2 ETFs for Eurozone Bond Exposure

LOW-COST FUNDS: Two ideas for investors seeking yield from government or corporate bonds amid eurozone quantitative easing

Holly Cook 16 January, 2015 | 7:00AM


Holly Cook: Hello and welcome to Morningstar. It's an interesting time for the eurozone markets and today we've got a couple of ETF investment ideas for those of you who may be interested in exposure to European bond markets. Joining me with these ideas is Jose Garcia Zarate. He is a Senior Passive Fund Analyst here at Morningstar. 

Jose, thanks for joining me. 

Jose Garcia Zarate: Hello. 

Cook: So, let's start with the assumption that the ECB is any day now going to announce quantitative easing and that this helps to support the eurozone economy, as it's intended to do so. What would be the effect on European bond markets? 

Zarate: The immediate effect would be a positive supportive effect on valuations across the board, and particularly for the government bond side of things because QE is essentially a government bond-buying programme. So, you would expect that government bond prices for the likes of Germany, Spain and all other eurozone countries would be supported, in particular, I would say, the peripheral countries. 

Cook: Well, if you wanted to get exposure to peripheral countries, that does sound like a bit of a sort of tactical bet? 

Zarate: It is. It is and the beauty of ETFs is that they give you the flexibility to slice and dice the market in very many ways and one of these ways is actually to gain exposure just solely to the lower-rated government bond markets within the eurozone. I've chosen one ETF that basically fits that bill, and it's the Amundi Lowest-Rated Investment Grade Government Bond ETF (X1G). It charges 14 basis points. 

Cook: And is that a relatively cheap fee for an ETF giving you that sort of exposure? 

Zarate: It is sort of like cheap to average. 

Cook: Okay. And then what about if you don't want to take that sort of a tactical bet looking just at the peripheral government debt, and you perhaps want to go towards corporate bonds for better yields. Do you have an ETF that would give us that broader exposure? 

Zarate: I think the ETF that's been extremely popular over the past few years precisely because it gives you a bit more of a yield pick-up relative to the government bond market is the iShares Core Euro Corporate Bond (IEAC). It's very sort of like mainstream, wide-ranging exposure to the euro-denominated corporate bond market and it charges 20 basis points. 

Cook: And are both of these ETFs available on the London Stock Exchange? 

Zarate: Well, you may find that with ETFs, some of them may be available on the LSE and some may not. What I would say is that from the point of view of an ETF investor, whether the ETF is listed on the LSE or not shouldn't be an impediment to actually execute trading orders because these instruments trade in different exchanges across Europe, and also sometimes in the US, and you as an investor don't have to be tied down to your local exchange. You can trade in any exchange in the world. 

Cook: So, of course, it's just like buying a stock on another exchange, but presumably you need to be aware of the currency differences? 

Zarate: There may be some trading considerations and FX considerations, but just because something isn't available on your local exchange if it's a nice and interesting opportunity maybe it’s worth exploring the availability in other European exchanges. 

Cook: So, no need to restrict yourself just to the local market then. 

Zarate: Not at all. 

Cook: Jose, thanks very much for those investment ideas. 

Zarate: You're welcome.

Cook: For Morningstar, I'm Holly Cook. Thanks for watching.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
iShares Core € Corp Bond ETF EUR Dist134.34 EUR0.09

About Author

Holly Cook

Holly Cook  is Manager, Morningstar EMEA Websites

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