As bond investors have come to terms with the fact that interest rates will remain near record lows for the foreseeable future, many have begun to look beyond U.S. borders for fixed income exposure offering more attractive yields. Over the past year, the number of ETFs offering exposure to foreign bond markets has increased significantly, with options now available for investors seeking local currency exposure in emerging markets or even international TIPS. Although the number of bond ETFs has been surging in recent months, there is definitely opportunity for enhanced granularity in the fixed income space, as evidenced by a recent SEC filing from WisdomTree outlining plans for a Brazil Bond Fund.
The proposed fund would offer investors a way to buy into the total Brazilian bond market, including both corporate and government issues as well as real and dollar-denominated debt across various credit risks and durations (including junk bonds). In addition to government bonds, the fund would invest in Brazilian agency debt and may invest in fixed income securities denominated in Brazilian real and issued by supranational organizations such as the European Investment Bank, International Bank for Reconstruction and Development or International Finance Corporation, and development agencies supported by other national governments. The proposed fund could also invest in inflation-linked in fixed income securities denominated in Brazilian reals [see 2010: Year Of The Bond ETF].
The fund would be the first ETF to offer bond market exposure to a single country outside the U.S., and as such it could receive interest from investors seeking exposure to one of the highest-yielding markets in the world. Currently, one year Brazilian government bonds yield about 11.3%, while comparable bonds in the U.S. offer a paltry 0.19% in comparison. So for yield-hungry investors looking for more targeted exposure, Brazilian bonds could be an intriguing opportunity [see Why Emerging Market Bond ETFs Are Safer Than Developed Markets].
The proposed Brazilian bond fund would be WisdomTree’s second fixed income ETF, joining the more broadly-based Emerging Markets Local Debt Fund (ELD). That fund offers exposure debt of emerging market issuers that is denominated in local currencies, distinguishing it from multiple other funds that focus on dollar-denominated debt. Although ELD is relatively new–it debuted in early August–it has amassed significant assets and has been a smashing success among investors. The fund has close to $300 million in AUM and trades roughly 1.25 million shares a day, making it the most widely traded ETF in the Emerging Market Bond ETF Category [see Ten ETFs Every Financial Advisor Should Know].
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Disclosure: No positions at time of writing.