An Alternative To The Usual Boring Bond ETF
Fixed income exchange-traded funds are providing investors with plenty of excitement this year, most of it good, but the usual view of bond funds, particularly those holding U.S. Treasurys, is that these are boring instruments.
Boring can be beautiful. The returns offered by a number of bond ETFs and low beta sector funds this year prove as much. However, adding a dash of international exposure to fixed income portfolios does not necessarily drastically increasing portfolio risk. After all, a dwindling number of countries have AAA credit ratings and the U.S. is not one of them.
Consider the WisdomTree Asia Local Debt Fund (WisdomtTree Trust (NYSE: ALD)). Actively managed, ALD holds sovereign debt issued by Asia ex-Japan countries denominated in local currencies. Countries currently represented in ALD currently include the following: South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia and New Zealand.
Why Consider ALD?
There are reasons to consider an ETF such as ALD.
“The story of Asian fixed income remains compelling, and select Asian bond markets recorded strong growth and solid performance in 2016. Most Asian currencies strengthened with the news of the Brexit, which may further improve sentiment among market participants. Asian bond yields, though tightened, are still at an elevated level compared with their global peers. Particularly in this global low-to-negative interest rate environment, Asian bonds are attractive, as the theme of yield hunting continues,” according to S&P Dow Jones Indices.
While U.S. Treasurys are on fire, another hot fixed income market is Indonesia, Southeast Asia's largest economy. Though still high, sovereign yields there tumbling. Indonesia is ALD's fifth-largest country weight at nearly 7 percent.
“Looking into the 10 countries in the S&P Pan Asia Sovereign Bond Index, the highest-yielding market was India (at 7.50 percent), followed by Indonesia (at 7.40 percent). In fact, the S&P Indonesia Bond Index was the outperformer in the region in 1H 2016, delivering 12.90 percent total return YTD as of July 7, 2016. The S&P BSE India Bond Index gained 5.99 percent during the same period,” added S&P Dow Jones Indices.
Indonesia bonds may imply ALD has a risk profile not suitable to many bond investors, but the opposite is actually true.
Led by a combined allocation of more than 27 percent to Singapore and Australia, ALD devotes nearly 41 percent of its AAA-rated bonds with another 25 percent devoted to bonds rated AA. None of ALD's holdings are saddled with junk ratings.
With an effective duration of 4.2 years, ALD has a 30-day SEC yield of 2.24 percent, which is about 75 basis points above Wednesday's closing yield on 10-year Treasurys.
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