European treasury bond exchange-traded funds (ETFs) provide investors with exposure to debt securities issued by governments of European countries. The European GDP is now back to its pre-pandemic level after the COVID-19 pandemic sent it into its worst-ever recession.
The EU economy grew by 5.3% in 2021 as the gradual lifting of COVID-19 containment measures triggered robust economic activity. A continuously improving labor market, high household savings, and favorable financing conditions are expected to continue supporting the expansion. The EU economy is projected to grow by 4.0% in 2022 and 2.8% in 2023.
Fundamentals of the euro area economy remain strong but there's great uncertainty following Russia's recent invasion of Ukraine. EU countries buy 41.1% of their gas and 27% of their oil from Russia and energy prices could rocket if the Russia-Ukraine conflict interrupts this supply. The European Commission is yet to assess the economic impact of the conflict and there are added risks due to inflation, higher energy prices, and ongoing supply chain bottlenecks.
Amid the Ukraine war, European Commission has agreed to ease its financial support of the euro zone economy in 2023. However, the commission acknowledges there's a high level of uncertainty and it is ready to provide cash should the war necessitate it.
- International treasury bonds, which have large allocations of European treasury bonds, have underperformed the broad U.S. equity market over the past year.
- The best European treasury bond exchange-traded funds (ETFs) are FLIA, ISHG, and BWZ.
- The top holdings of these ETFs are German bunds, bonds issued by the government of Sweden, and bonds issued by the government of Japan, respectively.
There are no ETFs that trade in the United States exclusively dedicated to European treasury bonds. However, there are international treasury bond ETFs, all of which have large European treasury bond allocations. There are five international bond ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM).
International treasury bonds, as measured by the Bloomberg Global Treasury Index, have significantly underperformed the broad U.S. equity market over the past 12 months. The SPDR Bloomberg Short Term International Treasure Bond ETF had a total return of -15.0% compared to the S&P 500’s total return of -5.15% for the last 52 weeks as of July 29, 2022.
The best-performing European treasury bond ETF, based on performance over the past year, is the Franklin Liberty International Aggregate Bond ETF (FLIA).
We examine the three best European treasury bond ETFs below. All numbers below are as of July 29, 2022.
Franklin Liberty International Aggregate Bond ETF (FLIA)
- Performance Over One-Year: -4.5%
- Expense Ratio: 0.25%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 66,579
- Assets Under Management: $190.5 million
- Inception Date: May 30, 2018
- Issuer: Franklin Templeton
FLIA is an actively managed international bond ETF that seeks to maximize total return by focusing on investment grade bonds primarily outside of the U.S. Investment grade bonds are debt securities deemed by credit rating agencies to have a low risk of default.
While the majority of the ETF’s holdings are invested in bonds issued by governments and government agencies, some holdings are of corporate bonds. Its largest geographic allocation is Europe at nearly 48%, followed by Asia and North America.
FLIA’s top three holdings comprise German bunds and bonds issued by the Japanese government bonds.
iShares 1–3 Year International Treasury Bond ETF (ISHG)
- Performance Over One-Year: -14.6%
- Expense Ratio: 0.35%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 11,098
- Assets Under Management: $65.5 million
- Inception Date: Jan. 21, 2009
- Issuer: BlackRock Financial Management
ISHG aims to track the performance of the FTSE World Government Bond Index — Developed Markets 1–3 Years Capped Select Index, which is composed of government bonds issued by non-U.S. developed markets and which have remaining maturities of one to three years.
The ETF provides exposure to short-term bonds issued by governments of non-U.S. countries, providing investors with enhanced-return potential, diversification, and protection against the adverse effects of rising interest rates.
ISHG’s largest geographic exposure is Japan, followed by Italy, France, and Germany. Its top three holdings include bonds issued by the government of Ireland, the government of Australia, and the government of Sweden.
SPDR Bloomberg Short Term International Treasury Bond ETF (BWZ)
- Performance Over One-Year: -15.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 0.01%
- Three-Month Average Daily Volume: 42,698
- Assets Under Management: $148.3 million
- Inception Date: Jan. 15, 2009
- Issuer: State Street
BWZ seeks to track the performance of the Bloomberg 1–3 Year Global Treasury ex-US Capped Index, which is designed to gauge the performance of fixed-rate local currency sovereign debt issued by non-U.S. countries with investment grade ratings and with remaining maturities of one to three years.
The ETF provides exposure to government debt outside of the U.S., giving investors access to international securities to potentially enhance returns and diversify their portfolios. The fund also focuses on short-term debt, which may be appealing to investors concerned about the adverse impacts of rising interest rates.
BWZ’s largest geographic exposure is China, followed by Japan and Australia. Its top three holdings include bonds issued by the government of China and bonds issued by the government of Japan.
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