The decline in the US dollar partly accounts for the dramatic rises in the price of commodities such as gold and oil which are priced in U.S. dollars. Even if they remain the same price in euros, they’re higher in U.S. dollars, making them more expensive for U.S. consumers and businesses.
Because there’s no one stable world currency, the only safety lies in diversification.
However, it’s not easy for the typical investor living in Waterloo Iowa to safely branch out and establish an income in other currencies.
American banks don’t offer accounts denominated in currencies other than the U.S. dollar. And they charge high fees to cash checks denominated in other currencies.
Foreign exchange trading has become popular, but is extremely risky and certainly not for ordinary investors. It is betting on short-term currency fluctuations, not long-term currency diversification.
However, investors can buy shares of BWX. That’s the ticker symbol of the SPDR Capital International Treasury Bonds exchange traded fund. BWX tracks the Barclays Capital Global Treasury ex-U.S. Capped Index (ticker: LTXUTRUU).
This means that BWX invests in the long-term (at least one year or longer) sovereign debt of investment grade countries outside of the United States. These are government bonds of politically stable and developed countries, backed by their full faith and credit — not to mention their ability to tax their citizens.
Therefore, for all practical purposes they’re as safe as U.S. Treasury bonds.
All these bonds pay interest in the local currencies. Like all bonds, their interest rates are fixed. But if that currency goes up in value against the U.S. dollar, the income you receive in U.S. dollars goes up an equivalent amount.
The interest rates these bonds pay is relatively low because they’re safer than corporate bonds. The average coupon is 4.25%. However, everyone should remember that chasing higher yields regardless of risk is what triggered the current financial crisis. Besides, that’s higher than U.S. treasuries or ordinary certificates of deposits. (However, there’s no guarantee that won’t change in the future.)
The gross expense ratio of BWX is 0.50%, and it pays dividends on a monthly basis. The average credit quality is AA2. The average maturity is 8.24 years.
The total number of bond holdings is 95.
The top countries it holds bonds from are: Japan (22.46%), Italy (11.80%), Germany (10.77%), Belgium (4.78%), United Kingdom (4.68%),France (4.61%), Spain (4.55%), Canada (4.53%), Netherlands (4.41%), Greece (4.32%), Austria (3.75%), and Poland (2.88%).
As you can see, there’s a broad balance between Japan and Europe, with Canada included.
Before December 19th, 2008, BWX was known as the SPDR Lehman International Treasury Bond.
One alternative for U.S. investors would be to invest in ETFs of international stocks, but those are subject to business risk. If you buy, for example, shares in a Japanese company it’s stock could go down for business reasons. You would lose money even though the yen is appreciating against the U.S. dollar.
Therefore, BWX is a safe and convenient way for U.S. investors to hedge their currency risk while receiving significant income.