ETF Update – International and Emerging Market Government Bonds
ETF’s continue to be an investing favorite due to their simplicity, transparency, intra-day pricing and trading, low cost and tax efficient structure. In the past, we have often been in the position where we have had to fill allocation gaps with other investment vehicles as the ETF landscape was not yet complete in its coverage of every sector. With so many options now available, it is becoming easier and easier to get the coverage you need for a well rounded portfolio.
One such example was in the world of international fixed income, particularly at the government bond level. Domestically, there are a number of fund choices out there that cover the full spectrum of fixed income options such as treasuries, municipal and corporate bonds, high yield bonds etc. Exposure internationally has been much more limited, particularly for government rated bonds, a great shame given the yields that some governments are offering on relatively high quality bonds. Finding a safe haven in the US has been easy, but with yields of treasuries sitting at such low levels, such as the 5 year paying a 2.1% coupon, the gains are very limited. Compare that to an Australian government 5 year bond offering 6.2% coupon and the rates become much more attractive.
Clearly, care needs to be given to countries that are in a developmental stage, as emerging market bonds have higher risk profiles than stable, established and developed economies and their ratings will reflect this. That being said, investors turned off by the risks of equity investing may find this to be a nice compromise in offering a middle ground between AAA rated government bonds and traditional domestic and international stock market funds that are higher on the risk spectrum. Brazil for example is offering coupon rates in excess of 10% on 2 year issues compared to 0.75% here in the US for the same duration, and this is reflected in the BBB-/A-3 rating Brazil currently has for government debt.
With a few new arrivals in the ETF space that fill this gap it is a good time to review the options open to the investor looking for international treasury bonds to help diversify their fixed income portfolio. Below is a brief outline of 7 International Treasury Bond ETF’s.
International Treasury Bond ETFs
1) SPDR Barclays Capital International Treasury Bond ETF (BWX)
Top 5 Countries – Japan, Italy, Germany, Belgium, France
Exp. Ratio – 0.50%, Inception date – 10/02/2007, Ave credit quality – AA2, Ave Coupon – 4.29%, Ave Maturity-8.32yrs
YTD performance (10/31/09) – 8.60%2) iShares S&P/Citi International Treasury Bond ETF (IGOV)
Top 5 Countries – Japan, Germany, Italy, France, Spain
Exp. Ratio – 0.35%, Inception date – 1/21/09, Ave credit quality – AA, Ave Coupon – 3.41%, Ave Maturity – 7.60yrs
YTD performance (09/30/09) – 6.68%International Short-Term Treasury Bond ETFs
3) SPDR Barclays Cap Short-Term International Treasury Bond ETF (BWZ)
Top 5 Countries – Japan, Germany, Italy, UK, S Korea.
Exp. Ratio – 0.35%, Inception date – 01/15/2009, Ave credit quality – AA2, Ave Coupon – 4.18%, Ave Maturity -1.90yrs
YTD performance (10/31/09) – 13.04%4) iShares S&P/Citi 1-3 Year International Treasury Bond ETF (ISHG)
Top 5 Countries – Japan, Germany, Italy, France UK
Exp. Ratio – 0.35%, Inception date – 1/21/09, Ave credit quality – AA, Ave Coupon – 3.61%, Ave Maturity – 1.83yr
YTD performance (09/30/09) – 11.65%Inflation Protected International Bond (TIPS) ETFs
5) SPDR DB International Government Inflation-Protected Bond ETF (WIP)
Top 5 Countries – UK, France, Germany, Mexico, Brazil
Exp. Ratio – 0.50%, Inception date – 03/13/2008, Ave credit quality – AA3, Ave Coupon – 3.10%, Ave Maturity – 11.37yrs
YTD performance (10/31/09) – 19.66%Emerging Market Bond ETFs
6) iShares JPMorgan USD Emerging Markets Bond ETF (EMB)
Top 5 Countries – Brazil, Russian Federation, Mexico, Turkey, Philippines
Exp. Ratio – 0.60%, Inception date – 12/17/07, Ave credit quality – BB, Ave Coupon – 6.92%, Ave Maturity – 12.25yrs
YTD Performance (09/30/09) – 14.82%7) PowerShares Emerging Markets Sovereign Debt Fund (PCY)
Top 5 Countries – Ukraine, Venezuela, Rep. of Indonesia, Rep. of El Salvador, Rep. of Turkey
Exp. Ratio – 0.50%, Inception date – 10/11/2007, Ave credit quality – Ba1, Ave Coupon – , Ave Maturity – 7.59yrs
YTD performance (09/30/09) 36.94%
