It is not much of a secret that billionaire investor Warren Buffett is a huge fan of stocks, especially when compared with fixed income securities. After all, equities have provided Buffett with his incredible fortune over the years and they still make up a huge portion of his investment portfolio. Beyond this, Warren has also attacked U.S. Treasury bonds as of late, decrying what a terrible investment these securities are for most.
Mostly, this is due to inflation and the devastating impact that this has on total returns. Warren highlights that since he took over Berkshire Hathaway (BRK.B - Analyst Report), an investment in a continuously rolled U.S. Treasury bill would have produced a return of 5.7% a year. Yet when factoring in inflation and taxes, the real return would have been pretty much been zero over this extremely long time period, suggesting investors may want to look past these securities for their exposure over the long haul (read Three Bond ETFs For A Fixed Income Bear Market).
Yet with that being said, Buffett doesn’t hate all types of bonds, as Berkshire Hathaway still has a sizable chunk of assets in some countries’ fixed income assets. Among the biggest holdings for Berkshire are bonds from strong, developed market nations from around the world. In fact, according to the recent annual report, close to $8.6 billion of the firm’s portfolio is tied up in securities from Germany, the UK, Canada, Australia, and the Netherlands, a figure that is nearly three times the value that the company has in U.S. government bonds (read The Best Bond ETF You Have Never Heard Of).
This bet by Warren and Co. in the fixed income market suggests that the company still sees some value in certain types of fixed income, and especially in some of the top rated Western nations in the world. This also suggests that Warren is still unsure of many European debt markets—and especially the high risk PIIGS nations—and that Berkshire is valuing safety above all else when it comes to his fixed income positions. “If a firm is looking at government debt as a source of potential liquidity, then it’s extremely important to remain in these bulletproof nations,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said in a BusinessWeek interview. “The list of names is certainly on the higher end of sovereign credit.”
As a result, investors may want to tilt their portfolios accordingly in order to match the Oracle of Omaha and his outlook on the bond world. Unfortunately, this will be hard to do for most, save for a few relatively new ETFs that are targeting the space. Below, we briefly profile some of the options investors have in this corner of the fixed income world for those that are looking to follow Buffett into the developed market bond space:
German Bond ETFs
Germany represents an intriguing bond choice for investors for a few reasons. First, the country’s export driven economy has held up well in this difficult environment, leaving the country in a solid position. This is further compounded by the country’s role as the safe haven of Europe, pushing investors its bonds when times are tough in other nations. For investors looking to play this bond market, there are currently three choices to pick from:
PIMCO Germany Bond Index Fund - This ETF tracks the BofA Merrill Lynch Diversified Germany Bond Index which produces a fund of about 50 securities. The product charges investors 45 basis points a year in fees and has an annual yield of about 1.9%. Currently, corporate securities make up about three-fifths of the fund while state debt comprises the rest. Thanks to this, the fund has a focus on short-term securities and puts a premium on safety over yield.
PowerShares DB German Bund Futures ETN - This ETN solely focuses on German government bonds, tracking an index of mid-term notes from the Federal Republic. The note charges investors 50 basis points a year and also collateralizes the investment with short-term U.S. Treasury bills as well. Investors should also remember the ETN structure of the product and the implications of this. The product will have no tracking error but does carry the risk of the underlying issuing institution, Deutsche Bank (read Italian Bond ETFs: High Risk, High Reward).
ProShares German Sovereign/Sub-Sovereign ETF - This new product from ProShares looks to give investors another way to play the German bond market from a broad perspective. The ETF holds 33 securities in its basket and charges expenses of 35 basis points a year to investors. However, in terms of holdings, it is reversed when compared to BUND, as the product has close to 60% of its assets in government debt and the rest in corporate. Still, the fund only focuses on investment grade securities, once again putting a premium on safety over yield.
Australia Bond ETFs
Australia is another top spot for investors seeking to deploy their capital in a safe location. The country has a relatively solid budget situation, a high discount rate which helps increase yields, and strong demand for its key commodities. Thanks to these factors, as well as its low dependence on European affairs, it is seeing renewed interest from many investors. As a result, investors who are seeking to gain more exposure to this trend should consider either of the following two bond ETFs:
PIMCO Australia Bond Fund - PIMCO’s entrant in this space looks to hold about 30 securities while charging investors 45 basis points a year in fees. While the product might not have much in the way of volume, it does pay out a decent yield of 3.5%. Assets in this ETF are tilted towards government debt at just over 50% while corporate securities comprise the rest of the holdings. From an individual holding perspective, Treasury bonds from several of Australia’s states dominate the top few spots.
WisdomTree Australia and New Zealand Debt Fund - For investors seeking a play on both Australia and New Zealand, this fund is tough to beat. The product holds 30 securities in total and like AUD, charges investors 45 basis points in fees. However, AUNZ does have a greater focus on government debt, putting over 70% of its assets in the security type, leaving the remainder for corporates. It should also be noted that the vast majority of assets focus on the Australian market so the product looks to be very influenced by events taking place in the nation (read Australia Bond ETF Showdown).
Canada Bond ETF
Given the surge in oil prices as of late, as well as perception that prices could remain high for quite some time, an investment in Canada’s bonds could be an interesting pick. This is because continued high prices for oil will keep demand for the Canadian dollar high and result in inflows and currency appreciation for the currency. Additionally, the budget situation for Canada is quite stable, suggesting that the country should be able to weather any shocks from bond vigilantes as well. For investors intrigued by this, there is currently one ETF available that focuses on this market:
PIMCO Canada Bond ETF - This fund tracks the BofA Merrill Lynch Diversified Canada Government Bond Index which gives broad exposure to fixed income securities from Canada. Currently, the product holds 27 securities in total and has fees of 0.45% a year, in line with products focusing on other nations. However, investors should note that the fund is almost entirely focused on government debt, giving the fund a longer-term focus than most on this list. In fact, long-term bonds comprise a plurality of holdings at 43% of the total, giving the fund an effective duration of about 13.3 years (read Canada Equity ETFs Worth A Look).
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