UDN - BWX: As 2 Mega-Trends Reverse This ETF Finally Deserves A Look

Summary

• BWX is part of a class of ETFs that investors could be excused for ignoring since at least 2018, if not several years prior.
• This ETF buys government bonds from many nations, just not from the US.
• That makes BWX a potential beneficiary of 2 big trend reversals: rising interest rates and potential topping of the US Dollar versus other currencies.
• The yield on this ETF is still quite low, but it is on the move higher. And if the Dollar continues to recede, the total return could be strong just based on that.
• BWX gets a Buy rating. It may take a while for this to play out, but the reward potential seems worth the risk to us, for the first time in a while.

By Rob Isbitts

Strategy

SPDR Bloomberg Barclays International Treasury Bond ETF (BWX) tracks the Bloomberg Global Treasury ex-US Capped Index. That index is comprised of government bonds from many countries, but not the United States. That makes BWX essentially International version of a Treasury ETF.

Proprietary ETF Grades

• Offense/Defense: Defense

• Segment: Bonds

• Sub-Segment: Non-US Government

• Risk (vs. S&P 500): Low

Proprietary Technical Ratings*

• Short-Term (next 3 months): B

• Long-Term (next 12 months): A

* Our assessment of reward potential vs. risk taken

(Rating Scale: A=Excellent, B=Good, C=Fair D=Weak, F=Poor)

Holding Analysis

BWX owns bonds with a fixed interest rate. It does not hold floating rate bonds, and no zero-coupon securities. The bonds are issued in local currency. That means that they are subject to currency fluctuation, since the bonds' value is translated back into US Dollars to price the ETF nightly.

Holdings are widely-diversified by region and country. Developed Europe accounts for the largest single position (38%), followed by Japan (23%). Emerging Asian country government bonds are 12% of the fund, and Canada, the United Kingdom and Australia currently occupy 5% each, and Developed Asia, a younger bond market, accounts for 6% of assets. Latin American and Eastern Europe round out the ETF's global, highly-inclusive, non-US allocation.

Strengths

These holdings all represent obligations of non-US governments. That would hopefully lead to a greater level of stability and confidence in getting paid back, versus the corporate bond sector.

The average credit rating is A, which is essentially the weighted average of the country allocation of BWX. With 70% of the fund targeted for bonds between 1-10 years to maturity, this is not one of those long-term rate plays, as it would be if the whole ETF were 20-30 year maturities.

In addition, BWX represents an investment in foreign currency to a large extent. Barring a major event that impedes the creditworthiness of one or more countries that have significant allocations within this ETF, the currency aspect can, at times, be the total return driver here. So can a decline in interest rates in the "fat" part of this ETF's own yield curve, namely the 1-10 year maturity range.

Weaknesses

US Treasury bonds are considered the most reliable in the world from a credit standpoint (pending the annual debt ceiling debates in the US Congress and other political risks that could create political footballs). They carry a AAA rating from most rating agencies. Other nations carry varying credit ratings on their government debt. That leads to a less than AAA rating on this ETF. And, while an average rating of A is strong, it is not AAA. And with some of BWX invested in bonds issued in China and other potential trouble spots for investors, this should not be confused with a US Treasury bond fund.

Opportunities

I've followed this ETF for many years, but have rarely had a reason to zoom in on it like I am now. That's because there are a pair of mega-trends that might just be in the process of reversing, at least for an intermediate-term period of time.

One is the potential peaking of this part of the rate cycle. There is increasing evidence that rates are levelling out after a strong move higher. While the global bond market is not directly impacted by the Fed, the European Central Bank, Bank of Japan and other world central bank policy is often in sync with that of the US. So at a high level, this ETF can correlate to US rate trends.

In addition, as shown above, BWX has had a rough 5 years. That is no coincidence, as rates around the world were sustainably low, and the US Dollar was rising consistently. That naturally came at the expense of non-US currencies, which is an automatic drag on BWX. So, the twin-threats of low, then rising rates (which drops bond prices), combined with a strong US Dollar provided no real reason to look at BWX. But now, finally, those trends are more likely to either be reversing or at least stabilizing at better levels.

Threats

That said, this ETF is not really one that should be used primarily for earning income through BWX's dividend payments. Rates have lifted, and the ETF is in the 2-3% yield range. That's better than zero, which was the case for a while. But it is inferior to what US investors can get at home. And, if the US Dollar re-ignites, rates resume their sharp ascent, or both, BWX's investment attractiveness is diminished.

Conclusions

ETF Quality Opinion

BWX is one I have and continue to track on my watchlist. It is not the only non-US Dollar government bond fund I track, and it does have a decent amount of "duration risk," in that its bonds don't mature quickly as T-Bills do. Still, as I look ahead, I see this as a potential bounce-back candidate.

ETF Investment Opinion

I'm willing to put a Buy rating on this one. This niche ETF is not for everyone, but if you are searching for an interesting way to try to profit from a weaker US Dollar, and possibly from lower rates, this one has the features to consider. I'll feel even more convinced in that rating when we see a bit more technical (chart) follow through. But my firm's process is to evaluate the reward potential versus the risk of major loss of any ETF. On that most critical score, I land in the Buy camp, at least for the short-term to intermediate-term.

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