Case Summary
Portfolio diversification calls for spreading investment risk across asset classes and geographies. In many cases, exchange traded funds offer investors the opportunity to do both. Yet, until recently, the ability to gain exposure to international fixed income with ETFs has been limited.
A flurry of recent fund launches has changed the investing landscape and the new offerings justify revisiting portfolio allocations.
Analysis
While the opportunity set for international bond ETFs has mostly been non-existent, new fund introductions have changed that. Investing choices now include international treasury, international corporate and international yield-enhanced exchange traded funds. Emerging market and inflation-protected bond ETFs are also available.
Portfolio Recommendations
The most conservative addition to a portfolio would be a short term international treasury ETF. The $100 million iShares S&P-Citigroup 1-3 Year International Treasury Bond Fund (ISHG) holds mostly Japanese and European short term treasuries. The ETF carries an expense ratio of 0.35% and has a 12 month yield of 1.25%. A similar fund is the SPDR Barclays Capital Short Term International Treasury Bond ETF (BWZ). The composition of holdings is similar to the iShares fund with Japanese and European holdings as well as some exposure to other Asian countries. BWZ carries an expense ratio of 0.35% and a SEC 30-day yield of 1.32%.
Longer term international treasury funds include the iShares S&P-Citigroup International Treasury Bond Fund (IGOV) and the $1 billion SPDR Barclays Capital International Treasury Bond ETF (BWX).
The recently launched SPDR Barclays Capital International Corporate Bond ETF (IBND) tracks the investment-grade corporate sector of the global bond market outside of the United States. Top holdings include bonds issued by the Netherland’s Rabobank, GE Capital Euro Funding, Goldman Sachs and UBS.
The PowerShares International Corporate Bond Portfolio (PICB) invests in international bonds across several currencies, capping exposure to any one currency at 50%. For currencies with multiple bond choices, managers pick higher yielding securities to enhance the portfolio’s overall yield. Top holdings include bonds issued by Barclays, Lloyds, GlaxoSmithKline and WestPac Banking.
For investors with more appetite for risk, emerging market bond funds are available. The JPMorgan USD Emerging Markets Bond Fund (EMB) and Emerging Markets Sovereign Debt Portfolio (PCY) both provide exposure to government bonds of emerging market countries.
Another international fixed income option is the SPDR DB International Government Inflation-Protected Bond ETF (WIP) which invests in inflation-linked government bonds from developed and emerging market countries outside of the United States.
See the ETF Directory for additional investing choices or a complete list of International Fixed-Income ETFs.