Instead of shifting down fixed-income assets as a hedge against rising rates from a three decade low, investors can consider foreign bond exchange traded funds that are less affected by U.S. rate risks.
“High-quality international bonds offer a simple way to buffer a bond portfolio from rising interest rates,” Chris Philips, a senior analyst in Vanguard’s Investment Strategy Group, said in an InvestmentNews article.
Rising rates have pushed down bond prices – bonds have an inverse relationship to rates. As a way to hedge against rising rates, bond investors have been taking on greater credit risk, or shifting away from high-quality debt for speculative grade debt with higher yields. Investors have essentially bet on the higher yields to cushion the potential shortfall. [Big Bond ETF Faces Critical Test]
International rates are “imperfectly correlated” and don’t rise at the same pace. So over the short-term, international bonds can provide a smoother ride and increased returns, Philips said. [BlackRock: Duration Customization]
However, with international bonds, potential investors should be aware of how changes in currency rates can affect overall returns.
“Currency is three times as risky as bond risk,” Phillips added. “Unhedged international bonds actually increase the risk of a portfolio.”
Some foreign bond ETFs without U.S. exposure include:
- SPDR Barclays International Treasury Bond (NYSEArca: BWX): 1.63% 30-day SEC yield
- Vanguard Total International Bond ETF (NYSEArca: BNDX): 1.59% 30-day SEC yield
- iShares International Treasury Bond ETF (NYSEArca: IGOV): 1.39% 30-day SEC yield
- SPDR Barclays Capital Short Term International Treasury Bond ETF (NYSEArca: BWZ): 0.63% 30-day SEC yield
- iShares 1-3 Year International Treasury Bond ETF (NYSEArca: ISHG): 0.39% 30-day SEC yield
- PowerShares International Corporate Bond Portfolio (NYSEArca: PICB): 2.26% 30-day SEC yield
For more information on bonds, visit our bond ETFs category.
Max Chen contributed to this article.