More often than not when investors think of exchange traded funds that hold Treasury bonds, their focus is on those funds that hold U.S. Treasuries.
That is understandable. After all, the home country bias phenomenon is well-documented and U.S. Treasury ETFs collectively hold tens of billions in assets. However, those traits do not diminish the allure of international Treasury offerings such as the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX).
BWX, which is nearly seven years old, has turned in a solid showing this year with a 5% gain. With a rate hike or two from the Federal Reserve believed to be inevitable, BWX’s utility as a core position for investors looking for global bond exposure increases. [Hedging U.S. Rate Risk With International Bond ETFs
Another way to look at BWX’s potential is that at a time when many market observers are betting on a Fed rate hike as soon as the first quarter of 2015, other global central banks remain accommodative.
“The drop in international sovereign yields has been caused by accommodative policies by central banks, such as the European Central Bank and the Bank of Japan,” said State Street Global Advisors Vice President and Head of Research Dave Mazza in an email exchange with ETF Trends. “In fact, sovereign yields have fallen in 21 of the 24 currencies represented in the Barclays Global Treasury Ex-US Capped Index. Similarly, falling sovereign credit spreads relative to US treasuries have contributed to performance.”
Although much attention has been paid to the strength of the U.S. dollar, the greenback has suffered against the yen due to safe-haven demand for the Japanese currency. Additionally, the British pound and Australian dollar have stacked up favorably against the U.S. dollar this year. Japan, the U.K. and Australia combine for 34.3% of BWX’s country weight, according to State Street data.
“Weakness in the US dollar relative to major currencies has also made a positive contribution to BWX returns. A weak US dollar relative to the Japanese Yen, British Pound and the Australian dollar has been the primary driver of positive FX return. A weak US dollar increases the total return on investment denominated in foreign currencies,” added Mazza.
Although the U.K. is BWX’s second-largest country weight, that is not a thorny issue for the ETF even as it is widely expected the Bank of England will soon enter a tightening cycle. The U.K. represents just 7.60% of BWX’s weight, well below the 23.1% the ETF devotes to Japan, a country that is unlikely to raise rates anytime in the near future. [Pound ETFs Push Higher]
BWX also features exposure to nine Eurozone countries, a plus when the ECB appears comfortable in a dovish posture. Other country weights include 1.2% to Sweden, itself a recent rate cutter, and 4.6% to South Korea, a country that may be forced to seriously consider multiple rate reductions to weaken the won.
“State Street Global Advisors expects global central banks to remain accommodative and for interest rates to stay low through the end of the year, which is a favorable backdrop for international treasuries. Accelerating global growth tends to put downward pressure on sovereign credit spreads, which may continue to be a major source of return going forward,” said Mazza.
Investors do not sacrifice credit quality by opting for BWX over a U.S. Treasury ETF. Nearly 78% of the ETF’s 567 holdings are rated Aaa or Aa. BWX features a modified adjusted duration of 7.21 years and an average yield to worst of 1.55%. [Spotlight on an International Treasury ETF]
SPDR Barclays International Treasury Bond ETF
Tom Lydon’s clients own shares of BWX.