Bond ETFs for European Index Investors

Guide to International and European Bond ETFs

This guide is designed for Investors looking to protect their International Equity Portfolio

Based on the Coronavirus Bond ETF Performance and full review I would suggest picking either of:

  • For best protection: iShares Global Government Bond ETF
  • For best protection/yield trade-off:  (i) iShares Core Global Aggregate Bond ETF, (ii) SPDR Bloomberg Barclays Global Aggregate Bond ETF or (iii) Vanguard Global Aggregate ETF
These are marginal preferences. The wider conclusion is that given that I have pre-selected only the most established names for this analysis any of the below Funds are good diversifiers for your portfolio depending on your Broker availability

Table of Contents

How do I choose an International Bond ETF?

The key criteria to think about when choosing European Bond ETFs (includes UK) for your Investment Portfolio are:

  • Availability – Not all of  options will be available with your Broker. Try to have a good variety to choose from
  • Geographical Diversification – You can choose an ETF with Bonds from the country/area you live in (e.g. Europe / UK) or diversify your risk further (Developed Countries)
  • Bond Type – You have the choice between Government Bonds only or Government Bonds & Other High Credit Rated Bonds. You want minimal volatility as Bonds are there to protect your Portfolio. You have the choice of Government Bond ETFs or Aggregate Bond ETFs (which are c.60% Government with some other highly rated securities). This choice will involve an incremental protection vs income trade off 
  • Income Treatment – Choose whether you want income to be distributed or reinvested based on your needs and tax efficiency
  • Currency – while this is not mandatory for Equities hedging cash flows to your currency (EUR,GBP) for Bonds is important to ensure stability of your portfolio and capital protection
  • Size – Try picking an established Asset Manager. Xtrackers and iShares are the largest players in Europe
  • Coronavirus Stress Test – European and International Bond ETFs have generally performed well during the Coronavirus Market sell-off with some nuances

BOND ETF TYPES

international bond etfs vs european bond etfs - infographic with pro and cons
Source: Bankeronwheels.com

What are the types of International Bond ETF?

There are four types on International Bond ETFs and can be divided across two criteria:

  • Geographical Focus – International or local Bond ETFs
  • Bond Type – Government or Aggregate Bond ETFs

GEOGRAPHICAL FOCUS - INTERNATIONAL vs. LOCAL

What geographical exposure can I get in a Bond ETF?

Outside the US, Bond ETFs can have 3 types of exposures:

  • International Bond (Developed Markets) ETFs
  • International Bond ETFs but concentrated in G7 Countries
  • Local Bond ETF – e.g. UK Bond ETF or European Bond ETF

International Bond ETFs

Typical Allocation of a Global Government (Developed Markets) ETF
BND UCITS equivalent for European and Uk Investors
Source: Bankeronwheels.com

What International Government Bond ETFs can I choose?

International Bond ETFs with focus on Developed Countries track either of two Benchmarks:

  • FTSE World Government Bond Index
  • FTSE Global Group of Seven Index (G7)

 

What is the difference between Government Bond ETFs tracking Developed Markets and G7?

The exposure of a World Government Bond ETF (Developed Markets) is to countries such as US (35-40%), Japan (approx. 20%), European Union, UK, Canada and Australia. Bond ETFs with G7 Countries are more concentrated, particularly as it relates to US Treasuries. These bond ETFs include only Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

Local Bond ETFs - UK and Europe

Typical Allocation of European Government Bond ETF
BLOOMBERG BARCLAYS EUROAGG TREASURY ishares SPDR LYXOR VANGUARD XTRACKERS
Source: Bankeronwheels.com

What is the country exposure in a Local Market Bond ETF?

Single Country / Area Bond ETFs are focused on either high quality EUR bonds or UK. European Bond ETFs have high allocation to countries such as Italy, France or Germany.

Does the choice between International and Local Bond ETF affect performance?

Since you will be hedging currency, in the long term return from International Government Bonds and your local Government Bonds tend to be similar as far as the theory goes (Figure 7 from this Vanguard research piece

What is the benefit of International Bond ETFs?

In a nutshell, International Bond ETFs provide better diversification without reducing returns

ETF BOND TYPE - GOVERNMENT VS. AGGREGATE

What Issuer Type exposure can I choose from in a Bond ETF?

When choosing the debt Issuer type, you have the choice between:

  • 100% Government Bond ETFs
  • Aggregate Bond ETFs (only c. 60% Government Bonds)

 

What is an Aggregate Bond ETF?

These are the broadest fixed income ETFs. These bond ETFs use a total bond market approach, which means about two-thirds government bonds and one-third corporate / or highest quality US mortgage products (e.g. implicitly guaranteed by the Government)

 

What is the typical Breakdown of Bonds found in a European and an International Aggregate Bond ETF?

  • The yellow breakdown is the sector allocation of the iShares Euro Aggregate ETF while the orange one is the iShares Global Aggregate ETF
  • While the composition may similar the geographical coverage means that the International Aggregate Bond ETF will have exposure to the highest quality American Mortgage Securities while the European one won’t
  • Non-Government Bonds provide you with enhanced yield compared to Government
European Aggregate ETF
International Aggregate ETF
AGGG AGGH AGBP AGGU GLAD GLAB GLAU SPFE GLAC VAGS VAGF VAGE VAGP GAGH EUN4 SYBA european bond etf agg sectors etfs
AGGG AGGH AGBP AGGU GLAD GLAB GLAU SPFE GLAC VAGS VAGF VAGE VAGP GAGH EUN4 SYBA global agg sectors etfs

Does the choice between Government and Aggregate Bond ETF impact quality and performance?

  • Government Bond ETFs give you the best protection and will react faster in a downturn 
  • Aggregate Bond ETFs remain very good quality but provide a bit more income (Government Bond yields in EUR area can be negative nowadays so Aggregate Bonds give you a better income)
  • As of August 2020, the Bloomberg Barclays Global Aggregate Index Hedged to EUR yields 0.9%. The Equivalent Yield to Maturity (8 yr duration) for most Developed Countries can be between 0.5% to negative but when averaged out and swapped to EUR Government Bond Index Yields will likely be negative

DIVIDEND TREATMENT - ACCUMULATING vs. DISTRIBUTING

Should I choose an Accumulating or Distributing Bond ETF Share Class?

The Bonds that pay interest can be distributed via dividends.

Choosing between accumulating or distributing funds is among the first choices investors in Europe make. The appropriate option may reduce your taxes. 

  • In most Continental Europe accumulating funds generally have lower taxes because they fully reinvest dividends without triggering dividend taxes
  • In the UK’s deemed tax on dividends taxes all accumulating fund dividends at the same tax rate as normal dividends except when part of an ISA account (where you don’t pay taxes). Other similar countries where distributing and accumulating makes marginal/ no difference include Switzerland or Germany (again, except if in tax protected schemes)
  • Verify ETF tax treatment for your country before choosing an accumulating or distributing ETF
If you’re just starting out, here is a guide on how to choose between Distributing vs. Accumulating ETF Share Classes

CURRENCY HEDGING

Should I hedge currency risk in a Bond ETF?

Yes, hedging Bonds will reduce volatility of your portfolio.

If you want to understand how it works, read this guide.

BEST BOND ETFs

Which Bond ETF should I choose?

Pick the ETF in your currency to reduce FX Risk. Then, choose between accumulating and distributing based on your personal tax situation.

Below are three lists with currency hedged funds

  • International Government Bond ETFs
  • European Government Bond ETFs and UK Bond ETFs
  • Global and European Aggregate Bond ETFs

All are good options but not all of them may be available with your Broker

A. Most liquid International Bond ETFs (Only Government Bonds)

european governement bond etfs xtrackers ishares spdr lyxor vanguard ftse bloomberg iboxx XGSI XGSG XGSH XGVD X03H SGLU IGLH IGLE
Source: Bankeronwheels.com

As mentioned above you have the choice between ETFs tracking two benchmarks FTSE World Government Bond Index or FTSE Global Group of Seven Index (G7)

If you choose an International Government Bond ETF choose based on the Type of Income Treatment you want and Currency Hedging available

B. Most liquid UK and European Bond ETFs (Only Government Bonds)

global government bond etfs xtrackers ishares usd eur gbp chf index investing europe XGLE EUNH SYBB MTX VETY VGEA IGLT GILS VGOV
Source: Bankeronwheels.com

European Bond ETFs are mainly distributing Income and UK has little flexbility in this respect as well. 

If you choose a local Government Bond ETF Income Treatment is the most important aspect

C. Most liquid International and European Bond ETFs (Aggregate Funds)

BLOOMBERG BARCLAYS EURO AGGREGATE GLOBAL AGG AGGG AGGH AGBP AGGU GLAD GLAB GLAU SPFE GLAC VAGS VAGF VAGE VAGP GAGH EUN4 SYBA
Source: Bankeronwheels.com

Aggregate Bond ETFs are great to generate a bit more income while still preserving the protection benefits

CORONAVIRUS STRESS TESTING

Reviewed Index Funds have generally performed well in the COVID-19 Stress test in March 2020:

  • International Government Bond from G-7 Countries (as tracked by iShares IGLE Fund) have performed best – it’s perhaps no surprise since US Treasuries are the safest assets and these represent 44% of the Index – while iShares outperformed Xtrackers International Governments this could be due to liquidity of EUR classes since USD classes had very similar drawdown at -5%
  • International Aggregate ETFs have benefited from exposure to the US
  • European Government Bond ETFs have performed similarly (-8/-9%) for similar duration as International Government Bond ETFs
  • European Aggregate Bond ETFs have had the worst performance (as expected) since they provide incremental yield vs. Government Bond ETFs (trade-off  explained above)

EUR denominated International and European Bond ETFs performance during March 2020 Sell-Off

CONCLUSION

  • All ETFs performed quite well in the context of the crisis
  • Pure Government Bond ETFs with US exposure provided marginally better protection
  • The key players are somewhat different from the US Markets – while BlackRock’s iShares, State Street SPDR and Vanguard are all present, local players have also a strong footprint – Deutsche Bank’s Xtrackers, Societe Generale’s LYXOR, Amundi ETFs or UBS ETFs
  • The choice is somewhat narrow compare to the US Market and one should choose among the most liquid Funds 
  • If you have the choice Deutsche Bank Xtrackers have the largest funds and it makes sense to invest in them if you want increased liquidity (Vanguard is still relatively small in Europe) while overall BlackRock’s iShares remains the leader in Europe
  • Either one of these two would be a great choice but an International Aggregate Fund can provide you with an additional yield pick up

Appendix - READ MORE

INVESTING GUIDES

GROW YOUR PORTFOLIO
Market Dashboard
FINANCIAL MARKETS RESEARCH
CHOOSE THE BEST ETFs
PROTECT YOUR MONEY
UNDERSTAND BOND ETFs
INVESTING FAQ
READ ALL INVESTMENT INSIGHTS
CYCLE THE WORLD

DISCLAIMER

All information found here, including any ideas, opinions, views, predictions, forecasts, commentaries or suggestions expressed or implied herein, are for informational, entertainment or educational purposes only. The information provided on Bankeronwheels.com is general in nature only and does not constitute personal financial advice.

Before acting on any information contained on Bankeronwheels.com you should consider the appropriateness of the information having regard to your objectives, financial situation and needs, and seek professional advice where appropriate. Read the terms and conditions.


HAVE A QUESTION ABOUT INVESTING?

Drop it below or if you enjoyed my work and found it useful please do leave a comment or share it with someone that may benefit from it – I am grateful for your feedback

This website is non-revenue generating and I do pay for services and software to keep it running.

Good luck and keep’em* rolling!

(*Wheels & Dividends)

Raph

 

FAQ

It’s one of the most liquid International Bond ETFs with FTSE Global Group of Seven Index (G7) as benchmark with US, Japan and France as largest issuers. The ETF is managed by BLACKROCK

It’s one of the most liquid International Bond ETFs with FTSE World Developed Government Bond Index as benchmark with US, Japan and France as largest issuers. The ETF is managed by DWS

It’s one of the largest and most liquid European Government Bond ETFs with France, Italy and Germany as largest issuers. The ETF is managed by DWS

It’s one of the largest and most liquid European Government Bond ETFs with France, Italy and Germany as largest issuers. The ETF is managed by BLACKROCK

The FTSE Actuaries Government Securities UK Gilts All Stock Index offers exposure to Sterling denominated UK government bonds (conventional gilts) quoted on the London Stock Exchange, other than index-linked bonds. The ETF is managed by BLACKROCK

It’s the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by BLACKROCK

It’s one of the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by State Street

It’s one of the largest and one of the most liquid International Aggregate Bond ETFs with US, Japan and France as largest issuers. The ETF is managed by Vanguard

It’s the largest and one of the most liquid European Aggregate Bond ETFs with France, Germany and Italy as largest issuers. The ETF is managed by BLACKROCK

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Damien
Damien
11 months ago

Very useful summary

Simon
Simon
10 months ago

Hi Raph, I wanted to thank you for producing this. It’s the most useful guide I’ve found on Bond ETFs. As someone who understands stocks well enough but pretty clueless about bonds, it was just what I was looking for. It hits the sweet spot between simplicity/ease of understanding and the important details that we need to know and the decision points we need to worry about most. Great job.

Vita
Vita
10 months ago

Hi Raphael, thank you for this guide, very useful.

One problem I ran into is that there seems to be limited historical data for the global aggregate funds (AGG_, GLA_, VAG_) – as little as 2-3 years. They all track the Bloomberg Barclays Global Aggregate Bond Index, for which I was unable to find any historical data whatsoever.

Do you have a suggestion as to what data one can use as a substitute to backtest historical correlations to other assets?

Thank you so much.

CuteBear
CuteBear
10 months ago

Hi,

If my portfolio has 22.5 to 30 percent bonds. International government bonds, European bonds, corporate bonds, treasury bonds. Do I have to combine them all into one part of my portfolio? or the portfolio will not be too much for all types of bond to hold

Kevin
Kevin
9 months ago

This was extremely insightful and very concisely written.

I have a somewhat naive question that I was hoping you could kindly clear. From the aggregate bond etfs that you’ve recommended, am I correct in saying that they all fall under distributing dividends?

If not – then I seem to be having trouble differentiating between distributing and accumulating on the fund listing page!

Last edited 9 months ago by Kevin
Maciej
Maciej
9 months ago

Hi Raph,

First of all thank you for the website! It is really great 🙂

I have one question. As I’m from Poland, there are no bonds ETFs hedged to local currency (only EUR or USD). In this case does it make sense to go for US/Global unhedged bonds ETF to diversify equity? My equity portfolio is purely global with higher EM share so I’m exposded to F/X anyhow (for now I have some gold and PL TIPS as well).

Maciej
Maciej
9 months ago

Hi Raph,

Many thanks! This is really supportive 🙂

Maciej

Vitalii
Vitalii
8 months ago

Hi Raph Antoine! I am 24, just started investing and luckily stumbled upon your website. You point out multiple times that bonds are a bit risky now given that yields are low [thus opportunity cost is also low], and there is a risk that interests rate start rising which will drive the price down of a bond ETF. So I am really confused if I need bonds at all or I simply can hold cash, and only add 7% of gold as diversifier and put the rest into Vanguard FTSE All-World (VWCE). But now, I do think whether I need… Read more »

Michal
Michal
7 months ago

Hi Raph, thanks so much for all that amazing work. I have a question: we have a below zero interest rates in EUR. With potential inflation from so much created money, why TIPS bonds are not among your recos? It feels they are only mentioned in passing, why?

Karel
Karel
6 months ago

I really enjoy reading your website. Keep up the nice work. I have a question about this section: wouldn’t it make sense to explicitly discuss the influence of the average bond maturity in the etf on the risk of holding it? As in, longer average maturity leads to larger potential decrease in value in an environment with rising interest rates (and larger increase when interest rates fall of course)? What would be a suitable average maturity according to you (for the global aggregate bond etfs mentioned above, the average maturity is 8.89 years)? If one expects to sell the etf… Read more »

Michal
Michal
6 months ago

Hi Raph, amazing work! Question: There’s so much talk about “bonds bubble” right now. I imagine this refer mostly to US goverment bonds, that are being bought like crazy by FED. Or does it equally apply to the whole world? And whether the bubble talk is true or not, shall we all expect negative growth of smth like ishares world bonds aggregated ETF (eur hedged) when interest rates will start to grow eventually in the whole world? The average coupon of that etf is 2.25. What is the connection between this figure and the expected year’s profits of the etf?… Read more »

Maciej
Maciej
5 months ago

Hi Raph, Many thanks for the Bond ETF calculator:) Really interesting. I just missed the overall conclusion from the exercise. I guess that the point is that the reinvestment of coupons and ETF provider adjustments to keep declared duration will assure nominal return of bond ETF in a long run despite interest rates increases.  However as you mentioned the key issue is inflation, so have you considered possibility in a calculator to input „spread” on market yields to proxy for inflation? In this case the conclusion will be a real loss? When I look on real interests rates history (https://www.longtermtrends.net/real-interest-rate/)… Read more »

Maciej
Maciej
5 months ago

Indeed. 2x duration is helpful rule of thumb:) Cheers!

Zubon
Zubon
4 months ago

Just wanted to thank you for sharing so much of your experience and knowledge. It’s like having a buddy who works at a hedge fund, but it’s written down, it scales, and you don’t forget half of it after talking over a few pints. Each blog comes at things from a different direction and I hadn’t found a good source on portfolio rebalancing and bonds in particular – till now. I also refer to portfoliocharts, bankeronfire, finumus, firevlondon, and monevator for UK infrastructure/tax info. Worked on a trading floor in JP for 10yrs, was great fun. Most memorable cycling trip… Read more »

Pires
Pires
4 months ago

Hi Raph, what about TIPs, on your three portfolios you discussed in an earlier post (e.g. Golden R., Cyclist and Banker) we could have a small allocation to these via ETFs, but which ones should an European investor really look into, namely in the current low interest rate and potentially inflationary future environment? (and risk Central banks will start increasing rates as well).

Werner
Werner
2 months ago

Hi Ralph, I just stumbled upon this website but, wow, I’m so impressed. You have assembled everything an ETF investor needs to know. I’m investing in ETFs since many years, but I still learned quite a few things. Your guide on EU bond ETFs is very useful, but I was wondering why you only tackle government bond and aggregate bond ETFs, and not inflation linked bond ETFs. Especially since your model portfolios contain 7.5% inflation protection assets. What is your opinion on these ETFs and would you consider writing a guide on them? In any case, thank you so much… Read more »