ETF Expert

In recent months and years, most asset types (e.g., stocks, bonds, commodities, etc.) traveled in the same direction; that is, when stock indices moved up, many commodites picked up as well. Similarly, when bond prices gained ground and pushed yields lower, many viewed stocks as more desirable.

It follows that the "golden rule" of diversifying across asset classes may not be achieving the goal of risk reduction. Indeed, even international and emerging market stocks seem to correlate highly with the direction of domestic stocks.

Does this mean that everything moves in the same direction such that… it’s only a matter of degree?

Clearly, cash remains the ultimate safe haven. And high-yield money markets with 4.5%-5.0% yields are significantly higher than the historical rate of return for cash instruments (3%). Yet a 5% return is unlikely to get many investors the portfolio results needed for financial freedom.

Enter international bonds. Here is the one asset class that may even move in a different direction than the majority of other assets (e.g., domestic bonds, domestic stocks, international stocks or high-flying commodities, etc.).

With escalating Venezuela tensions, Middle East concerns, as well as the potential for a significant drag on the economy by a weaker housing market, one might look to foreign fixed income. Yet the ETF world has yet to serve up the goods.

Vanguard recently offered up 4 new Bond ETFs, yet none of them capitalized on the growing interest in international possibilities. Vanguard’s domestic offerings included:

Vanguard Total Bond Market Fund (BND)
Vanguard Short Term Bond Fund (BSV)
Vanguard Intermediate Term Bond Fund (BIV)
Vanguard Long Term Bond Fund (BLV)

Perhaps the best solution at the present time has come in the form of the closed-end mutual fund (CEF) — the ETF’s distant cousin. One CEFs that may be worthy for international fixed income comes from the Nuveen family.

Nuveen Global Government Income (JGG) has an annual yield of 8.3% that turns out on a quarterly basis. First offered at a price point of 20 in July of 2006, it still trades in and around 20, without excessive volatility. The 2.1% each month for participation, alongside the potential for appreciation in a flight to bonds, makes JGG a reasonable "diversifier."

Disclosure statement: Some of Pacific Park’s investment clients may hold positions in any of the investments mentioned above.