Throughout much of the developed world, investors have become accustomed to low interest rates, but rates in some markets will not stay depressed indefinitely. In fact, some developed economies have already boosted borrowing costs this year.
Diverging developed world monetary policy makes country allocation a more important consideration when evaluating international fixed income exchange traded funds.
“Credit policies globally are likely to stay divergent due to varying rates of inflation and economic activity throughout the world. Until the Federal Reserve (Fed) and Bank of England (BoE) begin the process of normalizing interest rates upwardly – which the Reserve Bank of New Zealand (RBNZ) has already commenced to exert downward pressure on inflation, expect interest rates in the industrialized world to remain at or near record lows, while a growing number of emerging central banks pursues a tighter policy posture to curb domestic and external sources of inflation,” said S&P Capital IQ in a new research note.
For the investors looking for international fixed income exposure to primarily low interest rate nations or those countries where rates are expected to remain low into the foreseeable future, the $273 million SPDR Barclays Short Term International Treasury Bond ETF (NYSEArca: BWZ) is an option to consider. [Global Bond ETFs in the Limelight]
BWZ, with a modified adjusted duration of just 1.84 years, offers exposure to 34 countries, but 10 receive weights of 1% or less within the fund while perennially low rate Japan is 23% of the ETF.
Of BWZ’s nine other top-10 country exposures, only the U.K. is a credible near-term rate hike candidate. Some would argue that given the strength of the won and the pressure it applies exporters, South Korea should be lowering rates. Those countries combine for 9.2% of BWZ’s weight. [Sterling ETF Soars to Multi-Year High]
“Both the Bank of England and the Fed are likely to begin normalizing their monetary policies at different times in the coming eighteen months. The inevitability of the two central banks’ upward adjustment of credit costs will proceed to generate considerable nervousness. Consequently, corporate and government bonds of long duration will probably be the most profoundly rattled sector of the fixed income markets. In preparation for this eventuality, we recommend highly diversified sovereign exposures of short duration, corporate positions in low- and high-quality paper and the retention of a short-duration fixed income profile for the foreseeable future,” said S&P Capital IQ in the note.
BWZ features no exposure to New Zealand debt, which has helped the ETF remain firm in the face of two rate RBNZ rate hikes this year. Other rate cutters in the ETF include Mexico and Sweden and there has been talk Norway will be forced to follow suit with Sweden. Those countries combine for almost 5% of BWZ. [Norway ETFs Could Get Rate Hike Lift]
The ETF, which charges 0.35% per year, allocates a combined 84.7% of its weight to bonds rate AAA or AA. BWZ’s 30-day SEC yield is 0.55%.
SPDR Barclays Short Term International Treasury Bond ETF
