With a client base that is worldwide, I have a need to use non-USD fixed income products to generate retirement income as well as to hedge the dollar. For offshore clients, this is quite easy as there are an abundance of products. Unfortunately for US clients the offering is limited. Sure, you have plenty of international and emerging market bond funds, but in my opinion they are quite watered down and don't drill down into specific geographic regions that have stronger economic fundamentals than others.
For more adventurous investors, the ability to buy bonds in foreign currencies exists, but for many that's too remote and they lack the understanding to make smart decisions. While I may buy one- to three-year bonds in Brazilian reals that are AAA-rated and have ytms of between 8-9%, for most US-based clients it just doesn't fly. They don't want to convert dollars into reals and they have no idea of tax consequences if any. The question for US investors who want enhanced income by going overseas, as well as to profit from a weak greenback, has been how to go about tapping these markets.
Two new ETFs may be a good solution. Both are investing in bonds and are more specific in geographic exposure. Van Eck's new Market Vectors LatAm Aggregate Bond ETF (BONO) is a great way to gain fixed income exposure to Latin America. With both strong economies and currencies as well as attractive yields, Latin American debt should have a place in your fixed income allocation. Investors need to do a bit of research on the BONO, as there is a fair amount of US dollar exposure in the fund. Nonetheless, with a 7+% yield, it sure beats a 1.5% US corporate bond.
Another region with strong economic fundamentals that fixed income investors should look at is Asia. Some clients have used the Aberdeen Asia-Pacific Income Fund (FAX) closed-end fund, but I like more traditional ETFs instead. For my offshore clients, there are a couple of good mutual funds that invest in Asian bonds. One is run by Templeton. Unfortunately it's not open for US investors. Asian bonds have produced solid returns for the long-term. It's with this background that I was really happy to see the launch of WisdomTree's Asia Local Debt ETF (ALD). It's a well-diversified fund, holding bonds from Australia and China as well as South Korea, Indonesia and Malaysia.
In my model fixed income allocation for most clients, I encourage a 30-40% exposure to non-USD bonds. These two new ETFs could really help gain access to two geographic areas potentially worth investing in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.