As many bond investors already know, duration measures a
bond's sensitivity to interest rate changes. The longer a bond's
duration, the more sensitive it is to interest rate increases.
Conversely, shorter duration bonds are less vulnerable to
interest rate changes.
Speculation that U.S. interest rates could rise are part of
the reason investors have continued to put cash to work in
high-yield bond ETFs
. Junk bonds often feature shorter durations than
investment-grade corporates and highly rated government
Investors looking to mitigate interest rate risk have plenty
of compelling options among bond
. Importantly, investors that consider the following ETFs are not
sacrificing yield and, in some cases, nor are they incurring
significantly higher credit risk. All of the ETFs featured here
have average durations of less than five years.
WisdomTree Australia & New Zealand Debt Fund (NYSE:
) The WisdomTree Australia & New Zealand Debt Fund has an
effective duration of 4.05 years. Effective duration is the
method for calculating duration on bonds with embedded options.
As for AUNZ, its duration is slightly lower than the 4.73 years
seen on the iShares Core Total U.S. Bond Market ETF (NYSE:
), but there are other, more prominent differences.
For example, folks say the U.S. dollar has recently been
gaining strength. That is nice, but the Australian and New
Zealand dollars have
have been strong for several years
. In fact, the Aussie and the kiwi have been the two
best-performing developed market currencies against the greenback
since the financial crisis. That is one benefit of interest rates
of three percent and 2.5 percent in Australia and New
Additionally, AUNZ offers a strong credit profile as 75
percent of its holdings are rated AAA because Australia has an
AAA sovereign rating. The U.S. does not. With AUNZ investors also
get a distribution yield that is nearly 50 basis points higher
than what they would get with AGG.
Market Vectors Emerging Markets High Yield Bond ETF (NYSE:
) The rapidly growing Emerging Markets High Yield Bond ETF has an
effective duration of 4.11 years. That is a sign that like U.S.
junk bonds, emerging markets high-yield issues have lower
durations compared to government debt.
For example, the iShares J.P. Morgan USD Emerging Markets Bond
) has an effective duration of 7.6 years. Emerging markets
high-yield corporates also compare favorably to their
investment-grade counterparts in terms of duration. The SPDR BofA
Merrill Lynch Emerging Markets Corporate Bond ETF (NYSE:
) has a modified adjusted duration of nearly 5.8 years,
according to State Street data
On the surface, emerging markets junk corporates may indicate
a higher rate of default, but that is not the case. Since the
Argentine sovereign default earlier this century, default rates
for high-yield emerging markets corporates have been consistently
lower than in the U.S. Non-investent grade emerging markets
corporates also saw lower rates of default than the equivalent
U.S. bonds during the global financial crisis,
according to Market Vectors
The compensation is a little better with HYEM, too. The ETF
has a 30-day SEC yield of 5.6 percent compared to 5.02 percent on
the SPDR Barclays High Yield Bond ETF (NYSE:
PowerShares Chinese Yuan Dim Sum Bond Portfolio (NYSE:
) The PowerShares Chinese Yuan Dim Sum Bond Portfolio is an
under-the-radar bond play perhaps because the ETF has just about
$69 million in assets under management. It is a shame when
investors pay attention to those shallow metrics because DSUM has
climbed nearly 4 percent in the past year and features an
effective duration of just 3.1 years.
Again, the assumption here is that because DSUM is an emerging
markets play that investors are exposed to significantly higher
credit risk. That is not necessarily the case as a third of the
ETF's holdings are rated either AA or A by Standard & Poor's,
though it should be noted that neither Moody's nor S&P rate
half of DSUM's 83 holdings.
DSUM tracks the Citigroup Dim Sum (Offshore CNY) Bond Index,
which is composed of RMB-denominated bonds issued by governments,
agencies, supranationals and credit securities, excluding
synthetics, retails and CDs. That index has outpaced the BofA
Merrill Lynch Global Broad Market Non-Sovereign ex-USD Index
year-to-date and over the past year,
according to PowerShares data
For more on ETFs, click
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