European government bonds carry more risk than U.S. government bonds in the current market environment because many countries in Europe are currently experiencing upheaval. Across the continent Brexit is also affecting economies and cross-border relationships.
The European Central Bank is keeping interest rates low but has begun to remove some quantitative easing measures with plans for tapering Treasury purchases and potential incremental rate hikes on the horizon. This leads to a healthier outlook for the European government bond market and specifically countries in the Eurozone.
We have selected four of the top international government bond ETFs with a high allocation to European countries. These funds are likely to gain from positive economic trends affecting Europe this year, but for the time being, have been flat to lower. The funds were selected based on year-to-date (YTD) returns in 2017 and assets under management. All four funds are slightly lower so far in 2018. All data is as of July 11, 2018.
1. iShares International Treasury Bond (IGOV)
IGOV is an ETF that holds bonds denominated in local currencies. IGOV tracks the S&P/Citigroup International Treasury Bond Index Ex-US. European countries represented in the Fund’s holdings include Italy, the U.K., France, Austria, Denmark, Portugal, Belgium and Ireland. It does not have specific parameters for bond maturity duration.
Assets under management are $907.08 million. The current price is $49.14. In 2017, YTD return for IGOV was 11.33%. After seesawing in the first half of 2018, it’s down 1.4%. One-year, three-year and five-year annualized total returns are 2.95%, 3.43% and 1.05%.
2. iShares 1-3 Year International Treasury Bond ETF (ISHG)
This ETF seeks to track the investment results of the S&P/Citigroup International Treasury Bond Index Ex-US 1-3 Year. Like the Index, it invests in international developed market Treasury bonds outside of the U.S. that have maturities of one to three years. Its top allocation is to Japan with 21.6% of the Fund’s investment. European countries round out the remainder of the investments with high allocations to France, Italy, Germany, Belgium, Spain and the U.K.
Assets under management are $78.26 million. The current price is $82.17. In 2017, YTD return for ISHG was 10.40%. So far, in 2018, it’s down 2.24%. One-year, three-year and five-year annualized total returns are 0.76%, 1.24% and -1.93%.
BWZ tracks the Bloomberg Barclays 1-3 Year Global Treasury Ex-US Capped Index. This fund focuses on securities that have maturities of one to three years. The holdings in this fund are denominated in local currencies. BWZ has exposure to Japan. European country investments include Germany, France, Spain, the U.K., Belgium and Italy.
Assets under management are $332.59 million. The current price is $31.25. In 2017, YTD return for BWZ was 9.78%. So far, in 2018, it’s down 2.54%. One-year, three-year and five-year annualized total returns are 0.23%, 0.90% and -1.93%.
4. SPDR Bloomberg Barclays International Treasury Bond ETF (BWX)
This fund has significant European exposure. The Fund also invests in emerging markets and has investments in Japan and Canada. It tracks the Bloomberg Barclays Global Treasury Ex-US Capped Index. Its European country investments include Italy, Spain, Belgium, France, Austria and the Netherlands. It is important to note that all of the Fund’s investments are denominated in local currencies, meaning that a weak U.S. dollar could be an advantage.
Assets under management are $1.52 billion. The current price is $27.80. In 2017, YTD return for BWX was 9.84%. So far, in 2018, the ETF is down 2.01%. One-year, three-year and five-year annualized total returns are 1.29%, 2.47% and 0.45%.
The Bottom Line
European Treasury bonds are reporting some of the international Treasury market’s top returns. Investing in European government bonds is certainly riskier than investing in U.S. government bonds. However, as economies and new cross-border relationships develop, there could be some decent returns available from these four ETFs.