U.S. Markets open in 5 hrs 8 mins

The Guide to International Treasury Bond ETF Investing

Zacks ETF Research

Recent developments in the domestic as well as global markets have led to an increase in volatility across all asset classes. After getting off to a good start in 2012, the present scenario in the U.S equity markets is choppy, to say the least. The outlook for the same remains bleak in the near future, mainly thanks to the never-ending euro zone debt crisis and a slowdown in global economic growth (read The Five Best ETFs over the Past Five Years).

The recent ‘risk off’ environment has led the investors to flee from the risky asset classes and seek solace in the so-called safer bond segment. However, this trend has led to plummeting U.S. Treasury rates to near all time lows, forcing many investors to seek yield in other corners of the market.

Furthermore, recent steps and hints by the FOMC to either extend or expand Operation Twist or add another round of QE could keep rates depressed for the foreseeable future. If anything, investors could see rates slowly tick down, especially if emerging markets remain weak, uncertainty is the name of the game in Europe, and the U.S. struggles with low growth levels.

International Treasury ETFs

Thanks in part to the low yields in the U.S. market, some investors may want to consider obtaining some international bond exposure as a way to diversify fixed income exposure while still obtaining a high yield. These international bonds are also much less volatile than their stock peers, allowing many to obtain foreign assets with lower levels of risk than what many are seeing in the equity world.

Unfortunately, there are some risks in a few of the major European bond markets at this time, meaning that a broad basket approach across a variety of economies may be the best approach. In this way, investors can gain access to a number of different bond markets without worrying too much about individual inflation rates and credit ratings which vary from economy to economy.

Given this, the International Treasury ETFs could provide investors with an opportunity to look beyond the low yielding U.S sovereign bonds to earn higher yields. Moreover, these bonds can also go a long way in terms of diversification as these ETFs have a relatively low correlation with U.S Treasury securities while paying out solid yields as well (read Floating Rate Bond ETF Investing 101).

Risks of the International Treasury ETF Space

One of the main risks to be aware of is exchange rate risk as the ETFs hold securities issued in different currencies. Moreover, if the U.S. Dollar appreciates further against other major currencies, the value of the investments will go down even if the investment has generated positive sub-par returns. Therefore, investing in this foreign currency denominated assets necessarily involves having a bearish view of the U.S. Dollar.

Also, the ongoing socio-economic and political drama in the many parts of the world has resulted in a slowdown in many economies, including the U.S. Many developed as well as emerging markets are facing pressure in the form of a rising debt-to-GDP ratio, sovereign rating downgrades, recapitalization of the banking sector and rise in unemployment rates (read Beyond the PIIGS, Three Troubled European ETFs to Watch).

In particular, there has been some weakness in a variety of developed markets around the world. The recently reported high unemployment rate from Australia also indicates a slowdown in the economy and is a cause for concern. So is the double-dip recession which has been plaguing United Kingdom for quite some time now.

Speaking of European troubles, the PIIGS nations (Portugal, Ireland, Italy, Greece and Spain) are the front runners for the most troubled euro zone economies, and could alter the international treasury bond market going forward, depending of course on what the ECB does in the near future.

However, given the present circumstances of weak stock markets and low U.S. yields, International Treasury ETFs could make for a lucrative investment option with their relatively higher weighted average yields coupled with the cushion of investment grade sovereign rating and benefits of diversification.

Below, we highlight the four main choices that investors have in this space, breaking down the pros and cons of each, as well as some recent performance and yield figures of the funds in this group:

SPDR Barclays Capital International Treasury Bond ETF (BWX)

Launched in October of 2007, BWX follows the Barclays Capital Global Treasury Ex-US Capped Index. The index measures the performance of investment grade sovereign debt securities located outside the U.S. It has a fairly large asset base of around $1.85 billion and daily volume around 235,706 shares.

The ETF pays out an impressive yield of 3.93% but has slumped 58 basis points for the year as of the end of June. The ETF targets the longer end of the yield curve and has an average maturity of 9.28 years.

While this may go a long way in increasing yields, on the flip side this makes the ETF more sensitive to interest rate movements as indicated by an average duration of 7.19 years (see Three Muni Bond ETFs to Weather the Coming Storm).

From a holdings perspective, BWX allocates 23.32% of its total assets in the low yielding Japanese Government bonds. Another drawback of investing in BWX is the fact that it allocates more than half of its assets in European nations. It holds all investment grade securities in its portfolio but 8.24% of its total assets are rated Baa.

However, it provides a fairly well diversified portfolio allocating only 9% in the top 10 holdings. This has caused the ETF to perform relatively better than its counterparts.

iShares S&P/Citigroup International Treasury Bond (IGOV)

The ETF tracks the S&P/Citigroup International Treasury Bond Index Ex-US which measures the performance of foreign currency denominated treasury bonds issued by developed countries other than the U.S. Like BWX, IGOV also mostly places its bets on the Japanese government bonds as these account for almost 23% of its total assets.

The ETF pays out 3.78% as yields and has a weighted average maturity of 8.59 years. IGOV seems to be well placed as far as credit risk is concerned since a majority of its assets are rated investment grade. However, it is exposed to high levels of currency risk as it holds all securities denominated in foreign currency.

IGOV has an average duration of 6.66 years. This particular international Treasury bond ETF holds 220 securities in all and allocates 25.43% of its total assets in the top 10 holdings (read Guide to the 25 Most Liquid ETFs).

The ETF charges a low premium in the form of expense ratio of just 35 basis points. It also has a tight bid-ask spread of just 35 basis points. Both these factors give this fund a competitive edge over its peers as it reduces the total cost of investing and does not limit its profit potential. IGOV has total assets of $292.78 million and an average daily volume of 37,181 shares.

SPDR Barclays Capital Short Term International Treasury Bond ETF (BWZ)

The ETF debuted in January of 2009 and since then it has managed to amass $222.21 million in assets under management. The expense ratio stands at 35 basis points and it has an average daily volume of 32,260 shares.

This is done by tracking the Barclays Capital 1-3 Year Global Treasury ex-US Capped Index. This benchmark measures the performance of investment grade short term treasury bonds of developed countries excluding the U.S.

The ETF targets the shorter end of the yield curve by focusing on securities having a residual maturity between one and three years. This makes BWZ relatively more stable than its long term counterparts in terms of interest rate risk as indicated by an average duration of 1.86 years.

Despite targeting near-dated securities, the ETF pays out a solid yield of 3.51%, however, in terms of total returns the ETF has slumped 6.41% in the most recent one year period (see Real Return ETF Investing 101).

iShares S&P/Citigroup 1-3 Yr International Treasury Bond ETF (ISHG)

Like BWZ, this product also targets securities having a residual maturity of one to three years. The ETF was also launched just after the debut of BWZ as a strategic move by iShares to steal assets in the short term international Treasury bond ETF space. It has total assets worth $177.35 million and an average daily volume of 10,824 shares.

In terms of strategy and expense structure, both ISHG and BWZ are very similar and charge the same expense ratio, but, ISHG limits exposure to countries with higher debt and replaces them with countries having lower debt levels. However, this did not help prevent it from slumping 8.40% for the one year period as of 30th June 2012.

ISHG has a weighted average maturity of 1.86 years and an average duration of 1.80 years. It pays out an annual yield of 4.56% (see 11 Great Dividend ETFs). From a weightings perspective, the ETF holds 23.41% in Japanese short term bonds and around 65% in the European nations’ near-dated securities.

 

ETF

Total Assets

Expense Ratio

Yield

% in Top 10 holdings

1-Year returns (as of 6/30/2012)

Avg. Daily Volume

Avg. Duration

Avg. Maturity

BWX

$1.85 billion

0.50%

3.93%

9.04%

-0.58%

235,706 shares

7.19 yrs

9.28 yrs

IGOV

$292.78 million

0.35%

3.78%

25.43%

-3.32%

37,181 shares

6.66 yrs

8.59 yrs

BWZ

$222.21 million

0.35%

3.51%

20.03%

-6.41%

32,260 shares

1.86 yrs

1.92 yrs

ISHG

$177.35 million

0.35%

4.56%

30.88%

-8.40%

10,824 shares

1.80 yrs

1.86 yrs

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>

Read the analyst report on BWX

Read the analyst report on IGOV

Read the analyst report on BWZ

Read the analyst report on ISHG

Zacks Investment Research


 
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

More From Zacks.com

  • Business
    Financial Times

    Flawed rules contributed to Woodford fund meltdown, says FCA

    at Neil Woodford's flagship equity fund, which froze £3.7bn of investor money this month, was fuelled by “flawed” EU rules that may need to be jettisoned after Brexit, the head of the main UK financial regulator said on Tuesday. Andrew Bailey, chief executive of the Financial Conduct Authority, denied the episode stemmed from supervisory failures and instead said Mr Woodford's Equity Income Fund was using “to the full” an “excessively rules-based” EU regime that caps at 10 per cent the proportion of unlisted assets a fund can hold. Mr Bailey told the Commons Treasury select committee that this manoeuvre — which the FCA was not alerted to in advance — was “regulatory arbitrage” and “sailing close to the wind”.

  • What Kind Of Shareholder Owns Most PGS ASA (OB:PGS) Stock?
    Business
    Simply Wall St.

    What Kind Of Shareholder Owns Most PGS ASA (OB:PGS) Stock?

    Companies that used to be publicly owned tend to have lower insider ownership. With a market capitalization of øre4.4b, PGS is a small cap stock, so it might not be well known by many institutional investors. Our analysis of the ownership of the company, below, shows that institutional investors have bought into the company.

  • Uncertainty over trade could lead to more 'conservative' guidance in Q3
    Business
    Yahoo Finance Video

    Uncertainty over trade could lead to more 'conservative' guidance in Q3

    Chris Versace, the Chief Investment Officer at Tematica Research, says companies were hoping the trade fight with China would be resolved by now, and guidance will likely be more “conservative” as a result. He spoke with Yahoo Finance's Alexis Christoforous, Brian Sozzi and Scott Gamm.

  • Chinese buyers are pulling out of New York real estate in droves
    Business
    Quartz

    Chinese buyers are pulling out of New York real estate in droves

    China's capital controls are making their mark on New York's luxury real estate market. In an effort to shore up its currency, the world's second biggest economy has been cracking down on money leaving the country, and there are significant concerns (paywall) about its real estate developers' levels of US dollar debt. Having briefly been the main movers and shakers in New York real estate, Chinese developers have fallen behind the Canadians, the Germans and the Dutch.

  • Markets May Not Need a Deal, But Don't Want War
    Business
    Bloomberg

    Markets May Not Need a Deal, But Don't Want War

    In an eerie calm, stock volatility remains low for both the S&P 500 and the Euro Stoxx 50 ahead of the G-20 meeting between U.S. President Donald Trump and China's Xi Jinping, during a strong month for equities. Europe's benchmark and the S&P 500 have gained 5% and 6%, respectively in the period. I've been surprised at how benign the market environment has been during this year so far, given the amount of stuff that's going on in the wider economic and geopolitical context, both here and internationally,” says Ken Wotton, a fund manager at Gresham House in London.

  • Here’s What Hedge Funds Think About Conn’s, Inc. (CONN)
    Business
    Insider Monkey

    Here’s What Hedge Funds Think About Conn’s, Inc. (CONN)

    Hedge funds are known to underperform the bull markets but that's not because they are bad at investing. Truth be told, most hedge fund managers and other smaller players within this industry are very smart and skilled investors. Hedge funds underperform because they are hedged.

  • Bayer buoyed by new approach to glyphosate lawsuits, Elliott stake
    Business
    Reuters

    Bayer buoyed by new approach to glyphosate lawsuits, Elliott stake

    Bayer shares jumped on Thursday after the chemicals group beefed up plans to tackle multi-billion dollar lawsuits linked to glyphosate, a move welcomed by activist shareholder Elliott, which has revealed a sizeable stake in the company. Bayer said on Wednesday it had hired an external lawyer to advise its supervisory board and has set up a committee to help to resolve the glyphosate litigation issue. The company's shares have been under pressure following its $63 billion acquisition of Monsanto, which brought with it massive legal issues after more than 13,400 plaintiffs alleged the company's glyphosate weedkiller caused cancer - a claim Bayer contests.

  • Ford Stock Continued to Hover Near Its 50-Day Moving Average
    Business
    Market Realist

    Ford Stock Continued to Hover Near Its 50-Day Moving Average

    In the week ended June 21, Ford Motor Company (F) underperformed the broader market and its direct home market peer General Motors (GM). Ford stock remained mixed last week and settled with 0.1% minor weekly gains as compared to a 2.2% rise in the S&P 500 Index.

  • 2 Employees, Gunman Dead After Shooting at California Car Dealership
    U.S.
    Meredith Videos

    2 Employees, Gunman Dead After Shooting at California Car Dealership

    A man who had just been fired from a Northern California Ford dealership shot and killed two employees and then killed himself Tuesday evening, police and witnesses said.

  • Business
    U.S.News & World Report

    7 of the Best Stocks to Buy for the 5G Revolution

    How to invest in the transition to 5G networks. The coming transition from 4G to 5G cellular networks (the "G" standing for generation) is expected to facilitate the next phase of technological change and innovation. Market intelligence firm IDC expects the market for 5G infrastructure to soar from $528 million in 2018 to $26 billion in 2022.

  • ‘Rich Dad, Poor Dad’ Robert Kiyosaki on the looming market crash, ‘God’s money,’ and why he’s looking like a genius
    Business
    MarketWatch

    ‘Rich Dad, Poor Dad’ Robert Kiyosaki on the looming market crash, ‘God’s money,’ and why he’s looking like a genius

    'Gold is God's money... The Fed has destroyed the monetary system of the world along with its central banks. In my opinion they went criminal... So when I watch Wall Street, I watch the price of stocks and I watch what the Fed is doing — I just get nauseous.

  • Pinduoduo cements position as China's second-largest ecommerce player
    Business
    TechCrunch

    Pinduoduo cements position as China's second-largest ecommerce player

    Alibaba and JD.com have been in a war over the Chinese e-commerce space for a decade or so, but a third player called Pinduoduo has managed to shake up the duopoly in recent times. According to data provider QuestMobile, Pinduoduo's daily active users have outnumbered JD's for at least the past 12 months, and it came out of the mid-year sales festival -- first popularized by JD as a counterpart to archrival Alibaba's "11/11" shopping day -- with 135 million DAUs. JD, in comparison, ended with 88 million DAUs and Alibaba's Taobao retained its top spot at 299 million.

  • Business
    Morningstar

    A Checklist for Assessing Dividend ETFs

    Dividend Yield A fund's current dividend yield is often the first metric investors seek out when shopping for equity-income opportunities. The 12-month-yield metric aggregates an ETP's distributions during the trailing 12 months and then divides that figure by the fund's net asset value. While this metric is interesting, it is not very useful in isolation, because it lacks context.

  • A China trade deal could cancel Federal Reserve interest-rate cuts
    Business
    MarketWatch

    A China trade deal could cancel Federal Reserve interest-rate cuts

    A new high for the U.S. stock market before a trade deal with China is completed was a surprise, even though we had another “90% done” quote from the Trump administration this week. The moral here is never to underestimate the ability of the Twitter account of the U.S. president to create a short squeeze in stocks, particularly if the Federal Reserve has already more or less promised that a July federal funds rate cut is coming. Despite the weakening of manufacturing indexes in the U.S. to 10-year lows, it is rather telling that if one were to compare the largest junk bond ETF by assets, the iShares IBoxx $ High Yield Corporate Bond ETF (HYG) with the largest stock ETF, the SPDR S&P 500 SPDR (SPY) one would see similar strong performance.

  • Why Pareteum Stock Plunged Today
    Business
    Motley Fool

    Why Pareteum Stock Plunged Today

    What happened Shares of Pareteum (NASDAQ: TEUM) plunged 20.3% on Wednesday, after the cloud-communications platform specialist found itself in the crosshairs of yet another short-selling firm. In a scathing piece this morning that effectively amplified concerns brought by short-seller Aurelius Value earlier this month, Viceroy Research suggested Pareteum "appears to be in breach of U.S. sanctions against Iran," with its services to Iran-based mobile virtual network operator Amin SMC. Viceroy elaborated that Amin SMC's chairman, Hamid Reza Amirinia, is "suspected of breaching sanctions with an Iranian government mandate to launder money for the regime."

  • Cannabis stocks drift lower as broader markets falter; Hexo hit by downgrade
    Business
    MarketWatch

    Cannabis stocks drift lower as broader markets falter; Hexo hit by downgrade

    The spike in activity comes amid a broad push for legislation that would protect banks and credit unions from federal enforcement action that could be brought because cannabis is still illegal at the federal level. Two bipartisan bills are currently being promoted; the Secure and Fair Enforcement (SAFE) Banking Act, and the broader Strengthening the Tenth Amendment Through Entrusting States (STATES) Act. Last week, lawmakers approved a spending bill that included a rider preventing the Justice Department from using federal funds to interfere with the cannabis business in states that have legalized.

  • The 2 Biggest Casualties From the Celgene-Bristol-Myers Merger (So Far)
    Business
    Motley Fool

    The 2 Biggest Casualties From the Celgene-Bristol-Myers Merger (So Far)

    Celgene (NASDAQ: CELG) and Bristol-Myers Squibb (NYSE: BMY) were scheduled to say their official "I dos" in the coming months, but this blended family isn't starting off in Brady Bunch fashion. Last week, Celgene cut ties with BeiGene (NASDAQ: BGNE), giving up its rights to tislelizumab, BeiGene's anti-PD-1 antibody since Bristol-Myers sells a competing PD-1 antibody, Opdivo. Reportedly, the contract said Celgene can't hold two PD-1 class drugs, so Bristol-Myers likely knew it wasn't going to be able to keep rights to tislelizumab when it made the acquisition offer.

  • ECB Seen Cutting Rates in September as Draghi Reloads Stimulus
    Business
    Bloomberg

    ECB Seen Cutting Rates in September as Draghi Reloads Stimulus

    The European Central Bank will flag next month that it's ready to reduce interest rates and then deliver a cut in September as policy makers step up their efforts to revive the euro-zone economy, economists predict. The push for additional support was set in motion by President Mario Draghi last week when he said more stimulus will be needed if the outlook doesn't improve. He said prolonged uncertainty, largely driven by trade tensions, means the downside risks to growth and inflation have now materialized.

  • London markets flat as Boris Johnson summons ghost of Napoleon
    World
    MarketWatch

    London markets flat as Boris Johnson summons ghost of Napoleon

    London markets were flat as Conservative Party leadership candidate Boris Johnson invoked the Napoleonic blockade in discussions of a no-deal Brexit. Former U.K. foreign secretary Boris Johnson said potential European Union tariffs that could emerge in a no-deal Brexit scenario would be “bizarre” and “a return to Napoleon's continental system”. The leading candidate for head of the Conservative Party and by extension, Prime Minister, said in a radio interview that while he was not seeking a no-deal Brexit, the U.K. needed to be prepared for such an outcome in order for the EU to understand how serious the U.K. side is.

  • Elon Musk’s Fortune Is Shifting Away From Tesla and Toward SpaceX
    Business
    Bloomberg

    Elon Musk’s Fortune Is Shifting Away From Tesla and Toward SpaceX

    Apart from the failure of the center booster to land on a drone ship in the Atlantic Ocean, the mission that Musk had described as SpaceX's toughest test yet had been a success. The launch underscores SpaceX's status as one of the world's most valuable closely held companies. It's worth $34 billion, according to an analysis by EquityZen, a marketplace for shares of tech firms that haven't yet gone public.

  • 3 Top E-Commerce Stocks to Buy Right Now
    Business
    Motley Fool

    3 Top E-Commerce Stocks to Buy Right Now

    Investors seeking a promising e-commerce stock might be happy accepting those risks, giving the huge returns Stitch Fix would generate if its subscription-shopping model endures. Simplifying online homebuying Steve Symington (Zillow Group): The real estate world isn't exactly the first e-commerce category to come to mind for many investors. But Zillow Group has made its name by disrupting the real estate status quo already with its leading group of online brands, which not only includes its namesake site and apps but also Trulia, New York City sites StreetEasy and Naked Apartments, apartment and rental search site HotPads, and RealEstate.com.

  • Here is What Hedge Funds Think About Catalyst Pharmaceuticals, Inc. (CPRX)
    Business
    Insider Monkey

    Here is What Hedge Funds Think About Catalyst Pharmaceuticals, Inc. (CPRX)

    Hedge funds and other investment firms that we track manage billions of dollars of their wealthy clients' money, and needless to say, they are painstakingly thorough when analyzing where to invest this money, as their own wealth also depends on it. Regardless of the various methods used by elite investors like David Tepper and David Abrams, the resources they expend are second-to-none. Is Catalyst Pharmaceuticals, Inc. (NASDAQ:CPRX) a worthy stock to buy now?

  • Is Stratasys, Ltd. (SSYS) A Good Stock To Buy?
    Business
    Insider Monkey

    Is Stratasys, Ltd. (SSYS) A Good Stock To Buy?

    At the end of this article we will also compare SSYS to other stocks including OneSmart International Education Group Limited (NYSE:ONE), Bright Scholar Education Holdings Limited (NYSE:BEDU), and Oxford Industries, Inc. NYSE:OXM) to get a better sense of its popularity. Hedge funds' reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn't keep up with the unhedged returns of the market indices.

  • Is Hawaiian Holdings, Inc. (HA) A Good Stock To Buy?
    Business
    Insider Monkey

    Is Hawaiian Holdings, Inc. (HA) A Good Stock To Buy?

    It is already common knowledge that individual investors do not usually have the necessary resources and abilities to properly research an investment opportunity. Since stock returns aren't usually symmetrically distributed and index returns are more affected by a few outlier stocks (i.e. At the same time, the 20 most favored S&P 500 stocks by the hedge funds monitored by Insider Monkey generated an outperformance of 6 percentage points during the first 5 months of 2019.

  • Trump: 'Happy where we are now' on trade deal with China
    Business
    Yahoo Finance Video

    Trump: 'Happy where we are now' on trade deal with China

    Yahoo Finance's Emily McCormick says that trade talks with China were set back after Mnuchin's correction on CNBC saying that we were about 90% of the way' done with a deal.