Well-documented is the havoc caused by rising U.S. Treasury yields. Scores of asset classes from popular income-generating sectors to emerging markets currencies have been ravaged by the effects of rising U.S. interest rates.
Of course, the same can be said of long duration U.S. government bonds and the corresponding ETFs. Outflows from U.S.-focused bond funds over the past month have been substantial as more investors realize the ill effects of rising rates on the fixed income portions of their portfolios. [Many Investors Don’t Realize How Rising Rates Hurt Bonds]
Some investors would rather hold onto the bond investment and wait until maturity. Nevertheless, many bonds pay less than the current inflation rate, which generates an automatic loss. ETF investors can take steps to avoid the carnage and part of the solution includes international bond funds such as the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX). [ETFs for a Rising Rates Environment]
The $1.9 billion BWX has proven durable in the face of the recent spike 10-year Treasury yields. Going back to May 22 when talk of quantitative tapering really kicked up, which prompted the ensuing rise in 10-year yields, BWX has lost only 0.2%. The fund had actually traded higher over that time prior to Wednesday’s 0.5% loss.
ETFs that target international debt were previously in focus as investors sought fixed-income products for diversification and higher yields. Now lower durations and reduced exposure to U.S. government debt are among the themes prized by bond investors. [International Bond ETFs for Yield and Diversification]
BWX has a 30-day SEC yield of just 1.7%, but its duration of 7.07 years indicates the fund is not hyper-sensitive to changes in U.S. rates. The ETF is also not too sensitive to credit risk as a combined 74% of the fund’s holdings are rated AAA or AA, according to State Street data.
Perhaps more important than those statistics is BWX’s country weightings. The fund truly lives up to its international billing as the U.S. accounts for just 0.04% of BWX’s weight. Japan and the U.K. combine of 35.6% of BWX’s country exposure. Additionally, BWX offers investors leverage to an economic recovery in the Eurozone.
Should that recovery continue to gain steam, previously high bond yields there should decline, leading to capital appreciation for European. That scenario is particularly appealing when rising U.S. yields are destroying investors’ principle. Italy, Spain, Belgium, France, Germany, the Netherlands and Austria combine for over 39% of BWX’s weight.
SPDR Barclays International Treasury Bond ETF
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of BWX.