Home » Funds » Fixed-Income ETFs Rally Despite Europe’s Pending Recession

Fixed-Income ETFs Rally Despite Europe’s Pending Recession


It was recently announced by the World Bank, and backed by the International Monetary Fund, that the looming recession facing European nations would slow global economic growth, according to the Associated Press.

“In its annual report, the bank substantially cut its forecasts for growth in both developed and poorer nations. It now projects that the global economy will expand 2.5 percent this year and 3.1 percent in 2013. That’s down from a June forecast of 3.6 percent growth for both years.”

The IMF confirmed this projection by releasing its own forecast Tuesday of “global growth of 3.25 percent this year, slower than the 4 percent pace it projected in September. The 17 nations that share the euro will shrink 0.5 percent this year.   In September, the IMF had predicted 1.1 percent growth for the region,” both reports taken from NPR.

Although “weaker growth in India, Brazil and other developing countries will likely slow global economic growth” as well, a major reason for this stagnation is Europe’s debt crisis which has steared developing countries to take “steps to prevent growth from overheating and fueling inflation.” Furthermore, “Europe’s debt crisis has made investors nervous, so they are lending less to many emerging-market governments.  That has pushed up interest rates in those countries,” as indicated by the World Bank.

The news comes in as The Vanguard Group, Inc – one of the largest exchange-traded funds firm in the world- delays its introduction of two new international bond index funds and exchange-traded funds, stated by Investorplace.com; although it should be noted that Vanguard has not publicly stated reasons for the delay.

However on Vanguard’s website information pertaining to Europe’s credit rating was released.  “On January 13, nine European countries joined the United States on Standard & Poor’s list of weakened sovereign debt issuers.  S&P also downgraded Europe’s debt “rescue fund,” which is guaranteed by the Eurozone’s largest members.  France (the fund’s second-largest guarantor) and the rescue fund each lost their AAA credit ratings in the process.”  One can only draw the conclusion that the dim European outlook has contributed to Vanguard’s decision-making process.

According to Reuters, there are “almost 1,400 ETFs available in the U.S. and another 900 filed as future offerings with the U.S. Securities and Exchange Commission.”  Information taken from ETFDatabase tells us that there were only a handful of bond ETFs available to U.S. investors just a few years ago.  Today, popular ETF providers such as Vanguard, BlackRock, State Street and others help fuel an industry that has seen a “significant growth in international bond products.”

In the two weeks during the news junkets, from January 13-27, investors responded by increasing BlackRock’s iShares Global Inflation-Linked Bond Fund (AMEX: GTIP) by 2.06%, from $50.06 to $50.10 (based on a $0.01 bid/ask spread).  According to iShares’ website, since its inception on May 18, 2011, the fund has maintained an average annualized total return of 1.63% with nearly $15.4M in total net assets, a market cap of $15.36M, and a 30-day SEC yield of 2.60%; dividend yield for the fund is 1.60%.  Also, a one day trading high in volume YTD of nearly 5,000 shares was reached on January 6 when the average number traded has been less than 1000.  Beta, which is a measure of market risk, for GTIP is -0.45.  This fund generally corresponds to the price and yield performance, before fees and expenses, of the BofA Merrill Lynch Global Diversified Inflation-Linked Index.  It also gives investors exposure to U.S. Treasuries and foreign inflation-linked sovereign debt.

Standard & Poor’s SPDR Barclays Capital Int’l Treasury Bond ETF (AMEX: BWX)  With a one year annualized total return of 3.99% and a total net asset value, NAV, of 3.60% ($1,716.96M), BWX is trading at a premium of 0.35%; market cap for BWX is $1.61B and a beta of 0.27.  The fund also maintains a dividend yield of 3.27% with an average maturity of 9.07 years, according to State Street Global Advisors.

In comparing BWX with the SPDR S&P 500 ETF index (AMEX: SPY), the fund was trailing along in performance – the same period – until mid-trading day January 26 when trading spiked for BWX.  The fund surpassed SPY at a rate of 3.56% to close at $59.77 with 10.08k moved that day in volume (SPY closed at $131.88 with 184.88M moved) to end the week at $60.47 and doubling in volume to 27.21k, SPY closed at $131.82 and 135.26M in volume.

Also, based on a 30-day SEC yield, BWX is 1.95% where as SPY’s is 1.93%.  Additionally, the fund closed out the period- mentioned previously- at $60.48 (+3.97%) compared to $131.82 (+2.31%) for SPY, information serviced by Macroaxis, an online provider of investment management software applications. The Index is designed to track the fixed-rate local currency sovereign debt of investment-grade countries outside the United States that have a remaining maturity of one year or more.

SPDR DB Int’l Government Inflation Pro Bond ETF (AMEX: WIP) closed the period out at $59.16 (a 3.61% increase).  The fund has an average annualized total return of 2.13% and total net assets of $1,227.07 M (2.49% total net asset value) with a market cap of $1.22B and a beta of 0.53.  Also the fund has held a premium on a 52-week average of 0.1302%, according to Bloomberg.  The current NAV for WIP is $59.27B (as of January 31, 2012) with a dividend yield of 4.40% and a 30-day SEC yield of 1.14%.  The Index is designed to measure the total return performance of the inflation-linked government bond markets of developed and emerging market countries outside of the United States.

As for AdvisorShare’s Madrona Forward Global Bond ETF (AMEX: FWDB) – which typically does not have much daily trading activity – closed the two-week period out at $25.55, to end with a 1.32% price change increase.  Additionally, FWDB saw its second-largest day in trading activity on January 6 (two separate events on the same day, is that a coincidence?), when nearly 5,000 shares of the fund were traded; the largest day was held on July 6, 2011 with 12,400 shared traded.  FWDB has $15.99M in total net assets, an NAV of $25.58M, a market cap of $16.00M and a beta of 0.36.  The fund round’s out its terms with a dividend yield of 4.39%, 30-day SEC yield of 3.24% and an average maturity of 5.68 years.  FWBD invests in at least 12 distinct global bond classes that cover the entire global investable bond universe; all information that defines the funds was taken from BarChart.

U.S. News & World Report has ranked BWX and WIP amongst its top 10 “Best Fit” international income funds.  Despite the ETF market being a $1 trillion industry and experiencing a slight rally in volume, the year ahead will be its toughest time yet.  As Europe struggles to maintain economic stability, investors have three worries on their hands: rising interest rates, inflation, and now, sovereign default.


Update: FWDB had its busiest activity in January with 7 total trading days at 14,404 shares moved.


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