NEW YORK (TheStreet) -- Some financial advisors have long urged clients to diversify bond portfolios by including foreign issues. Not many investors have taken the recommendation. But this year it paid to look abroad. During the past 12 months, SPDR Barclays International Corporate Bond ETF (IBND) returned 5.0%, and PowerShares International Corporate Bond ETF (PICB) returned 3.3%, according to Morningstar. In comparison, the Barclays Capital U.S. Aggregate benchmark lost 2.1%.
The recent divergence between U.S and foreign markets is not unusual. Because foreign central banks do not necessarily move in line with the Federal Reserve, overseas bonds rarely move in lockstep with U.S. securities. "It is not uncommon to see a rally in the U.S. at the same time that there is a selloff in global bonds," says Brian Kinney, global head of indexed fixed income for State Street Global Advisors.
U.S. bonds sank this year because interest rates rose. When rates climb, bonds tend to fall. Rates also rose slightly abroad, but the impact in Europe was overwhelmed by other forces. A year ago many European bonds were depressed as investors worried that the ongoing financial crisis would lead to defaults. In recent months, the storm clouds have receded. Bond prices climbed sharply in troubled countries such as Italy and Spain as it appeared that the economies had hit troughs and were beginning to recover.
Recognizing the appeal of foreign bonds, a number of new ETFs have appeared this year. The most notable is Vanguard Total International Bond (BNDX). Convinced that foreign diversification is valuable, Vanguard has been pounding the table for the fund, which was launched in June. The ETF already has $720 million in assets. Along with the ETF, Vanguard also created mutual fund share classes that have $18.9 billion in assets.