Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your experience. Save up to 40% More details

New ETF Offers Investors A High-Yield Haven

By Wall Street Daily (Alan Gula)ETFsMay 16, 2016 05:21AM ET
New ETF Offers Investors A High-Yield Haven
By Wall Street Daily (Alan Gula)   |  May 16, 2016 05:21AM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items

In early 1998, Russia was hemorrhaging foreign exchange reserves.

A number of factors were feeding into worries about Russia’s debt sustainability – including the Asian financial crisis in 1997, a decline in the price of crude oil, political instability, and widening fiscal deficits.

Emergency loans from the International Monetary Fund and World Bank did little to stem the tide. On August 17, 1998, Russia devalued its currency (the ruble) and chose to default on its debt.

The Russian crisis serves as a warning: Even government bonds can be very risky.

Is the Risk Worth the Reward?

Today, Russia’s 5-Year government bonds yield around 9%.

In fact, Russia’s sovereign bonds are among the highest yielding of any country, as you can see in the following table:

Selected High-Yielding Government Bonds
Selected High-Yielding Government Bonds

In a world seemingly starved for yield, these rates are all rather high.

Indeed, very few investors like the sovereign debt in the table above because the perceived risks are significant.

Several countries’ economies on this list have suffered damage from the plunge in commodity prices, and many are in the throes of political turmoil or nasty recessions.

There’s a lot to be worried about. Hence, these bonds are unpopular.

But if popular investments should usually be avoided, then could these unloved bonds actually be attractive investments?

High-Yield Sovereigns

Typically, “high-yield” refers to sub-investment grade corporate bonds, or junk bonds.

In “Finding Yield in a 2% World,” Mebane Faber, Chief Investment Officer at Cambria Investment Management, back-tested a high-yield government bond strategy.

The universe comprised 30 countries from the Global Financial Data database and is sorted based on nominal yield. The top one-third of the bonds are bought, with periodic reconstitution.

The results were fairly surprising.

From 1950 to 2012, the high-yield strategy actually outperformed an equal weighting of all countries in the universe by around 2% per annum.

The outperformance was also consistent across decades, including both rising and falling interest rate environments.

The returns were U.S. dollar-based, but over the very long term, local real returns should be similar.

The high-yield bond portfolio also seems to have outstanding diversification benefits.

The table below compares the performance metrics for a traditional 60/40 portfolio, with those of portfolios having 20% and 40% allocations to sovereign high-yield bonds.

Asset Allocation Strategies: 1950-2012
Asset Allocation Strategies: 1950-2012

As the allocation to high-yield government bonds increases, returns rise, volatility decreases, and maximum drawdowns (peak-to-trough declines) are reduced.

The more favorable risk/reward relationship is also shown by the rising Sharpe Ratio.

Miraculously, adding unpopular, high-yielding sovereign bonds to a traditional portfolio can actually reduce risk, while increasing returns.

Now, for most retail investors, buying sovereign bonds issued by Indonesia would prove challenging, to say the least.

But there’s now a viable option…

ETF to the Rescue

Luckily, Faber’s firm launched the Cambria Sovereign High-Yield Bond ETF (SOVB) earlier this year.

SOVB is one of the many new exchange-traded funds (ETFs) that gives investors convenient and cheap access to promising strategies.

The ETF systematically buys the highest-yielding sovereign and quasi-sovereign bonds with sufficient liquidity.

SOVB’s annual expenses are 0.59%, which is reasonable for an ETF that has exposure to smaller bond markets. For example, the WisdomTree Emerging Markets Local Debt (NYSE:ELD) has an expense ratio of 0.55%.

Clearly, the data show that high-yielding government bonds are attractive long-term investments.

Far more often than not, the worst-case scenario – such as a default or currency crisis – doesn’t materialize. Thus, investors wind up more than fairly compensated for risk exposures via the higher yields.

And now that there’s a high-yield government bond ETF, I don’t want to hear any more complaints about the dearth of yield in this environment.

Original post

New ETF Offers Investors A High-Yield Haven

Related Articles

New ETF Offers Investors A High-Yield Haven

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
Sign up with Email