Where’s Our Eurozone Bond ETF?

In an increasingly crowded ETF market, the lack of U.S-listed Europe-focused debt strategies is astonishing.

Senior ETF Specialist
Reviewed by: Dennis Hudachek
Edited by: Dennis Hudachek

In an increasingly crowded ETF market, the lack of U.S-listed Europe-focused debt strategies is astonishing.

On June 5, the ECB unleashed a fresh round of unconventional stimulus measures in Europe, putting eurozone bonds—and the serious lack of ETF bond strategies focused on the region—front and center in the minds of global investors again.

Indeed, if you’re looking for a broadly diversified eurozone-specific bond ETF, you’re in for a surprise.

Can you believe that there isn’t one broad Europe- or eurozone-specific sovereign bond ETF listed in the U.S.?

After digging through our ETF Finder for broad eurozone fixed-income ETFs, I myself was surprised to learn of this huge hole in our ETF industry.

Some strategists expect the ECB to eventually pursue bond purchases, further driving down yields that are already ultra-low. Nouriel Roubini told me in a recent interview for an upcoming Alpha Think Tank publication that this could happen as early as year-end.

At our Inside ETFs Europe conference in early June, Michael Jones from RiverFront Investment Group echoed a similar bullish tone regarding eurozone bonds. He based his analysis on the divergence between the beginning stages of the ECB’s unprecedented stimulus coinciding with the U.S. Federal Reserve winding down its own quantitative easing program.

It seems odd to me that issuers are now wracking their brains to find untapped niche markets, and even conjuring up funds based on all kinds of complex methodologies that only a handful of those creating them even understand. Yet here’s this massive market that’s been ignored.

To put things into perspective, if the European Union were looked at as a single economy, the EU would be the world’s largest. To be clear, the EU consists of the eurozone, plus noneuro member nations, such as the U.K., Sweden, Denmark, Poland and Czech Republic.

And if you were to simply aggregate all the eurozone economies into one, it would be the world’s No. 2 economy, behind only the U.S.

If there are really no meaningful U.S.-listed ETFs that focus exclusively on European sovereign debt, it’s a gaping hole in the ETF industry that inspires genuine surprise.

At the very least, don’t you think that a eurozone sovereign debt ETF would have created a lot of interest since Draghi’s “whatever it takes” speech in July 2012, and could still have a big investor base even today?


Europe’s Investors Have It Good

Out of curiosity, I looked into our ETF.com European Reference Data Feed product—which captures and classifies all European-listed ETFs—for Europe or eurozone-specific bond funds. Again, this is a database we compile tracking all the ETFs that are listed in Europe’s markets.

So, guess how many broad, Europe-focused fixed-income funds are listed in Europe for European investors?

I counted 65 broad Europe- and 25 broad eurozone-specific bond exchange-traded products traded on multiple exchanges throughout Europe, the majority of them tracking Markit’s iBoxx indexes.

And that’s just for sovereign bonds! Throw in corporates or a mixture of the two, and the list expands significantly.

I understand that European investors are more interested in Europe-focused fixed-income products. But does it make any sense that there are 90 of them in Europe and zero in the U.S.?

Meanwhile Back In The States

So what exactly are our options here in the States? Unfortunately, there’s only a handful of funds that are somewhere in the ballpark.

The closest is the iShares International Treasury Bond ETF (IGOV| B-76). IGOV has roughly 50 percent weighting in eurozone bonds, and if you include the U.K., Denmark, Sweden, Switzerland and Norway, it carries a 66 percent weighting in Europe.

Still, IGOV has a 23 percent weighting in Japanese government bonds (JGBs), where the 10-year note is only yielding 60 basis points. The fund could almost be renamed the “iShares Ultra-low Yield International Sovereign Bond ETF.”

A similar story exists with the iShares 1-3 Year International Treasury Bond ETF (ISHG | B-83), which also has about 23 percent weighted in JGBs.

Then there’s the iShares Global ex USD High Yield Corporate Bond ETF (HYXU | C), which carries a 77 percent weighting in eurozone bonds, but it’s strictly a high-yield corporate bond ETF.

On the corporate debt front, we also have the PowerShares International Corporate Bond Portfolio (PICB | B-71), which has more than 20 percent in Canada and Australia, since it targets investment-grade corporates from the Group of 10 countries, excluding the U.S.

So, what’s in the pipeline from U.S. issuers?

Based on the filings that I combed through, none. Again, that’s shocking to me, especially since this is not some far-fetched product that’s impossible to create, nor is it a niche market that only a handful of investors would be interested in.

If anyone has any insights into why U.S. issuers have largely ignored the eurozone debt space, please feel free to comment, as I’m a bit stunned and don’t have any answer.

For U.S. issuers out there, for starters, how about an ETF tracking an index of market-value-weighted, sovereign eurozone bonds of broad maturities?

In the meantime, if you’re still bullish on eurozone debt, and want to participate in the ongoing rally with ETFs, your options are limited.

If you don’t have a brokerage account that permits you to trade internationally listed ETFs—usually at exorbitant commissions, I might add—you’ll either have to wait for an issuer to launch a new product, or go with the handful of existing international bond ETFs.


(Note: The WisdomTree Euro Debt ETF (EU) is an actively managed ETF that was transitioned from a euro currency ETF to a euro debt ETF in October 2011, making it another option for U.S. investors wanting euro-denominated debt exposure. The active fund is not a pure eurozone Treasury ETF, but invests in a mix of euro-denominated sovereign, corporate and supra-nationals debt. Duration—targeted between two and eight years—and country exposure can also change at their discretion. For example, EU currently has zero exposure to Spanish or Italian debt, which, combined, make up anywhere from a third to more than half of the weighting in many broad-based eurozone sovereign debt indexes.)

At the time this article was written, the author held no positions in the securities mentioned. Contact Dennis Hudachek at [email protected], or follow him on Twitter @Dennis_Hudachek.


Dennis Hudachek is a former senior ETF specialist at etf.com.