Foreign Fixed Income (BWX): True Diversification Has Finally Arrived

Everyone’s talking about the latest exchange-traded fund… and with good reason. This is the first ETF that’s tracking an international treasury bond index.

The first international fixed income exchange-traded fund is the SPDR Lehman International Treasury Bond ETF (BWX). It intends to provide investment results that, before fees and expenses, correspond to the price/yield performance of the Lehman Brothers Global Treasury ex-US Index.

At the moment, we’re talking a 4.35% yield, which is not much more than the 10-year U.S. Treasury. And 40% of the bonds mature in the intermediate range of 5-10 years.

So why is this new ETF of any intrigue you ask? Why is this important?

Well, in recent years, all assets have moved in the exact same direction. Stocks, bonds, commodities — it hasn’t mattered one iota. When stocks have moved higher, bond prices and commodity prices have also appreciated. (And vice versa.)

It follows that different asset classes haven’t really served as a way to diversify one’s risk; rather, it’s simply been a matter of how much risk you’ve wanted to take. You haven’t gotten any "zag" in your portfolio… it’s all been "zig."

And that’s not what diversification is supposed to do. When you diversify, you’re supposed to have some things that go down while other investments go up. (And vice versa… he repeated.)

Enter international bonds. International fixed income is the one asset type that actually has a negative correlation with the SPDR S&P 500 (SPY). (For financial geeks like me… that means… we’ve found a genuine diversifier.)

Before we uncap the champagne corks, we should note that the SPDR Lehman International Treasury Bond ETF (BWX) has an annual expense of 0.50%. That’s on the high side for a bond offering.

Yet BWX will serve up monthly income. And with continued depreciation of the U.S. dollar, BWX may just be a safe way to diversify AND get some double-digit annual gains.

Disclosure Statement:  As a Registered Investment Advisor, Pacific Park Financial, Inc. may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

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