European treasury bond exchange-traded funds (ETFs) provide investors with exposure to debt securities issued by governments of European countries. The European economy suffered a significant adverse shock due to the COVID-19 pandemic. But a recovery is currently under way, aided by increasing vaccination rates and mobility as well as accommodative macroeconomic policies.
While risks remain, the International Monetary Fund said in an October 2021 report that it expects growth of 5.2% for advanced European economies and 6.0% for emerging European economies in 2021. Stronger economic growth throughout Europe will reduce the risk of holding European government debt.
However, a recent resurgence of COVID-19 cases has led to the reintroduction of lockdowns in certain parts of Europe, including in parts of Germany, one of the continent’s biggest economies. The United Kingdom, another large European economy, has case numbers, hospitalizations, and deaths comparable to the European Union (EU) average, but the government there has said it will not reintroduce restrictions. Extended lockdowns could hamper the recovery.
To promote the economic recovery, the European Central Bank (ECB) has implemented monetary policies to ease credit conditions, including lowering interest rates and bond purchases. The ECB acts as the central bank for the eurozone, the group of countries belonging to the EU that use the euro as their official currency, similar to how the Federal Reserve acts as the central bank for the United States.
The pandemic has overshadowed a recent major development in Europe that could have significant ramifications for the European economy as a whole. That development is Brexit, the departure of the U.K. from the EU, which officially took place on Jan. 31, 2020. The U.K. began a new formal trading relationship with the EU on Jan. 1, 2021, through a deal known as the Trade and Cooperation Agreement (TCA). While goods will trade without tariffs and quotas between the U.K. and the EU, other nontariff barriers will increase trading costs. It still may be too early to determine the effects on the U.K. economy and the rest of the European economy.
- International treasury bonds, which have large allocations of European treasury bonds, have dramatically underperformed the broad U.S. equity market over the past year.
- The best European treasury bond exchange-traded funds (ETFs) for the first quarter (Q1) of 2022 are FLIA, BWZ, and ISHG.
- The top holdings of these ETFs are bonds issued by the U.S. Federal Home Loan Bank System, the government of China, and the government of Sweden, 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, with a total return of -5.3% as of Dec. 10, 2021, compared to the S&P 500’s total return of 28.9% as of Dec. 9, 2021.
We examine the three best European treasury bond ETFs below. All numbers below are as of Dec. 9, 2021.
- Performance Over One-Year: -1.1%
- Expense Ratio: 0.25%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 42,063
- Assets Under Management: $225.2 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, followed by Asia and North America.
- Performance Over One-Year: -6.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 0.01%
- Three-Month Average Daily Volume: 25,391
- Assets Under Management: $204.7 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 Japan, followed by Italy and France. Its top three holdings include bonds issued by the government of China, the government of South Korea, and the government of Japan.
- Performance Over One-Year: -6.2%
- Expense Ratio: 0.35%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 4,572
- Assets Under Management: $75.1 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 and France. Its top three holdings include bonds issued by the government of Sweden, the government of Ireland, and the government of Japan.
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