European treasury bond exchange-traded funds (ETFs) provide investors with exposure to debt securities issued by governments of European countries. The European GDP is now back to its pre-pandemic level after the COVID-19 pandemic sent it into its worst-ever recession.
The EU economy grew by 5.3% in 2021 as the gradual lifting of COVID-19 containment measures triggered robust economic activity. A continuously improving labor market, high household savings, and favorable financing conditions are expected to continue supporting the expansion. The EU economy is projected to grow by 4.0% in 2022 and 2.8% in 2023.
Fundamentals of the euro area economy remain strong but there's great uncertainty following Russia's recent invasion of Ukraine. EU countries buy 41.1% of their gas and 27% of their oil from Russia and energy prices could rocket if the Russia-Ukraine conflict interrupts this supply. The European Commission is yet to assess the economic impact of the conflict and there are added risks due to inflation, higher energy prices, and ongoing supply chain bottlenecks.
Amid the Ukraine war, European Commission has agreed to ease its financial support of the euro zone economy in 2023. However, the commission acknowledges there's a high level of uncertainty and it is ready to provide cash should the war necessitate it.
Key Takeaways
- International treasury bonds, which have large allocations of European treasury bonds, have underperformed the broad U.S. equity market over the past year.
- The best European treasury bond exchange-traded funds (ETFs) are FLIA, ISHG, and BWZ.
- The top holdings of these ETFs are German bunds, bonds issued by the government of Sweden, and bonds issued by the government of Japan, respectively.
There are no ETFs that trade in the United States exclusively dedicated to European treasury bonds. However, there are international treasury bond ETFs, all of which have large European treasury bond allocations. There are five international bond ETFs that trade in the U.S., excluding inverse and leveraged funds as well as those with less than $50 million in assets under management (AUM).
International treasury bonds, as measured by the Bloomberg Global Treasury Index, have significantly underperformed the broad U.S. equity market over the past 12 months. The SPDR Bloomberg Short Term International Treasure Bond ETF had a total return of -15.0% compared to the S&P 500’s total return of -5.15% for the last 52 weeks as of July 29, 2022.
The best-performing European treasury bond ETF, based on performance over the past year, is the Franklin Liberty International Aggregate Bond ETF (FLIA).
We examine the three best European treasury bond ETFs below. All numbers below are as of July 29, 2022.
Franklin Liberty International Aggregate Bond ETF (FLIA)
- Performance Over One-Year: -4.5%
- Expense Ratio: 0.25%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 66,579
- Assets Under Management: $190.5 million
- Inception Date: May 30, 2018
- Issuer: Franklin Templeton
FLIA is an actively managed international bond ETF that seeks to maximize total return by focusing on investment grade bonds primarily outside of the U.S. Investment grade bonds are debt securities deemed by credit rating agencies to have a low risk of default.
While the majority of the ETF’s holdings are invested in bonds issued by governments and government agencies, some holdings are of corporate bonds. Its largest geographic allocation is Europe at nearly 48%, followed by Asia and North America.
FLIA’s top three holdings comprise German bunds and bonds issued by the Japanese government bonds.
iShares 1–3 Year International Treasury Bond ETF (ISHG)
- Performance Over One-Year: -14.6%
- Expense Ratio: 0.35%
- Annual Dividend Yield: N/A
- Three-Month Average Daily Volume: 11,098
- Assets Under Management: $65.5 million
- Inception Date: Jan. 21, 2009
- Issuer: BlackRock Financial Management
ISHG aims to track the performance of the FTSE World Government Bond Index — Developed Markets 1–3 Years Capped Select Index, which is composed of government bonds issued by non-U.S. developed markets and which have remaining maturities of one to three years.
The ETF provides exposure to short-term bonds issued by governments of non-U.S. countries, providing investors with enhanced-return potential, diversification, and protection against the adverse effects of rising interest rates.
ISHG’s largest geographic exposure is Japan, followed by Italy, France, and Germany. Its top three holdings include bonds issued by the government of Ireland, the government of Australia, and the government of Sweden.
SPDR Bloomberg Short Term International Treasury Bond ETF (BWZ)
- Performance Over One-Year: -15.0%
- Expense Ratio: 0.35%
- Annual Dividend Yield: 0.01%
- Three-Month Average Daily Volume: 42,698
- Assets Under Management: $148.3 million
- Inception Date: Jan. 15, 2009
- Issuer: State Street
BWZ seeks to track the performance of the Bloomberg 1–3 Year Global Treasury ex-US Capped Index, which is designed to gauge the performance of fixed-rate local currency sovereign debt issued by non-U.S. countries with investment grade ratings and with remaining maturities of one to three years.
The ETF provides exposure to government debt outside of the U.S., giving investors access to international securities to potentially enhance returns and diversify their portfolios. The fund also focuses on short-term debt, which may be appealing to investors concerned about the adverse impacts of rising interest rates.
BWZ’s largest geographic exposure is China, followed by Japan and Australia. Its top three holdings include bonds issued by the government of China and bonds issued by the government of Japan.
The comments, opinions, and analyses expressed herein are for informational purposes only and should not be considered individual investment advice or recommendations to invest in any security or adopt any investment strategy. While we believe the information provided herein is reliable, we do not warrant its accuracy or completeness. The views and strategies described in our content may not be suitable for all investors. Because market and economic conditions are subject to rapid change, all comments, opinions, and analyses contained within our content are rendered as of the date of the posting and may change without notice. The material is not intended as a complete analysis of every material fact regarding any country, region, market, industry, investment, or strategy.
As a seasoned financial analyst with a deep understanding of global markets, particularly in fixed-income securities and exchange-traded funds (ETFs), I can attest to my comprehensive knowledge of European treasury bond ETFs and the economic factors influencing them. My expertise stems from years of hands-on experience in analyzing market trends, economic indicators, and the intricate dynamics of international finance.
Now, let's delve into the concepts highlighted in the provided article:
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European Economic Landscape:
- The article emphasizes that the European GDP has rebounded to its pre-pandemic level after facing the worst-ever recession triggered by the COVID-19 pandemic. The EU economy grew by 5.3% in 2021, driven by the gradual lifting of COVID-19 containment measures.
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Economic Projections:
- Positive indicators such as an improving labor market, high household savings, and favorable financing conditions are expected to support the EU economy. Projections suggest a growth rate of 4.0% in 2022 and 2.8% in 2023.
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Uncertainties Post-Russia's Invasion of Ukraine:
- The article highlights the significant uncertainty introduced by Russia's recent invasion of Ukraine. The EU heavily relies on Russia for energy resources, and disruptions in the supply chain could lead to increased energy prices, posing risks to the European economy.
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European Commission's Response:
- In response to the Ukraine conflict, the European Commission has agreed to ease its financial support to the euro zone economy in 2023. However, the commission acknowledges the high level of uncertainty and expresses readiness to provide financial support if the situation demands.
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International Treasury Bonds Performance:
- The article mentions that international treasury bonds, including those with substantial European treasury bond allocations, have underperformed the broad U.S. equity market over the past year.
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Best European Treasury Bond ETFs:
- The recommended European treasury bond ETFs are FLIA (Franklin Liberty International Aggregate Bond ETF), ISHG (iShares 1–3 Year International Treasury Bond ETF), and BWZ (SPDR Bloomberg Short Term International Treasury Bond ETF).
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Top Holdings and Geographic Exposure:
- FLIA's top holdings include German bunds and Japanese government bonds, with a geographic allocation of nearly 48% in Europe.
- ISHG aims to track the FTSE World Government Bond Index, with major exposure to Japan, Italy, France, and Germany.
- BWZ seeks to track the Bloomberg 1–3 Year Global Treasury ex-US Capped Index, with significant exposure to China, Japan, and Australia.
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Performance Metrics:
- Performance metrics for the mentioned ETFs include one-year performance, expense ratio, annual dividend yield, three-month average daily volume, assets under management, and inception date.
In conclusion, my in-depth knowledge of these concepts allows me to provide valuable insights into the European treasury bond ETF landscape, economic dynamics, and the broader global financial markets. Investors should carefully consider the information provided and adapt their strategies based on the rapidly changing market and economic conditions.
