Now Is The Season To: August 2011

Published on by on August 2, 2011 | Updated April 24, 2013

Consider International Treasury Bond ETFs

Investors have noticeably gravitated towards the fixed-income corner of the market in recent months given the persistent uncertainty surrounding Europe’s deteriorating financial health. At home, Congressional debates surrounding the debt-ceiling have put additional pressure on equity markets. Likewise,  interest in “safer” corners of the market has risen considerably and many investors have turned to international treasury bond funds as a means of diversifying the fixed-income portion of their portfolios.

Foreign treasury bonds often offer investors more robust yields than domestic fixed income securities, thanks to higher discount rates in numerous countries including Australia, the euro zone nations, and virtually any emerging market. Moreover, international bonds can add dollar diversification, potentially boosting returns when the U.S. dollar is facing headwinds in the currency markets, so long as the debt is denominated in local currencies. Several risks should be considered before investing in international treasury bonds including interest rate risk, in which case a central bank might raise rates sooner than the market expected, as well as the inherent currency risk, since many of the international treasury offerings are denominated in the local currency of the issuer.

Below we have briefly highlighted four options available from the International Treasury ETFdb Category:

  • S&P/Citigroup International Treasury Fund (IGOV): This ETF  offers exposure to treasury bonds issued in local currencies by developed countries outside of the United States. In terms of holdings, the largest allocations go to Japan, France, Germany, and Australia. IGOV recently had a yield to maturity of about 3.7% and an average maturity of about 8.4 years.
  • SPDR Barclays Capital Short-Term International Treasury Bond ETF (BWZ): This ETF gives investors access to the performance of fixed-rate local currency sovereign debt of investment grade countries outside the United States. BWZ’s top allocations by country include Japan, Germany, and Sweden. The fund recently had a yield to maturity of about 2.09% and an average time to maturity of roughly 1.86 years. Long-term bonds get hit the hardest following interest rate hikes, and thus BWZ could be a useful tool in an inflationary environment since the fund is more easily able to adapt to inflation expectations, given its focus on shorter-term holdings.
  • PowerShares DB German Bund Futures ETN (BUNL): This fund is intended to gives investors exposure which is identical to a long position in Euro-Bund futures. The underlying assets are German government issued debt securities with a remaining maturity of not less than 8 years and 6 months and not more than 10 years and 6 months. BUNL can serve as an excellent tactical-tool especially now given the uncertain outlook for Europe’s financial health. Because Germany is one of the most fiscally sound Eurozone economies, German debt is likely take on greater safe haven appeal as the situation overseas continues to intensify.
  • PowerShares DB Italian Treasury Bond Futures ETN (ITLY): This ETF tracks the performance of a long position in Euro-BPT futures. The underlying assets of Euro-BPT futures are Republic of Italy-government issued debt securities (BTPs) with an original term of no longer than 16 years and a remaining term to maturity of not less than 8 years and 6 months and not more than 11 years. Yields on Italian debt have spiked in the last two weeks as concerns about the country’s massive debt burden have greatly escalated, making ITLY a risky holding by all means.

Investors should note that IGOV and BWZ could serve as core-holdings within the fixed-income portion of certain portfolios. However, it’s recommended that these funds be used in conjunction with domestic fixed-income products to achieve more well rounded exposure across all corners of the market. BUNL and ITLY on the other hand can serve as excellent tactical holdings, especially in this current environment of financial uncertainty across Europe, however, these funds are not very liquid, which makes them unappealing as trading instruments.

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FactorShares 2X: Gold Bull/S&P500 Bear (FSG) is a leveraged spread ETF designed for investors who believe gold will increase in value relative to large-cap U.S. equities in one day or less. FSG seeks to track approximately +200% of the daily return of the S&P Gold – Equity Spread Total Return Index (before fees and expenses) by primarily establishing a leveraged long position in Gold Futures and a leveraged short position in the E-mini S&P 500 Stock Price Index™ Futures.