The ECB Is Electrifying Bond ETFs
The European Central Bank is expanding its quantitative easing program to include corporate debt as a way to stimulate its economy. As demand for Eurozone debt rises, investors can look to international corporate bond exchange traded funds to capitalize on the momentum.
The accommodative measures, bond purchasing programs and and even negative interest rate policies have helped support the international bond market. In a bid to support their flagging economies, many developed economies have implemented unconventional monetary policies, such as negative interest rates out of the European Central Bank and the Ban of Japan, which triggered a rally in global fixed-income markets. Now, the amount of global sovereign debt with negative yields has surpassed $10 trillion for the first time, according to Fitch Ratings - bond prices and yields have an inverse relationship, so falling yields correspond with rising prices.
The loose monetary policies have been a boon for international government bonds and related ETFs. For example, the SPDR Barclays International Treasury Bond ETF (NYSEA:BWX) increased 7.5% and iShares Core International Aggregate Bond ETF (NYSE:IAGG) gained 4.2% year-to-date while the iShares Core U.S. Aggregate Bond ETF (NYSE:AGG), which tracks the benchmark Barclays Aggregate Bond Index, rose 3.5%.
Looking ahead, investors may find opportunities in international corporate bond-related ETFs, which also include a heavy tilt toward European debt, as the ECB extends its bond purchasing program to include investment-grade corporate issues.
The ECB has revealed on June 8 it will start acquiring euro-denominated investment-grade bonds with maturities of over six months and up to 30 years from companies incorporated within the Eurozone. The central bank also said that it is not required to sell its holdings in the event of a downgrade to junk, which would extend its group of covered bonds to so-called fallen angels.
Moreover, the ECB has said it will be “market neutral” in in purchases, and negative-yielding bonds may be included as long as the yield is above the central bank’s -0.4% deposit rates.
While the ECB has not stated how much they are going to acquire, analysts project asset purchases to be between five and ten billion euros per month. At the March meeting, ECB President Mario Draghi announced the bond purchasing program will increase to €80 billion from €60 billion.
Given the increased buying pressure, Eurozone bond yields fall further and prices rise. While there are no Europe-focused speculative-grade debt ETFs on the market, U.S. investors can still gain exposure to European markets through international investment-grade bond ETFs with heavy tilts toward these countries.
For example, the PowerShares International Corporate Bond Portfolio (NYSE:PICB) holds 23.1% U.K., 18.8 France, 8.9% Germany, 6.9% Italy, 6.2% Netherlands, 4.7% Spain, 3.5% Switzerland and 2.7% Sweden. PICB has a 6.48 year duration and a 1.37% 30-day SEC yield.
The SPDR Barclays International Corporate Bond ETF (NYSE:IBND) includes 15.0% France, 12.6% U.K., 10.9% Germany, 7.7% Netherlands, 7.2% Italy, 5.3% Spain, 5.0% Switzerland, 3.0% Sweden, 2.2% Belgium, 0.6% Denmark, 0.6% Norway and 0.2% Portugal. The fund also includes a hefty 24.1% tilt toward the U.S.
However, potential investors should be aware that the ECB previously stated bank bands will not be eligible for the corporate bond purchasing program, including any company regulated by the ECB's single supervisory mechanism and any company with a non-Eurozone parent regulated as a bank. PICB and IBND both include heavy 50% exposure financial sector.
Additionally, the ECB's expanded quantitative easing program may act as a rising tide that lifts all boats. With yields falling, Eurozone investors could look to riskier speculative-grade debt to generate greater yields, bolstering the high-yield market. U.S. investors can gain exposure to European junk-rated corporate debt through international ETF options as well.
For instance, the VanEck Vectors International High Yield Bond ETF (NYSE:IHY) includes 15.6% exposure to U.K., 9.0% Italy, 6.0% Germany, 6.7% France, 3.8% Luxembourg, 2.4% Spain, 1.4% Liechtenstein, 1.4% Switzerland and 1.9% Netherlands. IHY has a 3.81 year duration and a 5.80% 30-day SEC yield.
The SPDR Barclays International High Yield Bond ETF (NYSE:IJNK) top European country weights include U.K. 16.5%, Italy 13.6%, France 9.9%, Germany 8.9%, Luxembourg 8.3% and Netherlands 4.1%. IJNK has a 4.11 year duration and a 5.24% 30-day SEC yield.
The iShares International High Yield Bond ETF (NYSE:HYXU) includes Italy 22.5%, Germany 13.6%, U.K. 15.9%, France 9.8%, Luxembourg 5.3% and Spain 5.2%. HYXU has a 3.56 year duration and a 3.85% 30-day SEC yield.
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