By Paul Amery
Why are ETF investors being given such a U.S.-centric view of international bond markets?
Equity ETF investors have a huge range of non-U.S. funds to choose between. Those include everything from a country fund or two for almost every market you can think of, as well as numerous emerging market ETFs. Investors also have international sector and style funds to choose from on the stock side, along with fundamental index global ETFs.
And those are just a few of the categories you can find through IndexUniverse.com's data query tool for U.S. funds.
By contrast, I counted only six non-U.S. fixed-income ETFs in the August 6 Deutsche Bank U.S-Listed ETF Liquidity Trends report, covering international emerging market debt (two funds), international treasuries (three funds; two covering short-maturity bonds, one covering the whole market) and one international inflation-linked bond fund.
In all six funds, you will have exposure to multiple government issuers, with the asset allocation dependent on the index compiler’s methodology.
By contrast, you can take your pick of 16 municipal bond ETFs. But aren’t U.S. investors (and ETF providers) missing out on a huge opportunity here?
Reliable data on the global bond market are hard to come by. But, by one estimate I found, U.S. bonds now represent only 21% of the world market, a big decrease from the 59% market share of 1989. And the global equity markets are tiny when compared to the international bond markets, by any measure.
But if you are a U.S. investor and want to gain exposure via an ETF to UK gilts; long-dated Eurozone bonds; Japanese government bonds; Russian, Brazilian or any other emerging market domestic currency debt market; global credit markets; any country-based inflation-linked debt market; or global asset-backed debt, tough luck.
To be fair, the foreign currency ETFs offered by CurrencyShares and WisdomTree Dreyfus do offer US investors the chance to gain exposure to overseas currency markets, which is one of the key attractions of international bonds—a chance to hedge against the depreciation of the US dollar. But these ETFs restrict their investments to the shortest maturity fixed-income assets in the countries concerned, so if you want duration exposure, you’ll have to go elsewhere.
I’m not suggesting that it’s necessarily a good time to buy international bonds—interest rates worldwide have plummeted, and there’s not a lot left to play for in terms of future yield declines. But by any measure, this asset class provides a valuable diversifier for a portfolio.
Is anyone going to step up and fill this product gap?
Vanguard this week filed to enhance its offerings with the introduction of seven bond ETFs. (See story here.) But again, none were international-focused. In fact, that has been a big complaint we’ve heard by investors—why isn’t Vanguard offering any foreign fixed-income index ETFs (or, index mutual funds, for that matter) in the pioneering indexing company’s vast lineup?
Others certainly are, although in limited quantities. It’s a topic that IndexUniverse.com has been digging into lately. Our two-part feature dug into the mechanics of fixed-income ETFs—available here and here; the series takes a particularly hard look at premiums and discounts across the different bond market sectors represented by ETFs.
The next (September) issue of ETFR will also focus on fixed income, with a number of expert contributors lined up. I’ll be awaiting its release with interest.