Indexor

International Bond ETFs' Correlation to Equities

Here's a thought:

Take each of the four foreign bond ETFs you mentioned - BWZ, BWX, JGT and WIP - and compare each one to UUP (PowerShares US Dollar Bullish) on a charting service, such as stockcharts.com. You will find each of the foreign bond ETFs have a strong negative correlation to UUP.

While we are always looking for issues that provide additional diversification through negative correlation, do you find that foreign bonds are simply a good diversifier because of their currency "effect?" In other words, as long as the dollar continues to weaken, foreign bonds should provide both diversification and alpha. But if the US dollar begins to strengthen, won't foreign bonds prove to be much less of a diversifier and produce negative alpha just when global stocks are also entering a downward trend?