Overseas Bonds Produce Fat Yields

Overseas Bonds Produce Fat Yields

Let me warn you up front: You probably won’t like today’s recommendation. It has nothing to do with the stock market. Today, I am going to recommend that you dip your toe into a different market—and buy bonds.

I bet not one in 100 readers gives the bond market as much attention as he gives to the stock market. And it’s fashionable these days to talk about all bonds as “bad” investments.

I don’t blame the bond skeptics. When most people think of bonds, they think of Treasury bonds—those issued by the U.S. Federal government. Treasury bonds offer yields that are below the official rate of inflation.

Take the 10-year Treasury note. It pays out an annual yield of under 1.7%. But the official annual rate of consumer price increases is about 2.3%. That means that, all else being equal, if you hold on to your Treasury note for the full 10 years, you’re actually paying Washington to loan it money!

Luckily, Treasury bonds aren’t the only bonds out there.

Emerging markets offer exciting new opportunities. And with economic growth in the emerging markets outpacing growth in developed markets such as the U.S., Europe, and Japan, investors now have much more faith in the bonds they issue. In fact, a lot of emerging market bonds now carry less credit risk than developed-market bonds.

So why are bonds so attractive now? Because the income they throw off is in short supply. Investors—particularly those nearing retirement—tend to favor investments that throw off a steady income stream. But in a world where the 10-year Treasury note yields less than 2% and the S&P 500 yield isn’t much better, the market is sending a clear message that income is scarce.

More than 10,000 baby boomers turn 65 every day in the U.S. And most of those boomers want safe, stable investments. They don’t want to put their hard-earned savings at risk. So the trend will favor the relative safety of bonds. Unlike stocks, bonds guarantee you the return of your principal, as long as the issuer doesn’t go bust.

That doesn’t mean I’m recommending that you go out and buy Treasury bonds. The yields aren’t worth it. And the U.S. has far too much debt. That makes Treasury bonds a poor long-term choice. Instead, I recommend you grab higher yields by way of two emerging-market debt ETFs.

Both ETFs deliver fat yields and a strong record of capital appreciation (returns).

The top five holdings of each bond are issued by Romania, Pakistan, Vietnam, Korea, and Uruguay…and the Philippines, Russia, Peru, Brazil, and Indonesia.

Both funds invest in U.S. dollar denominated, emerging-market bonds. So you don’t get extra currency diversification (or currency risk) here. Instead, you get the backing of the strong fundamentals of the emerging markets and fat yields…

Editor’s note: Get the full article, with more details on these ETFs and where to buy them, in the current issue of International Living magazine. If you’re not already a subscriber, you can become one here and gain instant access to this article and all the other articles in the July issue.

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