A good way to gain exposure to the foreign market and that too with an ETF is through the International Bonds ETFs. These are also substantial in hedging foreign interest rates and creating revenue stream for the portfolio. Investing in international bonds ETF can also help in gaining access to the stable regions of the foreign market.
Diversity is also an aspect to consider in the international bonds market. As ETF investors consider it a key to decreasing risk. International bonds ETF can help in maintaining a well diversified portfolio where losses remain minimal. Moreover, bonds investments are affected by interest rates. Foreign interest rates can be controlled with hedging techniques so international bonds ETFs can work out for this.
International Bonds ETFs usually compete with treasury bonds ETFs and international fixed income ETFs. Some investors consider international bonds ETFs a better option than treasury bonds.
The largest international bond ETF is the SPDR Barclay’s Capital International Treasury Bond (NYSEArca: BWX). It tracks the performance of government bonds outside US issued in local currencies. The average coupon rate is 4.21%. The major weightings are of 4.1% to Greece and 4.6% to Spain. It mostly is seen in competition with Treasury bond ETFs from iShares.
SPDR DB International Government Inflation Protected Bond ETF (WIP). It tracks the inflation protected government bonds outside the US. WIP mainly targets the developed an emerging markets. The average coupon rate is 3.2% with a thirty day yield of 1.5%.
Similarlty the iShares S&P/Citigroup International Treasury Bond Fund (IGOV) has an average coupon rate of 3.6%. Major weighting is contributed by Japan in accounting for about quarter of IGOV’s total assets. Germany has 9.6%, France has 7.3% and both Spain and Greece account for 9% of total assets.
SPDR Barclays Capital Short Term International Treasury Bond ETF (NYSEArca:BWZ), iShares JPMorgan USD Emerg Markets Bond (EMB), PowerShares Emerging Mkts Sovereign Debt (PCY ) and iShares S&P/Citi 1-3 Yr Intl Treasury Bd (ISHG) are some of the popular investments providing ways to enter into the international bonds ETF market.
International bonds targeting developed countries have low credit risk. Experts advise to take sovereign risk into account when investing in international bonds ETFs. During the 2008 market crash the international bonds sustained well. As the international presence of the bonds is affected by the sovereign state conditions, they can perform low if there is a default on the sovereign debt of a country.
Ownership of international bonds can be less appealing in cases of asset increasing without having any effect on the bond values. Some notions exist of international bonds having higher expense ratios and currency risks. One can easily find bonds with expense ratios of 0.15% or less in the US bond ETF market but usually international bond ETFs range from 0.35% to 0.5%.
Currency risk is true for international bonds since the investment value can be decreased if the currency devalues in which the investment is denominated. However, investors are willing to invest in international bonds to earn relatively predictable returns.