International Bond ETFs: Cruising Through All The Options

by on July 18, 2011 | Updated September 22, 2014 | ETFs Mentioned:

The fixed income corner of the ETF industry has experienced tremendous growth in recent years, as investors have become increasingly comfortable with achieving bond exposure through the exchange-traded structure. This is evidenced by the billions and billions and inflows to these products over the years.

Despite impressive growth figures, it seems that the potential for future expansion of the bond ETF arena is significant. Although bond ETFs have expanded considerably, the bulk of inflows has been to products focusing exclusively or primarily on debt of U.S. issuers. Most investors have gradually eased their “home country bias” on the equity side of their portfolios, embracing international stocks as a vital component of long-term strategies. But when it comes to bonds, many investors still limit their holdings to U.S. securities [see Are Bond ETFs Broken?].

International Flavor

Expanding the geographic scope can be a major improvement to long-term portfolios, especially in the current environment. International bonds generally offer opportunities to enhance current returns relative to comparable U.S. debt, and have the added bonus of diversifying exposure away from the U.S. government and American corporations. Moreover, debt denominated in local currencies provides a dollar hedge that could be beneficial if the greenback encounters the weakness many predict it will.

For investors looking to diversify beyond U.S. borders, there are more than a dozen ETFs offering international exposure. Below we profile each and every international bond ETF, from emerging markets to Italian Treasuries to TIPS [see Financials Free ETFdb Portfolio].

International Treasuries

There are a handful of products in the International Government Bonds ETFdb Category that offer exposure to debt issued by governments outside the U.S. (many of these products focus primarily on developed markets in Europe and Asia):

  • SPDR Barclays International Treasury Bond ETF (BWX): This ETF offers exposure to debt from a number of developed markets from all around the globe.
  • 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.
  • S&P/Citigroup International Treasury Fund (IGOV): This fund offers exposure to treasury bonds issued in local currencies by developed countries, with allocations stretch all across the world.
  • S&P/Citigroup 1-3 Year International Treasury Fund (ISHG): Through ISHG investors can gain exposure to developed market treasury bonds with a remaining maturity between one and three years, meaning that this fund will have a lower effective duration than those profiled above.

International TIPS

Protecting your portfolio against inflation is no easy challenge, however, adding international TIPS exposure could help reduce overall portfolio volatility and potentially increase risk-adjusted returns. Investors should have a global defense against inflation, which means considering international funds from the Inflation-Protected Bonds ETFdb Category, which can serve as tactical-tools with added diversification benefits.

  • SPDR DB International Government Inflation-Protected Bond ETF (WIP): Through WIP, investors can gain exposure to the performance of inflation-linked government bonds from developed and emerging market countries.
  • iShares International Inflation-Linked Bond Fund ETF (ITIP): This ETF gives investors broad-based exposure to inflation-linked sovereign debt that is publicly issued and denominated in the issuers’ currency.
  • iShares Global Inflation-Linked Bond Fund (GTIP): This fund gives investors global exposure to inflation-linked sovereign debt, but it also includes U.S. Treasuries, making it a great tool for those seeking an all-in-one TIPS fund.

Emerging Markets Debt

The Emerging Markets Debt ETFdb Category includes products that invest in dollar-denominated bonds (EMB, PCY) and those that focus on debt issued in the local currency (ELD, EMLC). That distinction can have a major impact on the risk/return profile; those looking to for dollar diversification will likely be better off with issues not denominated in the greenback:

  • JPMorgan Emerging Bond Fund (EMB): This ETF gives investors broad exposure to actively traded debt instruments in emerging market countries, all of which are denominated in U.S. dollars.
  • PowerShares Emerging Markets Sovereign Debt Portfolio (PCY): This fund allows investors to tap into the fixed-income corner of emerging market economies, by providing exposure to U.S. dollar-denominated government bonds issued by almost two dozen countries. PCY is rebalanced quarterly and the fund employs a proprietary indexing methodology.
  • WisdomTree Emerging Markets Local Debt Fund (ELD): This fund gives investors access to local debt denominated in the currencies of emerging market countries as opposed to U.S. dollars.
  • Market Vectors Emerging Markets Local Currency Bond ETF (EMLC): This ETF gives investors exposure to a basket of bonds issued in local currencies by emerging market governments.
  • SPDR Barclays Capital Emerging Markets Local Bond ETF (EBND): This ETF tracks the performance of fixed-rate local currency sovereign debt of emerging market countries.

International Corporate Bonds

Many investors looking to enhance the yield of their fixed income portfolio will gravitate towards investment grade corporate debt, an asset class that introduces slightly more risk but can deliver solid coupon payments as well. Most of the options in the Corporate Bonds ETFdb Category focus on debt of U.S. issuers, but there are a few options there that allow for international diversification within this segment of the bond market:

  • PowerShares International Corporate Bond (PICB): This fund gives investors exposure to the performance of investment-grade corporate bonds issued by non-U.S. issuers in developed markets overseas.
  • SPDR Barclays Capital International Corporate Bond ETF (IBND): This ETF can serve investors as a tool for gaining broad-based exposure to global investment-grade corporate bond markets outside of the United States. IBND’s holdings are primarily rated A or higher, and its holdings are equally split between foreign and U.S. corporate bond holdings.

Regional Debt: Asia

Investors with specific diversification objectives may look to regional debt funds that offer broad-based exposure to the fixed-income space of developing economic regions.

  • WisdomTree Asia Local Debt Fund (ALD): This fund gives investors exposure to local-debt denominated in the currencies of Asia Pacific (ex-Japan) countries. ALD is comprised of holdings from South Korea and  Malaysia, to Indonesia and Thailand among others.

Country-Specific Bonds: Germany, Italy, and Japan

Investors can now achieve hyper-targeted exposure to country-specific bond markets as the industry grows and new exchange traded products are constantly expanding the universe of investment strategies available. Keep in mind that all products listed below are ETNs, which exposes investors to a certain degree of credit risk as the products are unsecured debt instruments from the issuing institution.

  • 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. Germany is one of the most fiscally sound Euro zone economies, and German debt could take on safe haven appeal in certain environments.
  • PowerShares DB Japanese Government Bond Futures ETN (JGBL): Investors can gain exposure to a long position in 10-year Japanese Government Bond futures through JGBL. The underlying assets of this ETF are Japan-government issued debt securities (JGBs) with a remaining term to maturity of not less than 7 years and not more than 11 years. Japanese debt often exhibits very low yields, and may also have appeal as a safe haven when equity markets encounter turbulence.
  • 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.

Disclosure: No positions at time of writing.