When you get a chance at two birds with one stone, it’s usually a good idea to take it. Three birds with one stone is even better!
Right now we have a shot at combining three of my favorite investing categories: International, ETFs, and bonds. So today we’ll take a closer look at five international bond ETFs. I think they’re all poised to outperform this summer.
I’ve found over the years that bonds are something of a mystery to most investors. People usually understand stocks, but bonds? Not so much. Nor are they very interested in learning.
The reason for this, I suspect, is that the very word “bond” just seems boring. You invest your money, you get interest payments every so often, and that’s it. Ho hum.
If all you ever do is sit back and wait for your monthly check, then yes, bonds are not much fun. Fortunately (or not, for some people) bond investing is rarely so simple. You can make and lose money just as fast in bonds as you can in stocks. It all depends what kind you buy.
Some types of bonds, like short-term U.S. Treasury bills, are so safe and steady that professionals call them “cash equivalents.” Others are much riskier but have the potential for big gains in the right circumstances.
Foreign bonds used to be pretty exotic for U.S. investors — even more than foreign stocks. Now, thanks to the Internet and new instruments like ETFs, it’s easy to add a slice of international fixed income to your portfolio.
Here are five ways you can do it …
#1: SPDR DB International
Inflation Protected Bond (WIP)
With gold and oil prices shooting higher, “Inflation Protected” sounds like a pretty nice feature. The U.S. has a popular category of Treasury bond with a built-in adjustment factor to compensate for lost value caused by inflation. Many other countries offer similar securities. WIP gives you a diversified portfolio of international inflation-protected bonds.
WIP has another advantage, too. If, like many people, you think the U.S. Consumer Price Index doesn’t measure inflation very accurately, WIP gives you exposure to various other methods. Every country has its own particular benchmark.
#2: SPDR Barclays Short-Term
International Treasury ETF (BWZ)
This ETF holds a portfolio of short-term (1-3 years) Treasury bonds from about 20 different countries. Because the average maturity is so short, BWZ is often more sensitive to currency fluctuations than interest rate changes. You can think of it as a foreign currency fund with extra yield.
#3: iShares JPMorgan USD
Emerging Markets Bond (EMB)
Yes, emerging markets have bonds as well as the more familiar stocks. And some may actually be safer than the bonds of debt-ridden “developed” nations.
EMB is the key to unlocking this neglected market. Because it focuses on bonds denominated in U.S. dollars, this ETF is not subject to currency-related swings.
However, if you want currency risk, take a look at …
#4: Market Vectors Emerging Markets
Local Currency Bond (EMLC)
EMLC is similar to EMB in some respects, but starkly different in one big way. It holds government bonds issued in the local currencies of selected emerging markets. Top holdings include debt from Brazil, Poland, Malaysia, and Mexico.
This ETF kicks out a higher dividend than most other bond funds, currently yielding 5.8 percent, and it is also a bet that the U.S. dollar will fall in value compared to emerging market currencies. Long-term, I think that’s a pretty good bet, but EMLC can have big swings in the meantime.
#5: SPDR Barclays International
Corporate Bond (IBND)
Corporate bonds come in all flavors, and they’re not all American. IBND is fairly new — launched in May 2010 — but was still the first ETF of its kind. It’s designed to measure investment-grade corporate bond markets outside the U.S.
While IBND excludes dollar-denominated bonds, it does have some U.S. exposure. Some large American companies (especially banks) issue bonds in other currencies. IBND still provides mostly non-U.S. exposure, though.
Now, are international bond ETFs for everyone? No, absolutely not! It all depends on your personal goals and circumstances. If you think they may be what you need, I’ve given you five to check out. These are some of my favorites.
Best wishes,
Ron
P.S. If you’re interested in foreign bonds or foreign bond ETFs, you should look at the Weiss Sovereign Debt Ratings before investing. Click here to learn more.
{ 2 comments… read them below or add one }
Thanks for the article, Ron. One question: you say EMLC is one of your favorites, with top holdings from Brazil, Poland, Malaysia, and Mexico. But the Weiss sovereign debt ratings show that of those four, three have C ratings (Mexico C+), and only one has an A rating. I’m a novice in this area, but shouldn’t I look for more holdings in the A group, and fewer rated C or below?
Unfortunately, there is no such animal at this time. I’m not aware of any ETF that does wht you want. It’s great that you are using many of the tools at your disposal, such as the Weiss Sovereign Debt Ratings. Since you have looked at those, I don’t to tell you that there are very few A ratings at this time.
With ETFs, you are getting a “pre-packaged” set of holdings. In most cases, the funds are tied to an index and must hold all of the issues in the index – the bad with the good. EMLC is one of the better packages, but it is not perfect.
If you want to narrow in on emerging market debt from just the A rated countries, you are probably going to have to look at individual securities. In this segment of the market, you need to make a trade-off regarding what risks you want to take. Do you want the risk of holding individual securities or do you want the benefits of diversification from a fund even though some of the individual holdings may be riskier than what you desire?