International Bond ETFs – Perfect Mix of High Yield and Diversification

January 27, 2012 · 8 comments

International bond ETFs are becoming increasingly attractive to American investors.  Why?  Well, with a near-zero interest rate policy now through the end of 2014 as announced by Bernanke recently, there will not be yield within the states any time soon on Treasury bonds, CDs, savings accounts, money markets, or even the trickle-down effect into other US income investments like municipal bonds and corporate bonds.  The interest rate environment has been so accommodation to corporations for instance, that we’re seeing a resurgence of 100 year bonds.  That being said, investing internationally in income producing instruments can have several benefits:

  • Diversification away from US index returns – While the US recovery is surely anticipated to be an improvement over the picture in Europe, there are many economies growing much more strongly in Asia and Latin America.  Even Africa is performing marginally better.  If we have another lost decade here in the US equity index returns, there’s a decent shot at seeing stronger economic growth overseas.
  • High Yield – As mentioned previously, since it’s become increasingly difficult to enjoy any yields over 2-3% even in corporates and blue chip dividend yields, you can enjoy a much higher yield with some of the international issues outlined below.
  • Currency Benefits – If the US dollar goes back on a weakening streak, the returns converted back into US dollars are amplified by the strength of the foreign currencies in which the bonds are derived.

International Bond ETFs Reviewed

Here are a few options to choose from in the overseas high income segment:

PCYEmerging Markets Sovereign Debt Portfolio – This ETF is yielding approximately 8% and has been paying dividends pretty steadily on a monthly basis.  That’s comforting to investors that want to ensure they’re not caught off guard by a major drop in the dividend payout at the onset of a new quarter.  The holdings are pretty diverse, ranging from Bulgaria and Korea to Pakistan and Brazil.  PCY has been flat over the prior 6 month period and has returned 3% over the prior year on a capital appreciation basis, on top of the yield of course.

EMBJPMorgan Emerging Markets Bond Fund - This ETF is yielding approximately 7.5% and has been paying dividends pretty steadily on a monthly basis as well.  The holdings are spread out pretty widely, including Philippines, Russia, Turkey, Brazil and Peru to name a few.  EMB has been flat over the prior 6 month period and has returned 3.5% over the prior year on a capital appreciation basis in addition to the yield.

EMLCMarket Vectors Emerging Markets Local Currency Bond ETF – This ETF is yielding approximately 5.8% and has been paying dividends pretty a monthly basis but the payouts have not been quite as steady as the preceding two issues.  EMLC has been flat over the prior 6 month period and has returned 3.5% over the prior year on a capital appreciation basis in addition to the yield.  The majority of the holdings reside in a few select countries: Mexico, Malaysia, Brazil, Poland, and South Africa.  EMLC has lost 3% over the prior 6 month period and is flat over the prior year on a capital appreciation basis in addition to the yield.

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Disclosure: No positions in any bond ETFs reviewed here.
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{ 3 comments… read them below or add one }

Jacob @ My Personal Finance Journey March 2, 2012 at 8:34 pm

Interesting article here! Right now, my fixed income investment asset allocation only includes US securities. However, I’ve often wondered if there are any additional diversification benefits of expanding this to foreign fixed income securities as well.

Any thoughts on this?

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Darwin's Money March 3, 2012 at 1:30 am

I definitely like the overseas diversification for the reasons cited. US is doing great right now (comparatively), but over the next decade or two? Who knows!? Demographic and GDP projections definitely look good for many emerging markets.

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Stock Tips Investment March 10, 2012 at 3:53 pm

Very good article. One problem is that investor’s staff rarely considers the possibility of investing outside the U.S.. However, many things are changing in the world. Today there are stable countries with good economic growth and companies begin to show. There are good investment opportunities.

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