Looking For Real Yields On Sovereign Debt? A New ETF Can Help

Ten-year Treasurys closed with a yield of 1.75 percent Tuesday and that is far from the most piddly of a batch of scant yields on developed market sovereign debt. With so many developed markets turning to negative interest rates as a monetary policy tool, garnering adequate compensation for owning debt issued by those nations is becoming more difficult.

The new Cambria Sovereign High Yield Bond ETF SOVB can aide investors' thirst for sovereign debt yield. SOVB, the seventh exchange traded fund courtesy of California-based Cambria, takes a different approach than is used by traditional bond funds. Most bond ETFs are weighted by issue size, but SOVB seeks to identify attractively valued debt with favorable risk-reward profiles.

SOVB “applies the Cambria's core principles of value investing to fixed income by buying and holding attractively priced foreign government bonds with high yield characteristics. While traditional bond funds are often concentrated in the largest debtors, SOVB holds a well-diversified portfolio of liquid sovereign debt,” according to a statement issued by Cambria. 

Not surprisingly, the new ETF is heavily allocated to emerging markets. Due to a combination of higher interest rates and lower credit ratings than developed markets, developing economy sovereign debt usually provides investors with superior compensation for the risks they incur when investing in the asset class.

SOVB does not allocate more than 10 percent of its weight to any country. India is the new ETF's largest country weigh at 9.9 percent, which gives SOVB one of the largest allocations to Indian sovereign debt. Indonesia, which recently lowered interest rates, is SOVB's second-largest geographic exposure. Brazil, home to some of the highest rates in the world, is the third-largest country weight in the ETF. Greece, Russia and South Africa each account for more than 6 percent of the ETF's weight.

Brazil and Greece sport junk credit ratings and South Africa could be on its way there. 

Over 73 percent of SOVB's holdings have maturities ranging from under five years up to 10 years, according to issuer data. More than 26 percent have maturities of 10 to 20 years. 

“Foreign bonds are the largest asset class in the world, yet dramatically underrepresented in investor portfolios,” said Cambria Chief Investment Officer Meb Faber in the statement. “Moving away from a market-cap strategy and employing a value lens to foreign government bonds could help investors gain smarter access to income in a yield-starved environment.”

SOVB charges 0.59 percent a year, or $59 per $10,000 invested.