European Investor: US Treasury ETFs

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SmarBims
Posts: 1
Joined: Wed May 31, 2023 10:51 am

European Investor: US Treasury ETFs

Post by SmarBims »

Dear Forum,
could you please help me understand how ETFs tracking US treasury bonds (e.g. IE00BDFK1573) work/perform compared to buying individual bonds directly on the secondary market (e.g. US912797FH58).

I understand the latter as: I buy the bond at a specific price in USD (with a premium/discount vs. 100USD/pcs) with a given maturity and collect the coupon (if any) semi-anually, and will (if the counterparty does not default) get back the principal (100USD/pcs) at maturity. As an European Investor (in my case with domicile Switzerland, investing EUR) converting currency to USD and back is inconvenient, so is dealing with US withholding tax (I understand I can reduce taxation from 30% to 15% by submitting a W-8BEN form via my broker and offset the remainder vs. Swiss income tax, although I have not done that myself yet).

Given these complications the concept of buying an ETF directly in EUR on an European exchange (such as IE00BDFK1573) that tracks performance of US Treasuries seems interesting. However, I have been unable to find much explanation of what to expect from such a product (or the underlying index) in times of changing treasury yields.

Here are my questions:
  • Can I expect the ETF to return the current average yield of the treasury bonds in it's time-range? In other words: given that current 1 year T-bills return ca. 5%pa, would an ETF such as IE00BDFK1573 provide a similar return?
  • I understand the ETF buys and holds individual bonds in it's time-range and then sells them once they drop out. Does that mean that a 3 year bond bought 2 years ago is still part of the "basket"? Given the much lower yields 2 years ago, does that "drag down" the performance of the ETF (I understand bond prices fall if interests rise)? If I buy that ETF now, is that effect already priced in, i.e. reflected in lower ETF prices?
  • can you point me towards any good book/blog/site with information on that topic (in-dept discussions welcome)
Thanks!
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: European Investor: US Treasury ETFs

Post by daviddem »

Here is a good in depth explanation:

https://www.bogleheads.org/wiki/Individ ... _bond_fund

Mind that if you convert your Euros to USD to capture the better USD interest rates (or buy a treasury ETF even if it's trading in Euros), you are picking up currency risk at the same time: if the Euro rises vs the USD while you hold the USD, you will loose money when you change your USD back to Euros (or the fund price in EUR will drop accordingly).

Also the price of the ETF in USD will vary with changing interest rates (the longer the average duration of the fund, the more sensitive its price to changes in the Fed rate). If the Fed rate rises (or is anticipated to rise), the fund price drops. If the Fed rate drops (or is anticipated to drop) the fund price rises. The varying price of the fund is part of its total return. The other part is the return from the coupons. You can hold individual bonds to maturity to remove the influence of their varying price on the secondary market. You can't do that with a fund because you cannot hold a fund "to maturity".

Basically, the answer to your questions lies in what your goal is for that money you invest (as explained in the article). You can hold a bond fund forever as part of building an income stream and not worry too much about price variations. But if you will need the capital in the short to medium term, you may consider individual bonds which will mature when you will need the money.
EddyB
Posts: 2431
Joined: Fri May 24, 2013 3:43 pm

Re: European Investor: US Treasury ETFs

Post by EddyB »

daviddem wrote: Wed May 31, 2023 1:21 pm Here is a good in depth explanation:

https://www.bogleheads.org/wiki/Individ ... _bond_fund

Mind that if you convert your Euros to USD to capture the better USD interest rates (or buy a treasury ETF even if it's trading in Euros), you are picking up currency risk at the same time: if the Euro rises vs the USD while you hold the USD, you will loose money when you change your USD back to Euros (or the fund price in EUR will drop accordingly).
Probably with no tax benefit from that loss, while one probably pays tax on the gain of it goes in the other direction.
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