German Bond ETFs In Focus (BUND, BUNL) - Top Yielding ETFs
November 24 2011 - 4:06AM
Zacks
Although Germany remains the strongest and most important
economy in the euro zone, it is slowly being sucked into the
quicksand along with its more free-spending neighbors. While German
government bonds, popularly known as ‘bunds’ have long been the
safe haven investment in the region—much like U.S. Treasury debt
here—there is growing concern that this perception may be rapidly
fading. At the very least, investors no longer seem willing to buy
up bonds with such anemic yields in the region, especially with the
current economic headwinds.
Thanks to this trend, the most recent auction of the bunds, in
which the German government attempted to sell 6 billion euros in
10-year debt, failed, with bids totaling just under 3.9 billion
euros. This situation forced the central bank to retain close to
40% of the offering and marked the sixth time in the last eight
auctions that the Bundesbank has been forced to take some of the
supply. Furthermore, the ratio of total bids to accepted bids was
just 1.07, the lowest in the euro zone era, while the ratio of debt
taken by the central bank was nearly double the average over a
similar time period. “It was awful,” said Nick Stamenkovic,
fixed-income economist at RIA Capital in Edinburgh. “It just shows
that investors are not only shying away from [peripheral] euro-zone
bonds,” but are turning away from the euro zone in general (read
Hungarian Crisis Crushes The Austria ETF).
With this backdrop, yields have moved sharply off of their 52
week low for 10 year German government debt as payouts are now in
the range of 1.95%, far higher than the 1.58% low they saw in the
middle of November. As a result of the increase in yield
volatility, despite the still solid financial position of the
central European nation, German bond investing has become more
popular in the U.S. However, buying up securities has been, at
least until very recently, difficult for the average investor to do
both cheaply and easily. Yet, recent developments in the ETF world
have broken down these barriers and now allow investors to gain
broad exposure to this increasingly important slice of the market.
Below, we highlight two great options for investors who are looking
to make a play on the German bond market:
PowerShares DB German Bund Futures ETN
(BUNL)
The original fund in the space, BUNL looks to provide investors
exposure to the U.S. dollar value of the returns of a German bond
futures index, replicating the performance of a long position in
Euro-Bund Futures. The underlying assets of this contract are
Federal Republic of Germany-government issued debt securities with
a remaining time until maturity of at least eight years and six
months but not more than 10 years and six months (read Top 3
Highest Yielding ETFs).
However, investors should note that this product is an ETN, and
as such, doesn’t actually hold German bunds. Instead, it is a
senior unsecured debt obligation of Deutsche Bank in which the
institution promises to pay out to investors a return equal to the
index. While this eliminates tracking error and allows for a
collateralized purchase of U.S. Treasury bonds—which can
theoretically juice the return of the product—it does also result
in credit risk for the investor that holds the product.
Nevertheless, BUNL has returned to investors 12.7% since inception,
far higher than both the S&P 500 and the Barclays Capital U.S.
Aggregate Index in the same time period. These outsized gains have
more than made up for the relatively pricey fee of 50 basis points
a year and could make this product a solid choice for investors
seeking bund exposure (also read Top 3 Highest Yielding Muni Bond
ETFs).
PIMCO Germany Bond Index Fund (BUND)
For investors seeking a broader play on the German bond market,
the brand new BUND could be the way to go. This fund from bond
giant PIMCO follows, before fees and expenses, the BofA Merrill
Lynch Diversified Germany Bond Index which encompasses
euro-denominated investment grade bonds issued by German entities,
including sovereign, quasi-government, corporate, securitized and
collateralized debt. In the top ten holdings, there is a nice mix
of corporate and Treasury securities with bonds from Land
Nordrhein-Westfalen taking the top spot followed by Federal
Republic bonds in the next two spots.
In terms of expenses, BUND is also on the high side, at least
compared to more diversified bond products with an expense ratio of
0.45%. Furthermore, since the product is so new—having debuted on
the 9th of November—the volume really isn’t there yet as
daily trading is only in the neighborhood of about 3,200 shares.
Nevertheless, for investors seeking broad exposure to the German
bond market, both in terms of corporate and treasury securities,
BUND remains the only diversified choice at this time.
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DB German Bund Futures Exchange Traded Notes Due March 31, 2021 (delisted) (AMEX:BUNL)
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DB German Bund Futures Exchange Traded Notes Due March 31, 2021 (delisted) (AMEX:BUNL)
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