many predict it will [sign up for the free ETFdb newsletter].
For investors looking to diversify beyond U.S. borders, there are more than a dozen ETFs offering international exposure. Below we profile each and every international bond ETF, from emerging markets to Italian Treasuries to TIPS.
There are a handful of products in the International Government Bonds ETFdb Category that offer exposure to debt issued by governments outside the U.S. (many of these products focus primarily on developed markets in Europe and Asia):
- SPDR Barclays International Treasury Bond ETF (BWX): This ETF offers exposure to debt from a number of developed markets; the largest allocations go to Japan, Italy, and France. BWX recently had a yield to maturity of about 2.9% and a modified duration of about 6.5 years.
- SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ): This ETF gives investors access to the performance of fixed-rate local currency sovereign debt of investment grade countries outside the United States. BWZ’s top holdings include Japan, Germany, and Sweden. The fund recently had a yield to maturity of about 2.09% and a modified duration of 1.78 years.
- S&P/Citigroup International Treasury Fund (IGOV): This fund offers exposure to treasury bonds issued in local currencies by developed countries, with the largest allocations going to Japan, France, Germany, and Australia. IGOV recently had a yield to maturity of roughly 3.7% and an average maturity of about 8.4 years.
- S&P/Citigroup 1-3 Year International Treasury Fund (ISHG): Through ISHG investors can gain exposure to developed market treasury bonds with a remaining maturity between one and three years, meaning that this fund will have a lower effective duration than those profiled above. ISHG recently had a yield to maturity of 3.4% and the fund’s top allocations by country include Japan, Italy, and Germany.
Protecting your portfolio against inflation is no easy challenge, however, adding international TIPS exposure could help reduce overall portfolio volatility and potentially increase risk-adjusted returns. Investors should have a global defense against inflation, which means considering international funds from the Inflation-Protected Bonds ETFdb Category, which can serve as tactical-tools with added diversification benefits.
- SPDR DB International Government Inflation-Protected Bond ETF (WIP): Through WIP, investors can gain exposure to the performance of inflation-linked government bonds from developed and emerging market countries. The fund recently had a yield to maturity of 2.8% and a modified duration of about 9.5 years , while its top holdings by country are United Kingdom, France, and Japan.
- iShares International Inflation-Linked Bond Fund ETF (ITIP): This ETF gives investors broad-based exposure to inflation-linked sovereign debt that is publicly issued and denominated in the issuers’ currency. ITIP recently had a yield to maturity of 2.3% and the fund’s top allocations by country are United Kingdom, France, and Brazil.
- iShares Global Inflation-Linked Bond Fund (GTIP): This fund gives investors global exposure to inflation-linked sovereign debt, but it also includes U.S. Treasuries, making it a great tool for those seeking an all-in-one TIPS fund. GTIP recently had a weighted average coupon rate of 2.4% and an average maturity of just over 11 years.
Emerging Markets Debt
The Emerging Markets Debt ETFdb Category includes products that invest in dollar-denominated bonds (EMB, PCY) and those that focus on debt issued in the local currency (ELD, EMLC). That distinction can have a major impact on the risk/return profile; those looking to for dollar diversification will likely be better off with issues not denominated in the greenback:
- JPMorgan Emerging Bond Fund (EMB): This ETF gives investors broad exposure to actively traded debt instruments in emerging market countries, all of which are denominated in U.S. dollars. EMB offers a fairly high yield to maturity of about 5.2%, and its top allocations by country are the Philippines, Turkey, and Russia.
- PowerShares Emerging Markets Sovereign Debt Portfolio (PCY): This fund allows investors to tap into the fixed-income corner of emerging market economies, by providing exposure to U.S. dollar-denominated government bonds issued by almost two dozen countries. PCY is rebalanced quarterly and the fund employs a proprietary indexing methodology.
- WisdomTree Emerging Markets Local Debt Fund (ELD): This fund gives investors access to local debt denominated in the currencies of emerging market countries. The top three holdings by country are Indonesia, Malaysia, Mexico, and Brazil. ELD recently had a yield to maturity of 5.9% and an average of 4.6 years to maturity.
- Market Vectors Emerging Markets Local Currency Bond ETF (EMLC): This ETF gives investors exposure to a basket of bonds issued in local currencies by emerging market governments. EMLC recently had an average yield to maturity of just above 6.3% and top allocations by country are Brazil, Poland, South Africa, Mexico, Turkey, and Malaysia.
- SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND): This ETF tracks the performance of fixed-rate local currency sovereign debt of emerging market countries. Top allocations by country include South Korea, Brazil, and Russia. EBND recently had a yield to maturity of about 6.1%.
International Corporate Bonds
Many investors looking to enhance the yield of their fixed income portfolio will gravitate towards investment grade corporate debt, an asset class that introduces slightly more risk but can deliver solid coupon payments as well. Most of the options in the Corporate Bonds ETFdb Category focus on debt of U.S. issuers, but there are a few options there that allow for international diversification within this segment of the bond market:
- PowerShares International Corporate Bond (PICB): This fund gives investors exposure to the performance of investment-grade corporate bonds issued by non-U.S. issuers in developed markets overseas. PICB recently had a yield to maturity of about 4.5%. In terms of allocation by currency, the top holdings are currently the Euro, British Pound, and Canadian Dollar.
- SPDR Barclays Capital International Corporate Bond ETF (IBND): This ETF can serve investors as a tool for gaining broad-based exposure to global investment-grade corporate bond markets outside of the United States. IBND’s holdings are primarily rated A or higher, and its holdings are equally split between foreign and U.S. corporate bond holdings. Additionally, the fund recently had a yield to maturity of about 3.5% and an average modified duration of 4.4 years.
Regional Debt: LatAm and Asia
Investors with specific diversification objectives may look to regional debt funds that offer broad-based exposure to the fixed-income space of developing economic regions.
- WisdomTree Asia Local Debt Fund (ALD): This fund gives investors exposure to local-debt denominated in the currencies of Asia Pacific (ex-Japan) countries. ALD is comprised of holdings from South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia and New Zealand. The fund recently had an average yield to maturity of about 3.4%.
- Van Eck Latin American Aggregate Bond ETF (BONO): This ETF consists of sovereign and corporate debt securities from Latin American issuers denominated in U.S. dollar, Euro, and local currencies of issuers. BONO’s underlying index is market cap-weighted, and the fund’s top allocations by country include Brazil, Mexico, and Colombia.
Country-Specific Bonds: Germany, Italy, and Japan
Investors can now achieve hyper-targeted exposure to country-specific bond markets as the industry grows and new exchange traded products are constantly expanding the universe of investment strategies available. Keep in mind that all products listed below are ETNs, which exposes investors to a certain degree of credit risk as the products are unsecured debt instruments from the issuing institution.
- PowerShares DB German Bund Futures ETN (BUNL): This fund is intended to gives investors exposure which is identical to a long position in Euro-Bund futures. The underlying assets are German government issued debt securities with a remaining maturity of not less than 8 years and 6 months and not more than 10 years and 6 months. Germany is one of the most fiscally sound Euro zone economies, and German debt could take on safe haven appeal in certain environments.
- PowerShares DB Japanese Government Bond Futures ETN (JGBL): Investors can gain exposure to a long position in 10-year Japanese Government Bond futures through JGBL. The underlying assets of this ETF are Japan-government issued debt securities (JGBs) with a remaining term to maturity of not less than 7 years and not more than 11 years. Japanese debt often exhibits very low yields, and may also have appeal as a safe haven when equity markets encounter turbulence.
- PowerShares DB Italian Treasury Bond Futures ETN (ITLY): This ETF tracks the performance of a long position in Euro-BPT futures. The underlying assets of Euro-BPT futures are Republic of Italy-government issued debt securities (BTPs) with an original term of no longer than 16 years and a remaining term to maturity of not less than 8 years and 6 months and not more than 11 years. Yields on Italian debt have spike in recent weeks as concerns about the country’s massive debt burden have intensified; ITLY features quite a bit of risk, but also the opportunity for some juicy yields.
Disclosure: No positions at time of writing.
- WisdomTree Stuffs New Ideas Into ETF Pipeline
- Market Vectors Planning Japanese Bond ETF
- WisdomTree Launches Asia Debt ETF (NYSEArca:ALD)
- Recapping Impressive Innovation In Bond ETF Space
- State Street Planning Emerging Markets Local Bond ETF (NYSEArca:EBND)