With the Eurozone fixed-income market growing harder to trade, bond investors may be turning to international debt-related exchange traded funds to get their Europe fix.
For instance, investors can gain European bond exposure through broad international fixed-income ETFs, such as the SPDR Barclays International Treasury Bond ETF (NYSEArca: BWX) and the iShares International Treasury Bond ETF (NYSEArca: IGOV). BWX includes 7.8% U.K., 6.6% Italy, 6.4% France, 5.1% Germany, 4.6% Belgium, 4.6% Netherlands, 4.5% Spain, 3.3% Austria, 1.8% Ireland, 1.5% Denmark, 1.4% Switzerland and 1.3% Finland. IGOV includes 6.7% Italy, 6.7% France, 6.1% Germany, 5.2% U.K., 4.8% Netherlands, 4.6% Austria, 4.6% Belgium, 4.5% Spain, 4.4% Denmark, 4.3% Portugal 4.2% Ireland, 3.5% Finland, 3.4% Sweden, 2.1% Switzerland and 1.7% Norway. [Bond ETFs to Capitalize on ECB Easing]
Alternatively, the Vanguard Total International Bond ETF (NYSEArca: BNDX) provides broad exposure to international debt, including foreign investment-grade government, corporate and securitized debt while hedging currency exposure, which can diminish volatility attributed to the Forex risks. BNDX also includes 11.7% France, 8.5% U.K., 9.5% Italy, 8.4% Germany, 5.3% Spain and 4.5% Netherlands.
Speculation on monetary policies has helped Germany- and Italy-specific bond exchange traded notes strengthen over the past year. For instance, the PowerShares DB German Bond Futures ETN (NYSE Arca: BUNL) increased 13.1% over the past year and the leveraged PowerShares DB 3x German Bond Futures ETN (NYSE Arca: BUNT) jumped 46.3%.
As Europe’s money and debt markets become less liquid than U.S. counterparts, fixed-income investors could turn to more liquid international bond ETFs, similar to what happened with U.S. bond ETFs after banks hoarded investment-grade debt in response to new regulatory liquidity rules.
Goldman Sachs analyst Alain Durre argues that increased regulation in the European banking industry could diminish liquidity in the primary markets, reports Anchalee Worrachate for Bloomberg.
“With the expansion of bank balance sheets becoming more expensive owing to regulatory changes, the liquidity of European markets may be threatened,” according to Goldman Sachs.
Consequently, without enough bond securities to go around, investors may tap into ETF options instead.
“If times are good, ETFs can be more liquid than bonds because there is active secondary market trading, something which is lacking for bonds,” Christoph Fick, senior money manager at Pioneer Investments, said on The Globe and Mail.
Nevertheless, Fick warned of potential liquidity problems down the line, similar to what could happen in the U.S. as the Fed thinks about hiking interest rates. [Some Bond ETFs May Be Providing The Illusion Of Liquidity]
“But if everyone wants to get out of credit at the same time, owning the ETF won’t be an advantage,” Fick added.
For more information on the fixed-income market, visit our bond ETFs category.
Max Chen contributed to this article.