In a previous article, we highlighted the benefits of getting international bond exposure in the context of using passive funds to achieve this level of fixed income diversification. Here, active strategies will be discussed in their application to the international bond market, which could be beneficial for further risk mitigation.
When referring to a fund, an active strategy uses the assistance of a portfolio management team that can adjust the holdings of the fund in order to suit current market conditions. In the international bond market, this can be particularly useful, as various countries are exposed to their own market, geopolitical, and economic nuances.
Benefits of Using an Active Strategy
Global fixed income markets carry a high degree of complexity. Because of this, tapping into the expertise of a portfolio manager can be beneficial in order to not only mitigate the risks associated in the global bond market, but to locate opportunities in fixed income for diversification and yield benefits.
That said, some prime benefits of an active strategy for international bonds include:
- Higher yield opportunities: Active managers can handpick debt issues that offer higher yields compared to their U.S. bond counterparts. They can identify which specific bonds are exhibiting higher yields depending on a specific country’s macroeconomic environment and the policies set forth by their respective central banks.
- Active risk mitigation: Compared to a passive fund, active fund managers can allow for dynamic de-risking. They do so by reducing holdings in certain bonds that are exhibiting high volatility or selling off due to market or economic factors. For example, if a credit rating agency downgrades the debt on a country, an active manager can reduce the bond holdings of that particular country. Meanwhile, a passive fund must continue holding these bonds.
- Avoiding country bias: In a passive fund, investors could be heavily tilted towards only specific countries that have the most debt issues. To avoid this capitalization-weighted country bias, active managers can tailor the exposure to specific countries. That way, the fund isn’t top heavy in one or a few countries.
- Locating value: The international bond market is vast. A universe of opportunities exist when investors are looking to get exposure. An active management strategy can identify international bonds that are trading at a discount relative to their inherent value. A passive fund tracking an index, on the other hand, is tethered to its constituents. This gives active management funds a greater degree of flexibility.
Active Exposure to Broad International Markets
Again, exchange-traded funds (ETFs) can open up opportunities for international bond exposure if investors are looking for easy ingress. For core international bond exposure in an active ETF wrapper, consider this pair of options.
First up is the JPMorgan International Bond Opportunities ETF (JPIB), which received a silver Morningstar Medalist Rating. The fund offers deep diversification, with close to 900 bond holdings (as of September 12). Those holdings are spread across exposure to developed and emerging market countries. Corporate developed market debt (high yield and investment-grade) comprise the majority of the fund (56%). However, it also allocates almost 22% to EM debt to maximize yield opportunities.
Another option is the Franklin International Aggregate Bond ETF (FLIA), which primarily invests in international government, sovereign and corporate bonds using top-down macro views and bottom-up fundamental research to locate opportunities. One of the highlights of the fund is its low expense ratio of 0.25%, or $25 per every $10,000 invested.
Active EM Bond ETFs
Compared to developed countries, emerging market countries present a unique set of challenges when navigating their bond markets. EM countries have their own regulatory, geopolitical, and economic risks to consider. However, if investors are willing to accept these risks, they could be rewarded with higher yields.
The assets of these developing countries have inherently higher volatility. That requires market knowledge and expertise of professionals who are privy to EM bond markets. As such, it can help to assuage these risks with the help of active management.
With that, there are ETFs that address exposure to EM bonds. One of these is the SPDR DoubleLine Emerging Markets Fixed Income ETF (EMTL). The fund’s management comes by way of the DoubleLine Emerging Market Fixed Income team with a vast level of experience. To identify opportunities, the fund uses a five-step approach that leverages bottom-up research with sovereign macro overlays.
For those looking for a cost-effective solution, an option to consider is the actively managed Global X Emerging Markets Bond ETF (EMBD). The fund comes under the watchful eyes of portfolio managers with extensive track records in EM debt strategies. One of the aims of the fund is to target EM countries that offer high-yielding potential with a low expense ratio of 0.39%, which is less than the ETF Database Category Average as well as the FactSet Segment Average.
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