Foreign Bond ETFs: Considering Dollar Devaluation and Maximizing Income Stream

When State Street introduced the first foreign bond ETF nearly 2 years ago, I was ecstatic. The SPDR Barclay International Treasury Bond Fund (BWX) offered an annual income stream above 4.25%, a natural hedge against the U.S. dollar, potential for some capital appreciation and a history of non-correlation to stock assets.

Today, BWX produces an income stream of 2.25% while trading at a 0.6% premium to net asset value. Clearly, the desire to hedge against U.S. dollar devaluation – even at a premium, even with a dwindling income component — is still very vibrant.

As much as I still feel BWX is a strong contender as a portfolio mainstay, new foreign bond ETFs have come on the scene. Many of them have shorter average maturities than the 8 years of SPDR Barclay International Treasury Bond Fund (BWX).

For instance, SPDR Barclays Short Term International Treasury Fund (BWZ) has a 30-day SEC yield of a mere 1.15%… a full percentage point less in income. Yet the “cousin” SPDR has one quarter of the average maturity at just 1.7 years. In effect, you get the currency hedge as well as the low correlation for diversification purposes… with a bit less overall risk.

Another consideration is the likelihood of inflation in foreign countries where economies are beginning to expand. The worldwide stimulus spending and ultra-low interest rates probably seal the deal. That’s why an investor might be interested in the SPDR DB International Government Inflation-Protected Bond Fund (WIP).

The average maturity for WIP is 12 years to BWX’s 8 years. And the SEC yield for WIP is 50 basis points less at 1.75%. Yet the added benefit of purchasing power protection should world inflation gauges rise would increase the value of WIP’s net underlying assets.

Last, but certainly not least, the Nuveen Multi-Currency Short-Term Government Income Fund (JGT) provides an attractive level of income through direct and indirect investment into short-term international government securities. Investing in non-U.S. government securities through a variety of different currencies often garners unique results.

It’s not a cheap fund at a total management fee of 1.1%. And it’s not necessarily for the faint of heart, getting pummeled in the heart of the credit crisis. Yet it is already up 20%+ in 2009 and it has only lost 10% in the bear.

The Nuveen Multi-Currency Short-Term Government Income Fund (JGT) currently trades near a 7% discount to its net asset value. Most important, JGT is serving up an annual distribution close to 9% on quarterly payments, although it has already lowered its distribution amount once.

Full Disclosure: Gary Gordon, MS, CFP is the president of Pacific Park Financial, Inc., a Registered Investment Adviser with the SEC. The company may hold positions in the ETFs, mutual funds and/or index funds mentioned above.

Comments

[ynwestor:]

Surprised PGD was left off your list of candidates for USD devaluation risk. IMO, PGD (which I own) is a no-brainer: short term debt in 5 currencies pegged to the USD. If/when the devaluation escalates, the links will likely be broken, some or all the 5 currencies will then gain strength vs USD, and the value of PGD will soar. One negative is that PGD trades on very low volume. Word hasn't gotten out yet.

Sep 04 11:43 AM

[Analyste de...:]

Regarding PGD: "The Fund is intended to replicate a diversified, multi national money markets strategy in the five Middle Eastern and Asian market currencies."

Ergo, it's NOT a fixed income nor bond fund. For INCOME INVESTORS, what's the 12 month income distribution and/or dividend? Do you know if there's a regular dividend, or not? It's hard to get current information (red flag!) and there's no info on www.ipathetn.com/ about "PGD" (that's a very BAD sign!)

It's been a crappy investment, for those of us who initially bought the thesis (and the fund) early on, only to see forex plays in FXC, FXA, etc. dramatically outperform this dud. Sorry.

On Sep 04 11:43 AM ynwestor wrote:

> Surprised PGD was left off your list of candidates for USD devaluation
> risk.

Sep 04 01:15 PM

[Analyste de...:]

Domestic US money market funds can be considered part of the overall "Fixed Income" allocation in a portfolio - but not every advisor thinks that way. OTOH, relatively FEW are substituting forex funds for what most investors expect to be the most conservative wedge of the pie.

That said, if a USD devaluation is likely (the thesis) in the future, how you might add complementary forex plays like CEW or UDN or DBV to your portfolios is worth considering & modeling now.

OTOH, these are NOT investments for deleveraging crises nor sharp stock mkt declines - a flight to quality (USD, US Treasury) crushes the thesis. As we saw last fall!

Sep 04 01:33 PM

[ynwestor:]

PGD has been a crappy investment ontly if one overlooks the 800 lbs. Black Swan in the picture. It's a currency fund, not income. Its yield is <1% because for the moment these 5 currencies have their exchange rates still pegged to the USD. But the USD devaluation is in progress; make no mistake about it. When it accelerates some more (say China drops its currency 5 or10% vs USD) one might see PGD take off. When 2 or 3 others of the 5 currencies decide its time to cut their destinies from that of the USD, the black swan will become evident to all, and I can retire rich.


On Sep 04 01:15 PM Analyste de Boston wrote:

> Regarding PGD: "The Fund is intended to replicate a diversified,
> multi national money markets strategy in the five Middle Eastern
> and Asian market currencies."
>
> Ergo, it's NOT a fixed income nor bond fund. For INCOME INVESTORS,
> what's the 12 month income distribution and/or dividend? Do you
> know if there's a regular dividend, or not? It's hard to get current
> information (red flag!) and there's no info on www.ipathetn.com/
> about "PGD" (that's a very BAD sign!)
>
> It's been a crappy investment, for those of us who initially bought
> the thesis (and the fund) early on, only to see forex plays in FXC,
> FXA, etc. dramatically outperform this dud. Sorry.
>
> On Sep 04 11:43 AM ynwestor wrote:

Sep 04 03:10 PM

[NC Trader:]

As an ETN, PGD is an unsecured obligation of Barclays. If your black swan materializes, what make you think they could or would pay out? Not arguing with your thesis, but I think last fall proved that counterparty risk damn well better be part of your analysis.

Sep 04 03:21 PM

[ash67:]

What about impact of likely interest rate increases? Would this not rule out longer-term bonds till these stabilize (perhaps sometime next year once liquidity actions are reversed) ?

Which ETFs (or funds) would make sense to hold given this scenario? Devaluing dollar, pending interest rate increases.

JGT is clearly a candidate. What are others that have good yields?

Sep 04 05:49 PM

[i'mwithher:]

gary gordon, do you put your own money in crap like pgd?

Sep 04 08:49 PM

[buyitcheaper:]

Would an entry point for funds like these be on a pop in the US Dollar? It would seem that if we get such a move up (even if temporary) it would be the right time to enter these. Now, the other question, for all these funds, are they just beneficiaries of loose monetary policy by their own countries? Are these funds winning b/c their own currencies are depreciating faster than the USD?

Sep 05 08:32 AM

[mangy cat:]

try edd
high expense: 2.2%
but at 15% discount to nav, you get first seven years for free

Sep 05 09:22 AM

[Thomas Smic...:]

BWX is a holding at present within my portfolios. I see no reason not to consider it a long term holding as a hedge against current US economic policy (tax more and spend a lot more).

Sep 05 02:06 PM

[The-Stock-M...:]

Maybe it's just me, but I'm quite skeptical of investing in foreign currencies and related instruments mainly because of the political uncertainties associated with many foreign countries. Of course, you minimize the risk by selecting a basket, but still...

Sep 05 10:57 PM

[flainvestor:]

I owned BWX. I buy bond funds for an income stream. BWX has not made an income distribution since March 10, 2009. none. All my other bond funds make a regular income distribution. I sold BWX and am re-deploying the funds into something that makes a regular distribution.

Sep 08 05:51 PM

[ynwestor:]

You're quite right. Therefore:
1. I do NOT suggest holding PGD to maturity (presumably, 30 yrs) to find out whether or not Barclays will pay off the note.
2. It's more likely, if usd keeps falling, one or more of the 5 presently pegged currencies (including the yuan) would cut themselves loose from the greenback, their currency would float higher and translate to a higher price (and probably much higher trading volume) for pgd. Investors could take their profits when it suited their overall plan .
3. I would therefore NOT bet more than 1-3% of my capital on pgd; but that's the nature of black swans --- you never know where or when you might find one.


On Sep 04 03:21 PM NC Trader wrote:

> As an ETN, PGD is an unsecured obligation of Barclays. If your black
> swan materializes, what make you think they could or would pay out?
> Not arguing with your thesis, but I think last fall proved that counterparty
> risk damn well better be part of your analysis.

Sep 11 09:06 PM