China has confirmed its status as an integral part of the growth engine driving the global economy, which is why its recent investing activity may be leading some U.S. investors to worry. Most people know that China is sitting on a hefty pile of foreign exchange reserves, approximately $3.2 trillion, however, fewer investors are aware that the Asian behemoth has been increasingly diversifying away from the United States [see also Asia-Centric ETFdb Portfolio].
Treasury data shows a drop-off in China’s purchases of U.S. securities in the final stretch of 2011, leading many to believe that China has been gradually reducing its appetite for the dollar. Author Karen Maley, from BusinessSpectator.com, takes a closer look at where China has been reallocating assets to, highlight several noteworthy observations that could have an impact on a number of ETFs. So where is the money going? [see also Doomsday Special: 7 Hard Asset Investments You Can Hold in Your Hand].
According to investment research expert Andrew Batson, China has beefed up its exposure to European and Australian assets. Europe is an increasingly important market for China which gives weight to the above hypothesis; China has interest in buying euro-denominated assets because this can help protect exporters in case of a euro devaluation, while also protecting China’s hefty stake in the region’s debt market. Demand for the Australian dollar has also climbed as a result of China diversifying its foreign exchange reserves to neighboring trading partners [see also Bond ETFs For Every Objective].
This trend has sparked fears that China’s reallocation of assets may eventually push U.S. bond prices lower and as a result drive interest rates higher. Regardless of what may happen to Treasuries, it’s quite certain that China’s efforts will have an impact on European and Australian financial markets.
Below we highlight three bond funds that could benefit as China continues to diversify its foreign exchange reserves:
- WisdomTree Euro Debt Fund (EU): This is currently the only ETF available on the market which provides broad-based exposure to the region’s debt market. EU holds a portfolio of nearly 40 euro-denominated debt notes, including: government securities, supranational organizations’ debt, as well as other derivatives designed to provide similar exposure. Top holdings by country include Germany, France, and Luxembourg [see also 3 ETF Trades For The Next Euro Zone Debt Crisis]. EU charges 0.35% in expenses and had a recent 30-day SEC yield of 1.72%.
- PIMCO Australia Bond Index Fund (AUD): This ETF holds approximately 40 Australian dollar-denominated debt securities; the underlying holdings are investment grade debt instruments issued in the Australian domestic market, including sovereign, quasi-government, corporate, securitized and collateralized securities. AUD charges 0.45% in expenses and had a recent 30-day SEC yield of 3.98% [see also Easy-As-ABC ETFdb Portfolio].
- WisdomTree Australia & New Zealand Debt Fund (AUNZ): This ETF provides exposure to the Aussie debt market with a twist; AUNZ features allocations to debt securities denominated in Australian as well as New Zealand dollars. AUNZ consists of approximately 45 debt securities, ranging from government bonds to local debt from both Australia and New Zealand. Similar to AUD, this ETF also charges 0.45% in expenses and offers a comparable 30-day SEC yield of 3.88%.