Don’t Assume US Bond ETFs Are US Focused

July 16, 2014

If you think U.S.-focused bond ETFs are chock full of U.S. bonds, it’s time to think again.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Scott Kubie, chief investment strategist of Omaha, Neb.-based CLS Investments.

How much international exposure should you have in your portfolio? Most of the time the person who asks this question is referring to their stock allocation. But what about other parts of the allocation?

Rarely does anyone ask about their corporate bond allocation. If they did, they might discover they owned a lot more international bonds than anticipated. There are some ways to address this challenge, but suffice it to say it’s not a problem investors have a grip on.

So, let’s get into it, and then look at solutions.

ETFs that invest primarily in corporate bonds often contain large allocations to international bonds.

Table 1 below includes the bond ETFs in the U.S. classified by Morningstar as corporate bond, short-term bond or ultrashort bond with at least $100 million in assets.

It’s clear there’s a high degree of variability between bonds in the same category, but the international allocations are significant in most cases.


For corporate bonds, two funds based on the Barclays U.S. Credit Index—the iShares Intermediate Credit Bond ETF (CIU | B-88) and the iShares Core U.S. Credit Bond ETF (CRED | B-89)—include an allocation to international bonds of about 30 percent.

The iShares iBoxx $ Investment Grade Corporate Bond (LQD | A-75) is close to 20 percent. Short-term bonds are in the same position. For example, the iShares 1-3 year Credit Bond ETF (CSJ | B-91) is 43 percent non-U.S. bonds, and most short-term and ultrashort ETFs allocate more than 20 percent to international bonds.


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