How To Get Diversity With International Bond ETFs

Have you ever considered going global with bond-focused exchange traded funds (ETFs) in an effort to diversify your portfolio? International bonds can help you.

The same diversification benefits reveal themselves when you invest overseas in stocks as they would when you invest in international bonds. The prospect for greater long-term returns can occur, as well as lower correlations, reports Kyle Waller for Index Universe.

Although the diversification benefits of investing globally were on hold in the midst of the recent worldwide economic crash, the correlations are not all parallel.  Global diversification (and diversification in general) can soften the blow of downturns, such as the latest one.

International bonds have a lower correlation to the broad market than Treasuries. The key point is that while international treasury bonds of developed countries have very little credit risk, the risk of default is not zero, and sovereign risks of each country should be taken into account.

By using international bonds in a portfolio you add diversification by spreading out the sensitivity of U.S. interest rate movements, which affect bond prices. International governments will have different monetary policies and interest rates that will affect that government’s Treasury bond prices differently.

• SPDR Barclays Cap Short-Term International Treasury Bond (BWZ): up 2.8% since Jan. 30 inception

• S&P Citigroup 1-3 Year International Treasury Bond (ISHG): down 0.12% since Jan. 28 inception

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