International Government Bond ETFs: Short-Term Cautious, Long-Term Bullish

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Includes: BND, BWX, BWZ, DBC, EFA, IGOV, ISHG, JNK, PCY, SHV
by: MyPlanIQ

International bond ETFs are an inseparable part of any long-term investment portfolio. With globalization and the long-term U.S. dollar weakness, these ETFs offer hedge against both U.S. dollar weakness and the debt-laddened U.S. economy. These qualities make them especially well-suited for asset allocations to retirement investments like IRA investments and 401K investments.

Given the current turbulence in the global economy, especially fast developing European debt issues, however, short term, investors should be cautious on international government bonds . With relatively stronger perception on U.S. debt and the economy, markets have shown a flight to safety action and that has depressed the international bonds' performance.

The following table shows the performance of international government bond ETFs vis-à-vis other asset classes.

Major Asset Classes Trend

11/04/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

US Stocks

VTI

-2.21%

9.36%

5.21%

-6.2%

5.48%

2.33%

International Developed Stks

EFA

-6.24%

5.76%

-3.61%

-14.26%

-9.95%

-5.66%

Emerging Market Stks

VWO

-2.89%

13.43%

-3.83%

-13.87%

-11.53%

-3.74%

International REITs

RWX

-4.16%

6.17%

-3.75%

-12.53%

-8.81%

-4.62%

Commodities

DBC

-0.57%

6.22%

-2.88%

-2.13%

5.98%

1.33%

Gold

GLD

0.73%

7.33%

5.63%

17.58%

25.27%

11.31%

Total US Bonds

BND

1.02%

1.23%

2.25%

4.96%

5.35%

2.96%

International Treasury Bonds

BWX

-2.24%

1.11%

-0.9%

0.36%

1.94%

0.05%

Click to enlarge

Let us also consider the performance of international government bond ETFs relative to the overall bond market.

Fixed Income Assets Trend

11/04/2011

Description

Symbol

1 Week

4 Weeks

13 Weeks

26 Weeks

52 Weeks

Trend Score

US Total Bond

BND

1.02%

1.23%

2.25%

4.96%

5.35%

2.96%

Treasury Bills

SHV

0.03%

0.01%

0.0%

0.0%

0.1%

0.03%

High Yield

JNK

-0.4%

7.98%

3.18%

-1.02%

5.62%

3.07%

International Treasury

BWX

-2.24%

1.11%

-0.9%

0.36%

1.94%

0.05%

Emerging Mkt Bonds

PCY

0.87%

5.55%

1.58%

5.63%

2.54%

3.24%

Click to enlarge

The relative underperformance of international government bond ETFs compared with US and emerging market bond ETFs can be explained by the current economic slowdown and the localized debt crisis in Europe. As global GDP growth picks up and the debt crisis in Europe is contained, international bond ETFs will significantly outperform other fixed income assets going forward. International government bond ETFs also carry the added advantage of holding non-dollar denominated bonds (mostly Yen and Euro denominated bonds), which can add to your aggregate return in the current weak dollar scenario.

Details about the various international government bond ETFs are listed in the table below

International Government Bonds ETFs

11/04/2011

Description

Symbol

1 Yr

3 Yr

5 Yr

Avg. Volume(NYSE:K)

1 Yr Sharpe

SPDR Barclays Capital Intl Treasuries

BWX

0.99%

8.97%

NA

235

11.45%

SPDR Barclays Cap S/T Intl Treasuries

BWZ

-0.3%

NA

NA

46

-3.91%

iShares S&P/Citi Intl Treasury

IGOV

-1.72%

NA

NA

23

-23.04%

iShares S&P/Citi 1-3 Yr Intl Treasury

ISHG

-2.72%

NA

NA

25

-29.43%

Click to enlarge

As you can see, BWX and BWZ have the highest average volume (235k and 46k respectively) and also have relatively higher Sharpe ratios (11.45% and -3.91% respectively); making them good investment options. From the above list, BWX also has also given the best medium-term return (8.97% - 3 Year) so let us take a detailed look at the type and credit quality of BWX’s bond holdings.

Top 10 Holdings (35.87% of Total Assets)

Company

% Assets

Japan (Government Of) 1.3%

4.73

Japan (Government Of) 1.5%

4.37

Germany (Federal Republic Of) 4.25%

4.18

Germany(Fed Rep) 4.5%

4.10

Germany(Fed Rep) 4.25%

3.79

Japan(Govt Of) 1.5%

3.60

Italy(Rep Of) 3.75%

3.15

Italy (Republic Of) 5.25%

3.05

Japan (Government Of) 2.9%

2.60

Japan(Govt Of) 1.3%

2.30

Click to enlarge
Click to enlarge

Bond Ratings (%)

Sector

BWX

US GOVERNMENT

N/A

AAA

52.60

AA

38.40

A

5.87

BBB

3.13

BB

0.00

B

0.00

BELOW B

0.00

Click to enlarge
Click to enlarge

BWX holds 91% of its assets in AAA and AA-rated securities and the balance in A and BBB rated securities, making its bond portfolio extremely safe and creditworthy. BWX also holds 17.60% of its assets in various yen-denominated Government of Japan treasuries and about 18% of its assets in euro-denominated bonds (German Bunds and Italian treasuries). This makes BWX a potential growth story as both European and Japanese bonds are set to outperform once the current eurozone crisis is settled successfully. However, we can also see that BWX will be more volatile in the months to come as it does have a sizeable exposure to European sovereign debts such as Italian bonds.

The takeaway is that international bond ETFs are under two opposite forces: short term, they will be under European sovereign debt pressure while long term, they will ride on the U.S. dollar weakness trend.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.