ProShares announced the launch this week of its German Sovereign/Sub-Sovereign ETF (GGOV), which will offer U.S. investors exposure to one of the world’s largest bond markets. The new ETF is linked to the Markit iBoxx EUR Germany Sovereign & Sub-Sovereign Liquid Index, a benchmark that consists of debt issued by the German government or by local governments and entities guaranteed by various German governments. To be eligible for inclusion in the underlying index, bonds must have a minimum time to maturity of one year and meet certain minimum principal outstanding guidelines as well.
The launch of GGOV is part of a larger trend in the ETF industry that has emerged over the last year; U.S. investors have shown increased interest in diversifying their fixed income portfolios internationally, and ETFs have emerged as a favorite tool for doing so. With interest rates in the U.S. now expected to remain near record lows through much of 2014, many investors have turned to international markets as sources of more attractive yields; there are now a number of emerging markets bonds ETFs with billions in AUM [see Better-Than-AGG Total Bond Market ETFdb Portfolio].
GGOV offers exposure to a bond market that may be appealing not for its current income potential but for its stability. Though Germany is running a budget deficit, it is widely viewed as one of the strongest economies in Europe thanks to a booming export market. Germany recently auctioned six-month Treasury Bills with a negative yield, highlighting the tremendous amount of interest in this “safe haven” asset class [see International Bond ETF Guide: All The Options For Ex-U.S. Fixed Income Exposure]. Yields on ten-year German government bonds have been in the neighborhood of 2% recently, meaning that ETFs such as GGOV will stand out primarily to investors looking to find a safe haven but will not be expected to deliver significant current returns.
“Many investors have fixed-income portfolios concentrated in high credit quality U.S. bonds,” said Michael L. Sapir, Chairman and CEO of ProShare Advisors LLC, ProShares’ investment advisor. “This ETF can help these investors manage risk by adding diversification through international bond exposure.”
There are now a number of country-specific bond ETFs targeting securities from issuers beyond the U.S. In addition to GGOV, the current roster of international fixed income ETFs includes products targeting Australian bonds (AUNZ, AUD), Canadian bonds (CAD) and even securities denominated in Chinese yuan (RMB, DSUM).
Germany Bond ETFs
GGOV will compete most closely with the PIMCO Germany Bond Index Fund (BUND), which targets euro-denominated, investment grade debt of German issuers. That ETF, which seeks to replicate an index, currently has an effective duration of just under four years and a 30-Day SEC yield of 1.4%.
PowerShares and Deutsche Bank have also teamed up on ETNs linked to benchmarks comprised of futures on German debt. The PowerShares DB German Bund Futures ETN (BUNL) offers exposure to an index comprised of futures on intermediate term German debt, while BUNT offers 3x monthly leveraged exposure to that same index.
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Disclosure: No positions at time of writing.