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International Bond Market Widens Arsenal

In yet another attempt to broaden the vast array of exchange traded funds (ETFs) available to investors, State Street began trading the first ever international corporate bond ETF.

The SPDR Barclays Capital International Corporate Bond ETF (IBND), which tracks the Barclays Capital Global Aggregate ex-USD > $1B: Corporate Bond Index, carries an expense ratio of 0.55% and gives investors exposure to debt that is denominated in local currencies.

IBND focuses on investment-grade corporate bonds and gives exposure to the following currencies: Euro, Australian Dollar, Canadian Dollar, New Zealand Dollar, British Pound, Japanese Yen, Swiss Franc, Swedish Krona and the Danish and Norwegian Krone. Although IBND excludes US Dollar-denominated bonds, it does include bonds issued by US companies which are payable in other currencies. In fact, according to the fund’s prospectus, the US has the largest country weighting at 17.5%, followed by Germany at 16.1% and the United Kingdom at 12.5%.

In regards to sector weightings, IBND is heavily focused on financials, industrials and utilities, which constitute 46.9%, 39.5% and 11.6% of its asset base, respectively. Additionally, the underlying index that IBND seeks to track boasts a yield of 3.05%, which can be expected if IBND tracks its underlying index accurately.

Of the holdings in the newly traded ETF, all of the bonds in the fund are rated Baa or higher, with nearly half of them carrying a rating of A or better and the average maturity for the bonds is 5.3 years with a modified adjusted duration of 4.4 years.

Another notable mention regarding the international bond market is that PowerShares has also filed the necessary paperwork to launch the International Corporate Bond Portfolio (PICB), which will seek to replicate the performance of the S&P International Corporate Bond Index and give exposure to international corporate bonds.

Global X Expands Its ETF Focus

As exchange-traded funds (ETFs) continue to draw assets, innovation remains at the forefront of competiveness.  As a result, ETF provider, Global X, has recently announced the launch of its newest ETFs.

These ETFs include the Global X Aluminum ETF, the Global X Lithium ETF, the Global X Uranium ETF, the Global X Food ETF, the Global X Shipping ETF, the Global X Waste Management ETF and the Global X Fishing ETF – all sectors or industries that are likely to reap the benefits of an expanding global economy and population.

These unique products are nothing new to Global X, who recently introduced the Silver Miners ETF (SIL) and the Copper Miners ETF (COPX), both of which provide direct exposure to companies involved in the mining and production of the respective metals.

The products are expected to enable investors to gain diversified exposure to commodity driven industries and sectors which are traditionally difficult to access and are generally more volatile than traditional equities.

ETFs For Inflation Protection

In an attempt to revitalize a battered U.S economy, the U.S. government implemented stimulus programs and essentially printed massive amount of dollars.  As a result of the massive spending, the U.S. is expected to run record deficits and Moody’s is talking about downgrading the economic powerhouse’s sovereign debt.

Although price hikes have remained relatively low, stirring up an equally disturbing notion of deflation, eventually we will have to pay the price for spending our way out of the worst recession seen in the past five decades.  Inflation is inevitable, but how bad will it get and how do you protect yourself when it does occur?

The Federal Reserve has pledged to continue to keep interest rates at near record lows, indicating that there are subdued inflation trends and stable inflation expectations for the near future.  However, many other economists think that interest rates and prices will have to increase tremendously, eventually igniting double digit inflation.  If the Fed is proven wrong, some common plays to protect against inflation include precious metals and commodities.

Here are a few possibly plays to deal with inflation:

-Gold:  The most well-known hedge against inflation.  SPDR Gold Shares (GLD) is probably the best way to play this because it is actually backed by physical gold bullion.

-Treasury Inflation Protected Securities:  The iShares Barclays TIPS (TIP) is an ETF that invests in inflation-protected securities and adjusts its coupon payments and underlying principle to compensate for inflation as measured by the consumer price index.

-Commodities:  Commodity prices generally rise when inflation is accelerating.  Exposure can be gained through the iShares S&P GSCI Commodity-Indexed Trust (GSG).

Index IQ’s Newest International ETFs

As international markets continue to draw attention from investors, analysts and advisors, exchange traded fund (ETF) provider, Index IQ, recently launched two new ETFs, one tracking small-cap companies in Canada and another tracking small-cap companies in Australia.

Canada has drawn much attention due to its surplus in energy resources.  In fact, according to the U.S. Energy Information Administration, Canada has considerable natural resources and is one of the world’s largest producers and exporters of energy.  Additionally, over the past 30 years, Canada’s total energy production has increased by nearly 87 percent while its total consumption has only grown by 44 percent, leaving a sizeable surplus.

To put it into perspective, Canada has the second-largest proven crude reserves globally, it’s the second-largest exporter of natural gas globally and the fourth-largest exporter of crude oil globally.  It has nearly 180 billion barrels of crude oil, second only to Saudi Arabia.  As the global economy recovers from the financial windstorm and grows, energy will be in demand and Canada will likely be attractive.  For this reason, Index IQ launched the IQ Canada Small Cap ETF (CNDA).

CNDA offers exposure to small-cap Canadian stocks through its 100 different holdings which are comprised of energy companies (18.8%), financials (6.5%) and industrials (5.7%).  The ETF carries an expense ratio of 0.69% and seeks to replicate the performance of the IQ Canada Small Cap Index.

Australia continues to remain attractive for some of the same reasons as Canada does,  mainly its resource and commodity supply.  The continent is home to diversified natural resources giant and mining company, BHP Billiton (BHP) and metals mining giant Rio Tinto (RTP).  As a result, Australia is the world’s fourth largest producer of gold, a commodity that continues to keep its luster.  Australia is also the fourth largest producer of coal, the largest component in electricity generation, something that will likely witness increased demand as emerging markets continue to prosper.  To further bolster Australia’s appeal, the nation has heavy ties with China as it is one of the world’s largest exporters to the nation.

The IQ Australia Small Cap ETF (KROO), which carries an expense ratio of 0.69%, enables investors to reap the benefits of the Australian small-cap market.  The ETF is primarily focused on the materials sector which constitutes 26.9% of its assets, followed by consumer discretionary at 24.6% and industrials at 10.7%.

Hidden Costs of Mutual Funds

A recent Wall Street Journal article highlighted a well kept secret of mutual funds:  investors may be paying more for their mutual funds than they realize.  Most investors are familiar with the “expense ratio” charged by funds.  These fees typically cover the cost of the portfolio manager and other expenses involved with operating the fund.  According to Morningstar, the average expense ratio of U.S. stock mutual funds is 1.31% of total assets.  For comparison, the average expense ratio on similar ETFs is 0.29%.  However, what many investors don’t realize is that this expense ratio doesn’t include charges related to buying and selling securities for the fund – charges that are typically hard for investors to quantify due to either poor or non-existent disclosure by funds.

So what exactly are these additional charges and how much can they cost investors?  The article highlights four main components of these charges:  brokerage commissions, bid-ask spreads, market impact costs, and opportunity costs.  Brokerage commissions are simply the charges a fund incurs to buy and sell securities.  The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for a security and the lowest price for which a seller is willing to sell that security.  This spread can impact returns since a fund continually buys securities at the higher price and sells at the lower price.  Market impact costs result from funds causing a change in the price of a security before their trade has been completed due to the size of the trade and the liquidity, or lack thereof, of the security.  Opportunity costs arise when fund managers can’t purchase or sell a security at a desired price because of this market impact.  A study conducted last year puts these total costs at an average of 1.44% of total assets.  This is in addition to the 1.31% average expense ratio.

While ETFs also have exposure to these transaction costs as securities are bought and sold to track a targeted index, these passively managed products typically have a fraction of the turnover of actively managed funds.  With a number of mutual funds averaging more than 100% turnover, these hidden costs can soar and erode investor returns.  And when investors factor in research indicating that the majority of active mutual fund managers underperform their benchmark index, they’ll have to ask themselves if they’re getting what they pay for.