Guide to International and European Bond ETFs
This guide is designed for Investors looking to protect their International Equity Portfolio
Based on the Coronavirus Bond ETF Performance and full review I would suggest picking either of:
- For best protection: iShares Global Government Bond ETF
- For best protection/yield trade-off: (i) iShares Core Global Aggregate Bond ETF, (ii) SPDR Bloomberg Barclays Global Aggregate Bond ETF or (iii) Vanguard Global Aggregate ETF
How do I choose an International Bond ETF?
The key criteria to think about when choosing European Bond ETFs (includes UK) for your Investment Portfolio are:
- Availability – Not all of options will be available with your Broker. Try to have a good variety to choose from
- Geographical Diversification – You can choose an ETF with Bonds from the country/area you live in (e.g. Europe / UK) or diversify your risk further (Developed Countries)
- Bond Type – You have the choice between Government Bonds only or Government Bonds & Other High Credit Rated Bonds. You want minimal volatility as Bonds are there to protect your Portfolio. You have the choice of Government Bond ETFs or Aggregate Bond ETFs (which are c.60% Government with some other highly rated securities). This choice will involve an incremental protection vs income trade off
- Income Treatment – Choose whether you want income to be distributed or reinvested based on your needs and tax efficiency
- Currency – while this is not mandatory for Equities hedging cash flows to your currency (EUR,GBP) for Bonds is important to ensure stability of your portfolio and capital protection
- Size – Try picking an established Asset Manager. Xtrackers and iShares are the largest players in Europe
- Coronavirus Stress Test – European and International Bond ETFs have generally performed well during the Coronavirus Market sell-off with some nuances
BOND ETF TYPES
What are the types of International Bond ETF?
There are four types on International Bond ETFs and can be divided across two criteria:
- Geographical Focus – International or local Bond ETFs
- Bond Type – Government or Aggregate Bond ETFs
GEOGRAPHICAL FOCUS - INTERNATIONAL vs. LOCAL
What geographical exposure can I get in a Bond ETF?
Outside the US, Bond ETFs can have 3 types of exposures:
- International Bond (Developed Markets) ETFs
- International Bond ETFs but concentrated in G7 Countries
- Local Bond ETF – e.g. UK Bond ETF or European Bond ETF
International Bond ETFs
Typical Allocation of a Global Government (Developed Markets) ETF
What International Government Bond ETFs can I choose?
International Bond ETFs with focus on Developed Countries track either of two Benchmarks:
- FTSE World Government Bond Index
- FTSE Global Group of Seven Index (G7)
What is the difference between Government Bond ETFs tracking Developed Markets and G7?
The exposure of a World Government Bond ETF (Developed Markets) is to countries such as US (35-40%), Japan (approx. 20%), European Union, UK, Canada and Australia. Bond ETFs with G7 Countries are more concentrated, particularly as it relates to US Treasuries. These bond ETFs include only Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.
Local Bond ETFs - UK and Europe
Typical Allocation of European Government Bond ETF
What is the country exposure in a Local Market Bond ETF?
Single Country / Area Bond ETFs are focused on either high quality EUR bonds or UK. European Bond ETFs have high allocation to countries such as Italy, France or Germany.
Does the choice between International and Local Bond ETF affect performance?
Since you will be hedging currency, in the long term return from International Government Bonds and your local Government Bonds tend to be similar as far as the theory goes (Figure 7 from this Vanguard research piece)
What is the benefit of International Bond ETFs?
In a nutshell, International Bond ETFs provide better diversification without reducing returns
ETF BOND TYPE - GOVERNMENT VS. AGGREGATE
What Issuer Type exposure can I choose from in a Bond ETF?
When choosing the debt Issuer type, you have the choice between:
- 100% Government Bond ETFs
- Aggregate Bond ETFs (only c. 60% Government Bonds)
What is an Aggregate Bond ETF?
These are the broadest fixed income ETFs. These bond ETFs use a total bond market approach, which means about two-thirds government bonds and one-third corporate / or highest quality US mortgage products (e.g. implicitly guaranteed by the Government)
What is the typical Breakdown of Bonds found in a European and an International Aggregate Bond ETF?
- The yellow breakdown is the sector allocation of the iShares Euro Aggregate ETF while the orange one is the iShares Global Aggregate ETF
- While the composition may similar the geographical coverage means that the International Aggregate Bond ETF will have exposure to the highest quality American Mortgage Securities while the European one won’t
- Non-Government Bonds provide you with enhanced yield compared to Government
European Aggregate ETF
International Aggregate ETF
Does the choice between Government and Aggregate Bond ETF impact quality and performance?
- Government Bond ETFs give you the best protection and will react faster in a downturn
- Aggregate Bond ETFs remain very good quality but provide a bit more income (Government Bond yields in EUR area can be negative nowadays so Aggregate Bonds give you a better income)
- As of August 2020, the Bloomberg Barclays Global Aggregate Index Hedged to EUR yields 0.9%. The Equivalent Yield to Maturity (8 yr duration) for most Developed Countries can be between 0.5% to negative but when averaged out and swapped to EUR Government Bond Index Yields will likely be negative
DIVIDEND TREATMENT - ACCUMULATING vs. DISTRIBUTING
Should I choose an Accumulating or Distributing Bond ETF Share Class?
The Bonds that pay interest can be distributed via dividends.
Choosing between accumulating or distributing funds is among the first choices investors in Europe make. The appropriate option may reduce your taxes.
- In most Continental Europe accumulating funds generally have lower taxes because they fully reinvest dividends without triggering dividend taxes
- In the UK’s deemed tax on dividends taxes all accumulating fund dividends at the same tax rate as normal dividends except when part of an ISA account (where you don’t pay taxes). Other similar countries where distributing and accumulating makes marginal/ no difference include Switzerland or Germany (again, except if in tax protected schemes)
- Verify ETF tax treatment for your country before choosing an accumulating or distributing ETF
CURRENCY HEDGING
Should I hedge currency risk in a Bond ETF?
Yes, hedging Bonds will reduce volatility of your portfolio.
If you want to understand how it works, read this guide.
BEST BOND ETFs
Which Bond ETF should I choose?
Pick the ETF in your currency to reduce FX Risk. Then, choose between accumulating and distributing based on your personal tax situation.
Below are three lists with currency hedged funds
- International Government Bond ETFs
- European Government Bond ETFs and UK Bond ETFs
- Global and European Aggregate Bond ETFs
All are good options but not all of them may be available with your Broker
A. Most liquid International Bond ETFs (Only Government Bonds)
As mentioned above you have the choice between ETFs tracking two benchmarks FTSE World Government Bond Index or FTSE Global Group of Seven Index (G7)
If you choose an International Government Bond ETF choose based on the Type of Income Treatment you want and Currency Hedging available
B. Most liquid UK and European Bond ETFs (Only Government Bonds)
European Bond ETFs are mainly distributing Income and UK has little flexbility in this respect as well.
If you choose a local Government Bond ETF Income Treatment is the most important aspect
C. Most liquid International and European Bond ETFs (Aggregate Funds)
Aggregate Bond ETFs are great to generate a bit more income while still preserving the protection benefits
CORONAVIRUS STRESS TESTING
Reviewed Index Funds have generally performed well in the COVID-19 Stress test in March 2020:
- International Government Bond from G-7 Countries (as tracked by iShares IGLE Fund) have performed best – it’s perhaps no surprise since US Treasuries are the safest assets and these represent 44% of the Index – while iShares outperformed Xtrackers International Governments this could be due to liquidity of EUR classes since USD classes had very similar drawdown at -5%
- International Aggregate ETFs have benefited from exposure to the US
- European Government Bond ETFs have performed similarly (-8/-9%) for similar duration as International Government Bond ETFs
- European Aggregate Bond ETFs have had the worst performance (as expected) since they provide incremental yield vs. Government Bond ETFs (trade-off explained above)
EUR denominated International and European Bond ETFs performance during March 2020 Sell-Off
CONCLUSION
- All ETFs performed quite well in the context of the crisis
- Pure Government Bond ETFs with US exposure provided marginally better protection
- The key players are somewhat different from the US Markets – while BlackRock’s iShares, State Street SPDR and Vanguard are all present, local players have also a strong footprint – Deutsche Bank’s Xtrackers, Societe Generale’s LYXOR, Amundi ETFs or UBS ETFs
- The choice is somewhat narrow compare to the US Market and one should choose among the most liquid Funds
- If you have the choice Deutsche Bank Xtrackers have the largest funds and it makes sense to invest in them if you want increased liquidity (Vanguard is still relatively small in Europe) while overall BlackRock’s iShares remains the leader in Europe
- Either one of these two would be a great choice but an International Aggregate Fund can provide you with an additional yield pick up
Appendix - READ MORE
Popular Guides
My fundamental reviews of Equity ETFs and Asset Allocation include:
- Investor Checklist - Ready to Invest? Have a look at the checklist before buying ETFs
- How to build a Long Term Portfolio for Financial Independence - Guide to creating a Smart & Simple Long Term Portfolios with ETFs
- All you need to know about International ETFs - including Developed vs Emerging Markets, Small vs Mid/Large Caps and country allocations with List of Best ETFs
- The Simplest Equity Portfolio - Comparison of Best Total World Equity Index Trackers
- How to pick the perfect ETF? - Investing in Europe is not quite the same experience as in the US but this guide will solve all your issues. Spoiler - don't use TER! (applies to US Investors as well)
- Which Assets do I need in my Portfolio? - Clean up your portfolio from assets you don't need. High Performance and low maintenance Asset Allocation Strategies
- How do I benefit from a market crash? - In the long run no crash (including Japanese style) can derail you if you do it right
- How to Invest for Short Term goals? - Medium Term Investing is more risky than long term portfolio - pay attention to the right asset classes
My fundamental reviews include:
- Spectacular Market Crashes - how much can you lose? How long will it take to recover? How to take advantage of the next recession
- What if my Broker goes Bust? How to choose a Broker that is safe
- What is the best rebalancing method? How to increase returns and reduce risk by rebalancing your portfolio
- What about currency risk? Should I hedge my Portfolio? - Hedge or not to hedge? Guide to hedging currency risk in your Equity and Bond ETFs
- Should you buy Gold? - Is it necessary to have an asset that generates no yield? What really drives Gold price?
- International and European Bond ETFS - For Long Term International Investors Bonds are key to protect their Equity Portfolios
- US Bond ETF Guide - Comprehensive Review of Blend Bond Funds, Treasuries, Corporates, High Yield, Inflation Linked, Muni ETFs
- Top 3 Corporate Bond ETFs - If you want to increase income buy these ETFs to invest alongside the FED [for US Investors only]
DISCLAIMER
All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice
Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the full disclaimer.
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Stay safe & healthy,
Raph
FAQ
It’s one of the most liquid International Bond ETFs with FTSE Global Group of Seven Index (G7) as benchmark with US, Japan and France as largest issuers. The ETF is managed by BLACKROCK
It’s one of the most liquid International Bond ETFs with FTSE World Developed Government Bond Index as benchmark with US, Japan and France as largest issuers. The ETF is managed by DWS
It’s one of the largest and most liquid European Government Bond ETFs with France, Italy and Germany as largest issuers. The ETF is managed by DWS
It’s one of the largest and most liquid European Government Bond ETFs with France, Italy and Germany as largest issuers. The ETF is managed by BLACKROCK
The FTSE Actuaries Government Securities UK Gilts All Stock Index offers exposure to Sterling denominated UK government bonds (conventional gilts) quoted on the London Stock Exchange, other than index-linked bonds. The ETF is managed by BLACKROCK
It’s the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by BLACKROCK
It’s one of the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by State Street
It’s one of the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by Vanguard
It’s the largest and one of the most liquid European Aggregate Bond ETFs with France, Germany and Italy as largest issuers. The ETF is managed by BLACKROCK
Very useful summary
Hi Raph, I wanted to thank you for producing this. It’s the most useful guide I’ve found on Bond ETFs. As someone who understands stocks well enough but pretty clueless about bonds, it was just what I was looking for. It hits the sweet spot between simplicity/ease of understanding and the important details that we need to know and the decision points we need to worry about most. Great job.
Thanks, Simon
Glad it helped!
Hi Raphael, thank you for this guide, very useful.
One problem I ran into is that there seems to be limited historical data for the global aggregate funds (AGG_, GLA_, VAG_) – as little as 2-3 years. They all track the Bloomberg Barclays Global Aggregate Bond Index, for which I was unable to find any historical data whatsoever.
Do you have a suggestion as to what data one can use as a substitute to backtest historical correlations to other assets?
Thank you so much.
Hi,
If my portfolio has 22.5 to 30 percent bonds. International government bonds, European bonds, corporate bonds, treasury bonds. Do I have to combine them all into one part of my portfolio? or the portfolio will not be too much for all types of bond to hold
Hi CuteBear –
I am not providing individual advice here or on any other part of this website. However, going for an Aggregate Fund is, generally and without looking at your case, a good way of making a portfolio allocation efficient from a cost and operational perspective.
Hope this helps,
Raph
This was extremely insightful and very concisely written.
I have a somewhat naive question that I was hoping you could kindly clear. From the aggregate bond etfs that you’ve recommended, am I correct in saying that they all fall under distributing dividends?
If not – then I seem to be having trouble differentiating between distributing and accumulating on the fund listing page!
Hi Kevin –
Have a look at the Type column. e.g. GLAD is accumulating while e.g. GLAB is distributing
I just wrote, quite extensively, about deciding how to choose between accumulating and distributing funds
Hope this can help
Hi Raph,
First of all thank you for the website! It is really great 🙂
I have one question. As I’m from Poland, there are no bonds ETFs hedged to local currency (only EUR or USD). In this case does it make sense to go for US/Global unhedged bonds ETF to diversify equity? My equity portfolio is purely global with higher EM share so I’m exposded to F/X anyhow (for now I have some gold and PL TIPS as well).
Hi Maciej –
Have a look here – I wrote about FX hedging for Bonds.
Hedging will reduce volatility, but only for the currency that it’s hedge to. Leaving it unhedged will expose you to a mix of global currencies (USD being dominant).
Raph
Hi Maciej –
Please have a look here – there was a similar question in the comments section. It essentially depends on the currency your want to consume in, over the long term, to keep the bond portfolio part stable. Having a mix of local bonds / cash / gold is reasonable. The downside is limited diversification vs. a developed government bond ETF. During a major crisis flight to quality paper is also something to keep in mind.
Raph
Hi Raph,
Many thanks! This is really supportive 🙂
Maciej
Hi Raph Antoine! I am 24, just started investing and luckily stumbled upon your website. You point out multiple times that bonds are a bit risky now given that yields are low [thus opportunity cost is also low], and there is a risk that interests rate start rising which will drive the price down of a bond ETF. So I am really confused if I need bonds at all or I simply can hold cash, and only add 7% of gold as diversifier and put the rest into Vanguard FTSE All-World (VWCE). But now, I do think whether I need… Read more »
Hi Vitalii – The question of Bonds is an interesting one in this market environment. As I mentioned in comment above it is quite reasonable to hold a mix of cash/bonds/gold and as you rightly pointed out the opportunity cost in holding a cash or gold is very low in a low yield environment. That said, Bonds may still have an appeal – I will try to elaborate more on that front in the future (and the likelihood of negative returns with rising rates). Also note that you can still have scenarios with external macro shocks / deflationary scenario where… Read more »
Hi Raph, thanks so much for all that amazing work. I have a question: we have a below zero interest rates in EUR. With potential inflation from so much created money, why TIPS bonds are not among your recos? It feels they are only mentioned in passing, why?
Hi Michal –
Hard to respond in a comment since it’s a wider topic, but I do think an inflation hedge is needed to be fully forecast-free, like I mentioned here even though all forms of monetary stimulus didn’t generate inflation (as defined by CPI) since the GFC. That said, asset price levels are somewhat different story as explained here
Hope this helps,
Raph