Lehman Foreign Fixed Income ETF: Diversification and Double Digit Annual Gains

The first international fixed income exchange-traded fund is the SPDR Lehman International Treasury Bond ETF (BWX). It intends to provide investment results that, before fees and expenses, correspond to the price/yield performance of the Lehman Brothers Global Treasury ex-US Index.

Everyone's talking about the latest exchange-traded fund... and with good reason. This is the first ETF that's tracking an international treasury bond index.

At the moment, we're talking a 4.35% yield, which is not much more than the 10-year U.S. Treasury. And 40% of the bonds mature in the intermediate range of 5-10 years.

So why is this new ETF of any interest? Why is this important?

Well, in recent years, all assets have moved in the exact same direction. Stocks, bonds, commodities -- it hasn't mattered one iota. When stocks have moved higher, bond prices and commodity prices have also appreciated. (And vice versa.)

It follows that different asset classes haven't really served as a way to diversify one's risk; rather, it's simply been a matter of how much risk you've wanted to take. You haven't gotten any "zag" in your portfolio... it's all been "zig."

And that's not what diversification is supposed to do. When you diversify, you're supposed to have some things that go down while other investments go up. (And vice versa... he repeated.)

Enter international bonds. International fixed income is the one asset type that actually has a negative correlation with the SPDR S&P 500 (SPY). (For financial geeks like me... that means... we've found a genuine diversifier.)

Before we uncap the champagne corks, we should note that BWX has an annual expense of 0.50%. That's on the high side for a bond offering.

Yet BWX will serve up monthly income. And with continued depreciation of the U.S. dollar, BWX may just be a safe way to diversify AND get some double-digit annual gains.

Check out the Seeking Alpha ETF Selector for more information.

Comments

[Jona:]

Check SSgA's site. Japanese bonds account for over 90% of this fund! That hardly seems "international".

2007 Oct 09 01:04 PM

[Jona:]

Check SSgA's site. Japanese bonds account for over 90% of this fund! That hardly seems "international".

2007 Oct 09 01:04 PM

[Rob Jones:]

Japan only accounts for 22.79% according to the fact sheet.

2007 Oct 10 08:55 PM