ETF Ideas For The JGB Party

One of Tuesday's big financial news items was the descent of 10-year Japanese government bond (JGB) yields to below zero for the first time. With global investors thirsty for safe-haven assets, yields on the benchmark JGB fell as low as -0.007 during Tuesday's Asian session.

Earlier this month, Japan joined the ranks of countries with negative interest rates, pounding the yen and providing a boost to currency hedged Japan exchange-traded funds in the process. With the combination of Japan's ongoing monetary easing efforts and investors' thirst for safe-haven assets, JGBs are not an income story. Rather, these bonds have become a capital appreciation play.

U.S. investors looking to get in on the fun have some options from the world of exchange traded products, but they should be careful before getting excited about the DB Japanese Govt Bond Futures ETN JGBL and the DB 3x Japanese Govt Bond Futures ETN JGBT. JGBT has surged nine percent over the past month, but the ETN is difficult to access.

“Deutsche Bank has suspended further issuance on JGBL and JBGT. While JGBL has shown little trading activity, JGBT has attracted increased interest, with volumes on Tuesday almost double the average. Consequently, since new shares are no longer created, the ETNs may experience wide premiums to net asset value on increased demand. JGBT currently shows a 3.44% premium to its NAV,” according to ETF Trends.

A more practical idea for accessing JGBs is the $533 million iShares International Treasury Bond ETF IGOV. IGOV allocates 22.8 percent of its weight Japanese sovereign debt, more than triple the weight assigned to French government bonds, the ETF's second-largest country weight.

IGOV is up nearly five percent over the past month, but like JGBs themselves, IGOV is turning from an income play to an avenue for capital appreciation for an interesting reason.

As a recent Bloomberg article points out, IGOV's 30-day SEC yield of 0.3 percent is below its annual expense ratio of 0.43 percent. On a 12-month basis, IGOV yields 0.1 percent, meaning that if the ETF trades flat for a year, investors will lose 0.33 percent because that is the gap between the fund's annual fee and its 12-month yield. 

That is the result of negative interest rates and IGOV has plenty of exposure to countries where central banks have enacted such a policy. Japan, the Eurozone and Denmark are IGOV's 10 country exposures. All have negative interest rates.