Adding geographic diversity to your portfolio with foreign bond funds.
Sometimes, readers send in questions. I am always happy to answer them. Recently, I received this question from a reader:
I am interested in diversifying to more foreign investments. Does it make sense to include foreign bond funds in my portfolio?
Of course, the answer varies from person to person, and depends on your own risk tolerance and ultimate financial goals. There are a number of low cost mutual funds and ETFs that you can choose from, including those that offer foreign investments. Additionally, foreign bond fonds are becoming increasingly popular as investors look for yield.
It's hard to get excited about Treasury yields right now, so it makes sense to look elsewhere.
Where to Find Better Bond Yields
Of course, you can find pretty amazing bond yields if you look to many eurozone countries right now. Spain and Italy offer quite attractive yields. However, there is risk there. After watching the haircut private bondholders took in the Greek bailout deal, it's hard to imagine too many regular folks getting excited about risking their money on anything connected to the eurozone. It's just too volatile over there right now.
Another option is to consider emerging markets. While you might see some risk from Brazilian bonds, they seem like a reasonable choice right now. Other emerging markets, like Poland and South Korea, are also offering interesting options that seem a little more stable right now (although there is always the risk of loss).
Finally, bond yields are a little bit higher in Canada and Australia than in the United States. These are developed economies that are backed by vast natural resources. As a result, bonds from these countries are looking better and better. You won't see the same high yields evident in emerging market countries, or in stressed European countries, but you'll likely see a better yield than what you would get with US Treasuries.
Realize, though, that there are other risks involved with foreign bonds. Accounting standards might not be as transparent, and you run into currency risk. So choose carefully if you decide to invest in foreign bonds.
What about Foreign Bond Funds?
Of course, my reader wanted to know about foreign bond funds. Funds offer you the chance to invest in a variety of assets, providing instant diversity. This can be a real advantage in the long run — especially since some of the more popular companies are starting to offer bond funds that provide the ability to invest in a variety of countries' bonds. You do have to watch out for higher prices, though. Some of these bond funds, like the Templeton Global Bond, have sales loads.
You can look for cheaper alternatives, and they are out there. You can find bond funds that focus on developed countries, and those that focus on emerging markets. You can also look to Vanguard, which is rolling out new bond index funds (hooray for low costs!). The Total International Bond Index Fund looks very promising, since it includes a variety of corporate and government bonds in a number of countries around the globe. Vanguard is also expected to offer an emerging market fund.
If you want a little more foreign exposure, and if you are looking for yields that beat Treasuries, it can make sense to consider foreign/global bond funds. Just make sure you do your due diligence before investing, and ensure that what you choose works with your own investing goals.
Image source: ToastyKen via Flickr