Now, this is an innovative product: a foreign TIPS fund.
StateStreet Global just launched the
SPDR DB International Government Inflation Protected Bond ETF
WIP stands to be a great diversifier and a way to benefit from the growth (via inflation rates) from many countries without being vulnerable to their stock-market volatility.
The fund can own bonds from 18 different countries weighted by the amount of inflation-protected securities outstanding.
As of March 17, the U.K. was the largest weight at 17.96%, followed by France at 17.07%; the country weights get much smaller from there. At present, 23% of the fund is allocated to emerging-market countries like Turkey, South Africa and Uruguay.
One thing to note: 15% of the fund is in U.S. dollars. This is temporary, as the fund is not fully invested yet.
Based on the index composition, as opposed to what is in the fund right now, I would expect a big chunk of that 15% to be allocated to Brazil and Mexico for even more emerging-market exposure. However, that hasn't happened yet, according to the StateStreet Web site.
The fund has a 0.50% expense ratio. It concentrates maturities with 24% being one year or less and 28% maturing in 7-10 years.
The amount in one-year paper may come down when the rest of the fund is implemented. The average credit rating of the portfolio is AA-, which may seem high, but the holdings are all sovereign debt.
The yield is currently 2.01%, but with fixed-income ETFs the yield can be a moving target. If you follow the foreign fixed-income market at all, you may be familiar with some of the very high yields available in some of the countries in the fund -- but remember that these are inflation-protected issues and they yield less. The big benefit is that the par values of these bonds adjust up at the rate of inflation.
The back test only goes back one year from Feb. 29, and for that one year, the index was up 20.99%. According to
, 12% of those gains were from the dollar's decline against most of the currencies held within the fund, and 5% came from inflation. with the rest coming from coupon payments.
I am as entrenched in the weaker dollar camp as anyone, but expecting 12% per year to come from a dollar decline in the future is not realistic. I was quoted elsewhere saying that 5% to 6% might be more like it. As I think about it some more, even that may be a little high. Getting 2% to 4% from currency, 3% to 5% from inflation and a couple more percentage points in coupon payments would make WIP a home run for a bond fund.
In addition to the innovative nature of the fund and its strong, but short, back test, the index only has a 0.01 correlation to the
Used in moderation, 3% to 5% of the portfolio, I believe that WIP will be an excellent tool for diversification in a broad portfolio.
However, I would wait until the rest of the fund has been implemented before buying in. Brazil and Mexico seem like the obvious candidates for inclusion, but that does not make it so until the bonds are purchased.
I am hoping to start adding this fund in for clients in the next month.
At the time of publication, Nusbaum had no positions in the assets mentioned, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
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