International treasury bonds exchange-traded funds, or ETFs, invest in sovereign bonds issued or guaranteed by governments of foreign countries. Depending on the composition of holdings by country and credit rating, returns on these ETFs may vary widely. If a fund invests in investment-grade bonds, its holdings offer little downside but at the expense of lower returns currently within 1 to 3%. Funds that invest in noninvestment-grade, fixed-income securities that have a higher risk of default may command higher rates of return within the 3 to 5% range, depending on weightings toward riskier securities.
International treasury bonds ETFs provide diversification opportunities for investors who wish to invest in foreign sovereign bonds that exhibit returns with different correlations from U.S. Treasury bonds (T-bonds).
SPDR Barclays International Trs Bd ETF
The SPDR Barclays International Trs Bd ETF (NYSEARCA: BWX) was created in 2007 to track the performance of the Barclays Global Treasury ex-US Capped Index, which is composed of highly rated sovereign bonds issued by developed countries. The fund has a high holdings concentration in Japanese government bonds with 23% allocation, while sovereign bonds from the United Kingdom and Italy account for 8.4% and 6.8% of the fund's portfolio, respectively. Other sovereign bonds held by BWX are issued by France, Germany, the Netherlands and Belgium. BWX has an expense ratio of 0.5%.
BWX is most appropriate for investors who want to gain exposure to international T-bonds and notes of developed countries. Because the fund holds high-credit, quality sovereign bonds, it is suitable for investors who are very risk-averse and do not mind receiving lower returns as a result of lower default risks.
iShares JPMorgan USD Emerg Markets Bond
The iShares JPMorgan USD Emerg Markets Bond (NYSEARCA: EMB) tracks the investment results of the JPMorgan EMBI Global Core Index, which is composed of U.S. dollar-denominated sovereign and corporate bonds issued by emerging market countries. Unlike BWX, EMB has a lower credit-rated portfolio, as the fund holds bonds with an average credit rating of BB. The fund invests 77% of its assets in sovereign bonds, while 22% of the fund's assets are invested in corporate bonds of companies from emerging markets. The fund is not exposed to currency risk since its holdings are denominated in U.S. dollars. The top five holdings are from Russia, the Philippines, Turkey, Indonesia and Mexico. Due to higher default risks, EMB has generated an annual weighted average yield of 6.3% since the fund's inception in 2007. EMB has an expense ratio of 0.4%.
EMB is most suitable for investors who wish to diversify their portfolio with holdings of U.S. dollar-denominated sovereign bonds from emerging markets that bear a higher risk of default when compared to developed countries.
iShares Intnl Inflation-Linked Bond
The iShares Intnl Inflation-Linked Bond (NYSEARCA: ITIP) tracks the performance of the BofA Merrill Lynch Global ex-US Diversified Inflation-Linked Index, which is composed of inflation-linked bonds issued by sovereigns in local currencies. The fund holds inflation-protected bonds of France and the United Kingdom that have 13% allocation each. Other countries, such as Brazil and Italy, account for 11 and 10%, respectively, of ITIP's portfolio. ITIP has generated an average annual return of -1.57% due to deflationary pressures around the world. ITIP performs best during episodes of rising inflation in issuing countries. The fund's expense ratio is 0.4%.
ITIP is most appropriate for investors who want to obtain exposure to international T-bonds of mostly developed countries but are highly concerned about inflation and real returns.
PowerShares Fdmt Emerg Mkts Lcl Dbt ETF
PowerShares Fdmt Emerg Mkts Lcl Dbt ETF (NYSEARCA: PFEM) tracks the performance of the Citi RAFI Bonds Sovereign Emerging Markets Extended Local Currency Index, which measures the investment results of local currency bonds issued by the governments from emerging market countries. The fund does not hedge its currency risks. PFEM invests in Brazilian and Russian sovereign local currency bonds with 10% allocation for each country, while Mexico, South Korea and Indonesia each account for 8% of PFEM's portfolio. The fund has an expense ratio of 0.5%.
PFEM is suitable for investors who have high risk tolerances and want to invest in sovereign bonds denominated in local currencies.