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.
Leading International Bond ETFs
While there are plenty of non-U.S. bond ETFs trading on U.S. markets, two stand out in particular.
The passively managed Vanguard Total International Bond ETF (BNDX) is the largest international bond ETF currently trading on the U.S. market. The fund focuses on developed markets and is currency-hedged, which reduces the impact of currency fluctuations. BNDX launched in 2013 and has accumulated $50.2 billion in assets. It has gathered $5 billion in flows year-to-date. The fund has an expense ratio of 0.07%, making it one of the lowest-cost non-U.S. fixed income ETFs available to U.S. investors. BNDX has a YTD return of 3.59% and an annual dividend yield of 1.83%.
The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) is the largest emerging market bond ETF listed on the U.S. market. The fund offers exposure to fixed income opportunities denominated in U.S. dollars in a range of developing markets; it has an expense ratio of 0.39%. EMB launched in 2007 and now has more than $15 billion in assets, with $2.51 billion in flows added so far this year. The fund is up 5.94% year-to-date and has a dividend yield of 4.82%.
A Complex Category
Those are just the largest funds in their respective categories. There are a lot more to choose from when you take a step back and look at the entire global/international bond category, and there may be better options for your portfolio. While things like duration and credit quality are key considerations for U.S. investors targeting domestic fixed income, looking abroad brings a number of additional criteria into focus, especially currency-related concerns, such as whether a portfolio is hedged and what its securities are denominated in.
A message from Advisor Perspectives and VettaFi: VettaFi’s Fixed Income Symposium is the biggest virtual event this summer. Register here and learn from experts and thought leaders how to navigate this unusual fixed income environment.
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