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Don’t Tap Germany Through the Bund Fund

New German debt fund is a 'return-free risk'

   
Don’t Tap Germany Through the Bund Fund

If there is one word that summarizes the choppy, volatile year that was 2011, it would be “Europe.” Last year, the market lived or died based on developments (or lack thereof) in the ongoing European sovereign debt crisis. But when investors weren’t running to the safety of U.S. Treasuries, they were heading for the (relative) safety of German bunds. With the periphery of Europe threatening to descend into chaos, mighty Germany seemed a rock of stability.

Today, getting access to the German bund market is as easy as buying a share of General Electric (NYSE:GE) or Wal-Mart (NYSE:WMT) with the arrival of the ProShares German Sovereign/Sub-Sovereign ETF (NYSE:GGOV). The ETF gives investors access to euro-denominated bonds issued by the Federal Republic of Germany, the state governments of Germany, and various federal and state agencies.

Before, it was somewhat difficult for individual investors (and even professional traders) to get access to the German bund market. The world’s bond markets are far more opaque than the respective stock markets, and few of the popular retail brokers gave their clients ready access. Buying a foreign bond meant going through the bond desk and often paying a frustratingly large bid-ask spread. In other words, it wasn’t easy and it wasn’t cheap. But now with GGOV, you can have instant exposure to the German bund market with a click of the mouse.

But while buying German bunds is easy now, it doesn’t necessarily mean it’s a good idea. The 10-year bund yields a pitiful 1.85%, according to Bloomberg. This is even lower than the less-than-inspiring 1.87% offered by the 10-year U.S. Treasury note. At a sub-2% yield, German bunds are not worth buying for income.

For dollar-based investors, German bunds could be a way to get exposure to a rally in the euro. But for most investors, there are easier and more direct ways to trade the euro that don’t involve interest rate risk.

And we must not forget the elephant in the room: If the European debt crisis takes a turn for the worse and Germany finds itself in the unenviable position of having to bail out the rest of the eurozone, how safe is Germany’s AAA credit rating, and would German bunds still be considered the safe haven they are today?

There is no good way to answer this question, of course, but it certainly makes me think twice before putting capital at risk. To paraphrase a quote from newsletter writer Jim Grant, at current low yields, government bonds no longer represent a risk-free return. Instead, they offer a return-free risk.

If you are going to put capital at risk, you should expect a reasonable return on your investment. You’re not going to get that with shares of GGOV at current prices and yields.

This does not mean Europe is without its attractions. In my view, blue-chip European multinationals offer some of the best potential returns in the world at current prices. In the Sizemore Investment Letter, I’ve highlighted plenty, including Spain’s Telefonica (NYSE:TEF) and the Anglo-Dutch consumer products giant Unilever (NYSE:UL).

Investors looking for a one-stop ETF option should consider the iShares MSCI Germany ETF (NYSE:EWG). EWG is a basket of Germany’s largest and most globally diversified blue chips. With a dividend of 3.51%, you’re getting nearly double the yield of GGOV with the possibility of substantial capital gains in 2012.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “4 Dividend Stocks to Buy and Forget.”


Article printed from InvestorPlace Media, http://investorplace.com/2012/01/proshares-german-sovereign-subsovereign-etf-ggov-bunds/.

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