Exploit Weak Dollar With a Foreign Bond ETF

I think allocating 20% of a bond portfolio to foreign countries is a reasonable approach. Allocating 70% to this portion to the broad-based BWX, 20% to FAX and 10% to EDD would be a simple way to have broad exposure and enhance yield dramatically, versus just buying BWX. Instead if 3.56% from BWX alone the above mix would yield 4.72%, and obviously a more aggressive investor could tweak the mix to take on more volatility and yield.

This is a part of the market where there should be a lot more product development. In addition to other broad-based products in the works, PowerShares will be listing an emerging market bond ETF soon with ticker PCY, State Street has a global TIPS fund in registration and I also expect to see more specialized products, such as regional funds that invest in Oceania, the Nordics and the European continent and perhaps some single-country bond funds for places like the U.K. or Canada.

Owning foreign assets can be thought of as a bet that the dollar will go down. So the biggest risk to owning foreign bonds is that the dollar goes up. While I do believe the dollar will be weaker over the longer term, there will be pockets of dollar strength over shorter period. When that happens, BWX or any other similar product is likely to go down.

Still, ETFs should provide a less volatile way to invest in foreign bonds than closed-end fund. That's because closed-end funds issue a fixed number of shares and prices can fluctuate widely from their net asset value. But ETFs can create new shares when demand soars and breaks up existing shares into their component securities when it falls off. As a result, they don't fluctuate from their net asset values anywhere near as much as closed-end funds.