ETFs for Global Income
07/03/2017 2:52 am EST
Just as U.S. investors have a “home country” bias by investing the bulk of their equity investments in U.S. stocks, they are also reluctant to invest the income portion of their portfolio in foreign bonds, observes Nicholas Vardy, editor of The Global Guru.
That’s ironic because foreign debt -- when you take both sovereign and corporate debt together -- is the single-largest asset class in the world.
While U.S. investors are tip-toeing back into international stock investments in 2017, foreign bond investments remain the red-headed stepchild in international investing.
U.S. investors often point to currency risk as the reason for avoiding foreign income investments. But there are ways to invest in foreign income investments without exposing yourself to currency risks.
Some international bond ETFs, especially those targeting emerging markets, hold foreign debt securities denominated in U.S. dollars. These offer some of the highest yields you can earn and come with no currency risk attached.
Global X SuperDividend ETF (SDIV)
This ETF tracks the Solactive Global SuperDividend Index, an equally weighted index consisting of 100 equally weighted companies that rank among the highest-dividend-yielding equity securities in the world.
Now, remember that “global” doesn’t mean international. SDIV has about one-half of its investments in U.S. stocks.
As U.S. dollar-based investments, you are not taking in any currency risk in this section of the portfolio. The remainder is invested in high-dividend-yielding companies in Europe, Australia, Asia, Canada and Latin America.
In terms of sectors, it’s no surprise that SDIV focuses on financial services and consumer cyclicals, which together make up about 60% of its portfolio.
SDIV yields an impressive 6.77%, pays dividends monthly and charges a fee of 0.58% annually. SDIV has generated a total return of 5.61% year to date.
PowerShares Emerging Markets Sovereign Debt (PCY)
This ETF invests in U.S. dollar-denominated emerging markets bonds. As such, it does not have any direct foreign currency exposure. Emerging markets’ sovereign bonds do carry credit risk, whereas U.S. Treasuries are "risk-free."
Thanks to improving fundamentals and relatively higher yields in emerging markets, demand for emerging-markets’ debt has skyrocketed during the last few years. Emerging-markets’ debt has also historically exhibited low correlations to U.S. bonds.
PCY yields 4.98% -- a substantial premium over U.S. debt. It pays out monthly and has generated a 7.59% gain so far in 2017.
iShares JPMorgan USD Emerging Markets Bond ETF (EMB)
The iShares JPMorgan USD Emerging Markets Bond ETF tracks an index of U.S.-dollar-denominated sovereign debt issued by emerging-market countries with more than $1 billion outstanding and at least two years remaining in maturity.
Most importantly, EMB holds USD-denominated rather than local-currency debt. This eliminates currency risk for U.S. investors.
EMB was one of the first emerging-market debt ETFs. As a result, the ETF has terrific liquidity, making it a top choice for many investors. EMB yields 4.68% and pays out monthly. It has generated a 7.13% gain in 2017.