There is a mad dash to find yield these days. Some are replacing portions of their bond allocation with dividend stocks to get a better yield. Others are choosing long-term bonds in an attempt to capture yield. Both of these options have the potential to increase your yield, but carry added risk.
One option overlooked is the use of foreign bonds. Over the past few years, many of these foreign bonds have beat U.S. based bond ETFs such as Vanguard's Total Bond Fund (NYSEARCA:BND). These bonds offer attractive yields in the 3-5% range and a way to diversify your bond allocation. With the use of ETFs, these bonds can be very specialized in terms of country, region, developed market vs. emerging market, local currency vs. U.S. currency, and corporate vs. government. Here are a few examples to consider.
PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY):
This ETF is U.S. dollar based and contains the bonds of 22 different emerging market countries. Turkey is the largest country allocation at 4.74% of the portfolio. The ETF currently trades at its NAV. The distributions are paid monthly and yields 4.5%. The expense ratio is a reasonable .50%. In the past 5 years, a $10,000 investment would have grown to $16,472.
Market Vectors Emerging Markets Local Currency Bond ETF (NYSEARCA:EMLC):
Like the name implies, this ETF is not U.S. dollar based, but rather uses local currency. This ETF is fairly diversified with Brazil, Poland, South Africa, and Mexico each allocated at 10%. It trades just above the NAV. Distributions are paid monthly and currently yields 5.47%. The expense ratio is .47%. This is a newer ETF, but the 1 year return is over 13%, and has averaged just over 8% since its 2010 inception date.
SPDR Barclays International Corporate Bond ETF (NYSEARCA:IBND):
This foreign bond fund is more developed countries based. The United States is the largest allocation at 15%, so it is not a pure international play. The European countries of France, Germany, United Kingdom, and the Netherlands round out the top 5 with allocations of around 13% each. The ETF trades just above the NAV with an expense ratio of .55%. IBND has averaged an 8.6% return since 2010. Distributions are paid monthly, yielding just over 3%.
Foreign bond funds had a good 2012, but may have room for solid gains again in 2013. In a recent commentary by Dodd Kittsley, an ETF analyst at BlackRock's iShares, his opinion was:
"If the prolonged low interest rate environment persists (and we think it will), we expect to see more investors considering these products as a potential source of yield."
"In addition, the relatively positive risk/return characteristics and low historical correlations to other segments of the fixed income market should continue to make this category one to watch."