PIMCO, the bond fund giant that has made a push into the ETF space in recent years, rolled out the first international bond ETF in its lineup this week with the debut of the Australia Bond Index Fund (AUD). The new ETF will seek to replicate the BofA Merrill Lynch Diversified Australia Bond Index, a benchmark that consists of investment grade Australian debt including sovereign and corporate debt.
With yields in much of the developed world still hovering at record lows and concerns over the outlook for the euro zone once again flaring up, investors have begun to search for international markets that have the potential to deliver solid yields without an overwhelming amount of risk. Those criteria have led some to Australia, a commodity-rich economy that was among the first countries to raise interest rates following the most recent financial crisis. The Reserve Bank of Australia is actually coming off a quarter point cut to its benchmark interest rate, which now stands at 4.50%. Still, interest rates down under are considerably greater than the U.S. and much of Europe, where lending rates are expected to hover near record lows for the foreseeable future.
While Australia’s economy has shown some signs of weakness lately, the tremendous resource wealth of the country is generally seen as a source of long-term fiscal strength. Australia is home to massive reserves of a number of different commodities, which has contributed to relatively strong government finances in recent years.
In a press release PIMCO announced that it will launch a Canada bond ETF and Germany bond ETF in the near future, giving the issuer a suite of products focusing on fiscally strong international markets. “These new index ETFs are designed to help investors access select countries that may offer better risk-adjusted returns in this New Normal environment, and benefit from PIMCO’s trading and investment expertise in local markets,” said Tammie Arnold, managing director and global head of the firm’s ETF business. “With ETFs, investors may benefit from convenient access to PIMCO’s capabilities as well as the portfolio transparency and intra-day pricing attributes of the ETF vehicle.”
Australia Bond ETFs
AUD is the second Australia bond ETF to begin trading in the last few weeks, following on the heels of WisdomTree’s Australia and New Zealand Debt Fund (AUNZ). That product is actively managed, and as the name suggests includes debt denominated in the currencies of both Australia and New Zealand.
Disclosure: No positions at time of writing.