If you have been paying even a modicum of attention to the debt contagion issues in Europe, you know that the safest play in Europe might be Germany. Specifically, I’m talking about German debt. The country is Europe’s largest economy, and appears to be the only nation capable of coming to the rescue and preventing a collapse of the European Union.
Germany has been regarded as a safe haven where investors flock if they need euro-denominated debt but fear owning debt issued by fiscally faltering countries such as Portugal, Italy, Ireland, Greece and Spain (PIIGS). So, the timing seems right for PIMCO to launch its German bond exchange-traded fund (ETF) to let U.S. investors take advantage of this flight to quality in Europe.
The PIMCO Germany Bond Index Fund (BUND) is the only U.S. ETF that aims to provide focused exposure to euro-denominated, investment-grade bonds issued in Germany. The fund seeks total returns that closely correspond, before free and expenses, to the BofA Merrill Lynch Diversified Germany Bond Index. This index encompasses euro-denominated investment-grade bonds issued by German entities that include sovereign, quasi-government, corporate, securitized and collateralized debt.
The top holdings of BUND have a mix of German sovereign debt, net cash positions and corporate debt. These positions all mature in the next two to five years.
There are other funds available to take advantage of German debt, but this is the first ETF to do so. The PowerShares DB 3x German Bund Futures ETN is an exchange-traded note (ETN) and a 3x leveraged investment that tracks the same German futures index. However, the fund’s leverage, and the fact that ETNs are treated differently in terms of taxation, makes BUND the more attractive German bond option.
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