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Opportunity With An International Bond ETF

June 22, 2016 3:40 pm
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Opportunity With An International Bond ETF

Fixed income exchange-traded funds, usually viewed as a not-so-glamorous asset class, are decidedly glamorous this year. Several of this year's top 10 asset-gathering ETFs are bond funds and with the Federal Reserve consistently passing on raising interest rates, U.S. government bond funds have been the toast of the ETF world.

The Bond Fund Appeal

“Investors put an additional $4.2 billion of net new money into fixed income ETFs in May, pushing the year to date flows figure to $42 billion, according to Factset data. While demand remained strong for actively managed fixed income mutual funds this year, up until last week, a wide variety of lower-cost ETFs that offer intra-day liquidity and typically seek to passively replicate an index have been gaining share in 2016,” said S&P Capital IQ in a note out earlier this month.

Related Link: Bond ETFs Propel ETF Industry To Another Record Assets Tally

BATS Exchange Gets In On The Action

While U.S. bond ETFs are commanding the bulk of investors' attention and assets this year, some international equivalents merit consideration as well. That group includes the iShares International Aggregate Bond Fund (BATS: IAGG). IAGG is the international answer to the popular iShares Barclays Aggregate Bond Fund (NYSE: AGG), one of this year's top asset-gathering ETFs.

At a time when there is still potential for multiple rate hikes by the Fed and as some bond investors are increasingly concerned about the return potential offered by U.S. government debt going forward, looking at high-grade international bonds makes sense.

“For example, while the United States is tightening its monetary policy, the central banks of Europe and Japan both have launched aggressive stimulus measures since 2014 to jumpstart economic growth. These stimulus measures have driven bond yields in Europe and Japan lower and bond prices there higher, and could continue to do so,” according to BlackRock.

A Deeper Dive Into IAGG

IAGG, which tracks the Barclays Global Aggregate ex USD 10 Percent Issuer Capped (Hedged) Index, debuted in November and is already home to $169.4 million in assets under management. The ETF allocates nearly 27 percent of its combined weight to Japanese and French bonds. Six of IAGG's top 10 country weights are nations with negative interest rates.

There are valid reasons for investors that are heavily allocated to U.S. debit to consider an ETF such as IAGG.

“If a portfolio’s fixed income allocation is entirely made up of U.S.-only bonds, it likely means that if U.S. bonds have had a bad year, so has the portfolio’s fixed income exposure. But if a portfolio holds a basket of bonds from different countries, bond prices of one country may be rising while bond prices of another may be falling. This way, price movements of bonds from different countries can help offset one another,” added BlackRock.

IAGG has an effective duration of 7.38 years and a weighted average coupon of 2.77 percent.

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