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Time To Get Regional With Bond ETFs

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Bond ETF investing is continuing to gain popularity with a number of investors thanks to the strong performance in the asset class during 2011. Broad funds such as (AGG - Free Report) and (BND - Free Report) , which both track a broad benchmark of fixed income securities that trade in the U.S., have both put up solid performances over the last twelve months of 4.6% and 4.3%, respectively. This is in sharp contrast to SPY which finished the year flat and only managed to do so after a late surge in the fourth quarter of the year. Given this stock underperformance and the broad uncertainty starting off 2012, it may be worth it for most investors to take another look at the bond ETF space for their portfolios.

While AGG and BND are both decent choices, a relatively new trio of bond ETFs could merit further inspection. All three of these products allow investors to gain assorted fixed income exposure while also diversifying out of dollars as well. This could help investors to not only boost yields, but gain a more varied profile in their bond components as well (also see Go Local With Emerging Market Bond ETFs). Furthermore, all three offer exposure to more than just one country suggesting that even if a single nation’s bond market falters, it isn’t likely to hurt the overall performance of the fund too much. If this strategy sounds promising, any of the following three bond ETFs could make for great additions to a well-diversified portfolio:

WisdomTree Asia Local Debt Fund

For a broad play on the Asia-Pacific bond markets—outside of Japan—ALD is one of the few options available. The fund seeks to give investors a high level of total returns consisting of both income and capital appreciation, investing in local currency denominated debt in 12 different nations. The basket of nations includes a 50/50 split among developed markets (South Korea, Hong Kong, Singapore, Taiwan, Australia, and New Zealand) and emerging countries (Malaysia, Indonesia, Philippines, Thailand, India, and China) which should also help the fund balance between safety and growth (see Top Three Emerging Market Consumer ETFs).

For individual country holdings, six nations roughly make up about 11% each while all countries are allocated at least 5% of the portfolio. For the big allocations, assets flow into Malaysia, Thailand, and Indonesia on the emerging side, and Australia, South Korea and Singapore on the developed. Given the perceived risky nature of many of these economies, most bonds are shorter term in nature. As a result, the effective duration on the fund is just 2.75 years but the 30-Day SEC Yield is at a pretty solid 2.25%.

Market Vectors LatAm Aggregate Bond ETF

For those looking to make a play on the Latin American market, BONO is truly the only option available. The fund tracks the BofA Merrill Lynch Broad Latin America Bond Index which is composed of external and local currency Latin American sovereign debt and the external debt of non-sovereign Latin American issuers denominated in USD or Euros. The fund holds 32 securities in total and charges an expense ratio of 49 basis points a year for its services (see Brazil Small Cap ETF Showdown).

Currently, securities from the two giants of Latin America—Brazil and Mexico—dominate the holdings of the fund making up 37% and 29.8% of the benchmark, respectively. Beyond these two, however, one gets high levels of exposure to smaller economies in the region such as an 11.5% weighting to Colombia and a 6.5% weighting to Venezuela. Additionally, it should be noted that this fund includes far higher weightings to junk securities than either of its counterparts on the list as well as a solid level of exposure to corporate bonds. Thanks to the corporates and high level of junk bond exposure, the fund has a far higher yield than the other two on the list, paying out 5.8% in 30 Day SEC Yield terms. However, investors should also note that the fund does put close to 60% of its assets in U.S. denominated securities, suggesting that the fund may not be a very good way to diversify out of greenbacks but it could be the regional bond ETF ticket to higher yields.

WisdomTree EuroDebt Fund

This active ETF looks to give investors a high level of total returns consisting of both income and capital appreciation. EU seeks to do this by purchasing Treasury debt of a variety of European countries, all of which have their bonds denominated in euros. Currently, the fund holds 38 types of securities in total and it charges investors a rock bottom expense ratio of 35 basis points a year (read EUFN: The Best ETF For The Euro Crisis).

In terms of individual country holdings, bonds from three countries—Germany, France, and Luxembourg—are the only ones to take up more than 12% of the assets, although Finnish, Belgian and broad euro bonds all make up at least 8% as well. For individual securities, mid-term French government bonds—which both have coupons in the 4.0-4.25% range, take the top two spots, both they are closely trailed by longer-term government bonds which have a coupon of 4.75%. Despite the focus on longer-term securities in the top few securities, the rest of the holdings profile has a more short-term focus. This gives the fund an effective duration of 5.9 years but a slightly lower yield of just 2.1%, meaning that while interest rate risk isn’t too high, neither is the current income.

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