Fixed income has become one of the hottest trending topics in the finance world due to the uncertain economic environment. The asset class has seen a huge increase in interest from investors and advisors alike.
There are roughly 500 bond ETFs, and they have pulled in more than $100 billion in YTD flows. Considering that there are well over 2,000 equity ETFs, which have seen net inflows of nearly $150 billion, there are essentially four times as many equity ETFs as there are bond ETFs. However, equity ETFs have only seen about 1.5 times as many inflows as bond ETFs.
Considering International Bond ETFs
Home country bias means that investors may be overlooking international bonds. Certainly, the flows into U.S. fixed income ETFs dwarf the flows into international bond ETFs. That could be a missed opportunity.
As Todd Rosenbluth, head of research at VettaFi, explained, “Many advisors have core U.S. and international equity and core U.S. fixed income in their asset allocation models. But they leave out international bonds, which can offer much-needed diversification.”
International exposure through bond ETFs is available in a range of permutations. Global fixed income ETFs provide access to both U.S. and non-U.S. markets, while some funds only focus on developed markets and others focus on emerging markets. Some strictly invest in bonds issued in U.S. dollars, and others may invest in bonds denominated in local currencies. Those variations among funds’ holdings should be taken into account when constructing an optimally diversified portfolio.
Yields may also vary across regions and countries. When U.S. interest rates were at all-time lows for a sustained period of time not too long ago, it was difficult to generate meaningful income from U.S. bonds. However, it was possible to achieve better results by looking abroad, especially in developing markets.
“The yields are compelling in emerging markets, and investors can benefit from growing local economies,” Rosenbluth said.