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An overview of international bonds and ETFs

The financial markets are getting globalized, as regional companies are finding alternatives to access cheap sources of funds that can help them finance their business. Additionally, these sources of funds can also help the businesses spread their operations outside the country. Relying only on domestic investors can limit the funding for any business as well as the reach of the business in the global market.

International bonds
The international bonds are a type of fixed income or debt investments that are issued by a non-domestic entity. These bonds are issued by other countries in their domestic currency. The bonds pay interest to the buyer at specific intervals and also the principal amount at maturity.

Seeing it from the perspective of being a resident of our country, an investor who wants to buy international bonds to earn a fixed income will have to do so in a currency other than the United States Dollar. There are usually three types of international bonds which can be bought, these are:

  • Foreign bonds– These types of international bonds are sold in a domestic market (and domestic currency) by a foreign issuer. For instance, a bond issued by a Japanese financial firm is valued in Japanese Yen by the United States of America. Some examples of foreign bonds are Samurai bonds, Yankee bonds, Bulldog bonds, Matador bonds, etc.
  • Global bonds– These bonds can also be traded and issued in the foreign country denominating in a currency other than their domestic currency and sold to more than one country. An example of a global bond is the one where a Canadian company issues bonds denominated in the United States Dollars, offering them to France and Japan.
  • Euro bonds– Similar to global bonds, the Euro bonds are also traded in different countries. Often marketed by European countries, they can be issued in the United States Dollars and sold to other countries. Some examples of Eurobonds include Euroswiss bonds, Euroyen bonds, etc.

Brady bonds are another type of international bonds providing fixed income to the investors. A type of an exchange-traded fund (ETF) bond, Brady bonds are issued by the foreign countries for the developing countries in order to help them manage their international debt.

As discussed earlier, international bonds providing fixed income are usually denominated in the currency of the host or domestic country. As a result, the domestic value of these bonds fluctuates based on the economic demographics of that particular country, putting the bonds at a currency risk.

Hence, investors should be precautious when investing in international bonds to earn a fixed income. They should also be aware of the fact that international bonds are subjects to different regulations and taxation requirements of the host country.

Bond ETFs
International bonds providing a fixed income with the help of ETFs are a type of mutual funds, as they hold a portfolio of different bonds with different strategies. Bond ETFs are from the United States treasuries with high yields and holding periods for both short- and long-term.

Based on the current global market trends, ETFs are still in their infancy. Sometime in the first half of 2015, bond ETFs held about $320 million in assets under management, which was less than approximately 1% of the total market. So, if bond ETFs were to witness the trading deficit, it would not affect the entire bond market.

Bond ETFs are very much similar to the stock ETFs because they promote market stability by adding transparency and liquidity during an economic fluctuation. Bond ETFs are traded throughout the day based on a centralized exchange unlike individual stocks sold by bond brokers over-the-counter. Stock bonds are at a disadvantage as it is difficult for them to maintain an attractive price. Bond ETFs are issued with the help of major index like the New York Stock Exchange.

Another advantage of investing in an international fixed income or bond ETFs is that it helps investors in gaining exposure to the ETF market with the transparency and ease of stock trading. These types of bonds are more liquid than both individual stock bonds and mutual funds, which are traded at one price per day after the global financial market closes. During times of distress and economic fluctuation, investors have the option of trading a bond portfolio even if the bond market is not performing well.

Bond ETFs offer similar features as an individual bond, including a regular coupon payment. One of the biggest advantages of investing in international bonds is the chance to receive a fixed income regularly. The payments made by these bonds can be scheduled for every six months.

The ETFs, in contrast, work differently than the international bonds, as they hold assets with different maturity dates. So, at any given time, some international bonds in the portfolio may be due for a coupon payment. Hence, bond ETFs pay interest every month based on the value of the coupon varying on a monthly basis.

Both, international fixed income bonds and ETFs are a great way to diversify the portfolio, as it helps you gain exposure to foreign securities and global market that is not necessarily moving in tandem with local securities.

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