ETFs
A pair of international bond ETFs with upside potential
Opportunistic fixed-income investors may want to take a look at a pair of international bond exchange-traded funds (ETFs) if they haven’t already: the Vanguard Emerging Markets Government Bond ETF (VWOB A) and ETF shares of the Vanguard Total International Bond Index Fund (BNDX A-).
Faced with a rising dollar and high interest rates, emerging market (EM) bonds have attracted interest from the bond market. Anticipation of lower interest rates following the US Federal Reserve’s easing of monetary policy is fueling interest in this riskier segment of the debt market.
“Since the start of 2023, the bonds of these developing countries, both sovereign and corporate, have outperformed the Bloomberg Global Aggregate and the US Agg. The prospect of a somewhat weaker dollar, once the Federal Reserve finally cuts interest rates, would further fuel EM bonds. Investment Director’s Report noted, referring to a report Looking for Ned Davis.
“The fact that emerging markets have been able to outperform against a firm US dollar is a testament to their underlying strength,” the report adds.
In addition to future price appreciation following rate cuts, VWOB also offers a competitive yield alternative. As of June 6, VWOB’s 30-day SEC yield was 6.78%. This should appeal to yield seekers who want to take advantage of high yields before the U.S. central bank ultimately cuts interest rates. Additionally, this fund comes with a low expense ratio of 0.20%.
Overall, the ETF seeks to track the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures investment performance in U.S. dollar-denominated bonds issued by governments and government-related issuers in emerging market countries.
BNDX is an attractive option for bond investors seeking exposure to European debt. Nearly 60% of the fund is made up of European bonds, which have also been attracting interest lately.
“There comes a time when European bonds are more attractive than Treasury bills,” said Bill Gross, co-founder and former chief investment officer of Pacific Investment Management. “In terms of attractiveness, German 10-year bonds and French 10-year bonds have seen their spreads narrow significantly over the past couple of months relative to Treasuries.”
BNDX seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio consists mainly of investment grade debt securities, so credit risk is minimized. Additionally, the fund’s 30-day SEC yield is also 3.32% as of June 6. Additionally, it has a low expense ratio of 0.07%.
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