Investing in International Bonds

 

international bondsI recently enjoyed reading the Learn Bonds article “3 Reasons Your Portfolio Needs More Exposure to Emerging Markets.”  At the end of the article, a few non-exchange-traded funds were mentioned as investments worth researching further should you have an interest in investing in emerging markets.  Given my preference for exchange-traded products over non-exchange-traded products, I would like to mention a few ETFs worth exploring if you plan to venture into the world of internationally-focused securities.

For those readers who have a copy of my new book, The 5 Fundamentals of Building a Retirement Portfolio, I recommend consulting Chapter 5 for additional ideas and commentary on international investing.  For the purposes of this article, I’d like to make you aware of two ETFs worth researching further.

The iShares Emerging Markets Local Currency Bond Fund (LEMB) has exposure to countries like South Korea (21.07% weighting), Brazil (11.76%), Mexico (7.52%), Poland (6.35%), Turkey (4.47%), Indonesia (4.46%), and Thailand (4.42%).  This fund’s focus is on sovereign debt, and there is currency risk involved with an investment in the fund.  The expense ratio is currently 60 basis points, the 30-day SEC yield is 3.76%, and the effective duration is 4.20.  At this time, 79.67% of the fund is in bonds maturing in 10 years or fewer.

In terms of credit ratings, among the bonds that are rated, the focus is on investment grade debt.  With that said, there is some non-investment grade debt and a significant amount of debt that is currently not rated.  For more information on LEMB, including a complete list of the holdings, various fund documents, the history of fund distributions, and more, visit the section of iShares’ website dedicated to the fund.

Another fund worth exploring is the Van Eck Global Market Vectors International High Yield Bond ETF (IHY).  While not focused on emerging markets (although it may include emerging market debt), the fund does buy non-investment grade corporate debt of non-U.S. issuers.  As with LEMB, there is currency risk associated with this fund.  The debt purchased by IHY is typically denominated in euros, U.S. dollars, Canadian dollars, or the British pound.  At this time, the 30-day SEC yield is 5.81%, and the average effective duration is 3.87.  Despite the average effective duration being just 3.87, it should be noted that 12.9% of the fund is in debt maturing 30 years or more from now.

Additionally, regarding the expense ratio, while the net expense ratio is just 40 basis points, the gross expense ratio is 2.85%. Expenses are currently capped at 40 basis points, but that contractual agreement ends on September 1, 2013.  If you decide to purchase IHY, pay close attention to what happens to the expense ratio come next September.  For more information on IHY, including a list of the holdings, country of origin and credit ratings of the debt, and various fund documents, visit the section of Van Eck Global’s website dedicated to the fund.

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