New ETFs Yield Better Than Treasuries

11/21/2011 11:15 am EST


If you’ve been following financial markets for the past year or two, you’re acutely aware that investing in US government bonds really isn’t worth the trouble, says Todd Shriber of ETF Profit Report.

I’m not going to bore you with all the tired scare tactics that we’ve been seeing all too much lately. You know what I mean. Headlines like "Another US Debt Downgrade Coming; Stash Your Money in a Mattress."

Obviously, I made that up, but it’s in the vein of some of the wacky stuff I’ve seen recently about investing in debt issued by Uncle Sam.

I just look at things this way: The yield on ten-year Treasuries dipped below 2% again, and if you’re looking for something better from across the Atlantic, don’t get your hopes up. Yields on ten-year UK gilts are barely above 2%, while ten-year German bunds yield even less than equivalent Treasuries.

That’s the bad news. And it is bad news because a lot investors, particularly those that are planning for retirement, want fixed-income exposure. Fortunately, there are options from a booming part of the ETF universe, and I’m going to show you how to take advantage of this emerging trend.

I’m talking about international bond ETFs. Moreover, I’m talking about ETFs with exposure to emerging markets.

At the beginning of the month, PIMCO introduced an Australian Bond ETF (AUD) and announced plans for Canadian and German equivalents, while Vanguard announced its foray into the international bond ETF game as well. In other words, faster than a Kardashian marriage, investors are getting more and more choices when it comes to international bond ETFs.

For a while folks would ask me about getting exposure to emerging-market bonds, I used to point them in the direction of the PowerShares Emerging Markets Sovereign Debt ETF (PCY) and the iShares JPMorgan $ Emerging Markets Bond ETF (EMB). These were kind of the pillars of the international bond ETF community.

However, both include issues denominated in US dollars, so if you want an emerging-market bond ETF that doesn’t expose you to dollar weakness, you’ll have to take your business elsewhere. One of the funds I really like for investors that want some Asia-Pacific exposure is the actively managed WisdomTree Asia Local Debt ETF (ALD).

ALD is actively managed, but its expense ratio of 0.55% is decent for an actively managed ETF, and it features no greenback exposure. ALD’s holdings are denominated in the local currencies of South Korea, Malaysia, Indonesia, Philippines, Thailand, India, China, Hong Kong, Singapore, Taiwan, Australia, and New Zealand.

For those that want to broaden their EM bond horizons, I also like the WisdomTree Emerging Markets Local Debt ETF (ELD). Also actively managed with a 0.55% expense ratio, ELD features bonds denominated in the local currencies of Brazil, Chile, Colombia, Mexico, Peru, Poland, Turkey, South Africa, Russia, Malaysia, Indonesia, Philippines, Thailand, China, and South Korea.

For a Latin American flair, try the Market Vectors LatAm Aggregate Bond ETF (BONO), but I will tell you the bonds featured in BONO are denominated in dollars or euros.

The investment case for this trio is simple. ALD’s yield is barely higher than that of ten-year Treasuries, but the ETF has a far better chance for capital appreciation within your portfolios.

Regarding ELD and BONO, they feature 30-day SEC yields of 4.82% and 6.03%, respectively. Sounds a lot better than Treasuries to me.

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