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
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
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
SPDR Barclays Capital International Treasury Bond ETF
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
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
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
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
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
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 30
th 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.
% in Top 10 holdings
1-Year returns (as of 6/30/2012)
Avg. Daily Volume
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SPDR-BC INTL TR (BWX): ETF Research Reports
SPDR-BC ST CB (BWZ): ETF Research Reports
ISHARS-SP IN TB (IGOV): ETF Research Reports
ISHARS-SP 1-3IT (ISHG): ETF Research Reports
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