Important note from Seeking Alpha editors: State Street has informed us that the key premise of this article, that 70% of the SPDR Lehman International Treasury Bond ETF is comprised of three Mexican Fixed Rate Bond issues, is incorrect. As one of the comments below the article points out, problems with State Street's web site have resulted in confusion about the fund's holdings. An updated and corrected page showing the fund's holdings is now available.

Many of my fellow advisors seem to be enamored with the idea of investing in foreign treasury bonds via the relatively new (October 2007) ETF from State Street (BWX). This fascination has been exacerbated by the recent rapid decline in U.S. equity markets and the coinciding increase in bond values.

For those of you who don't know this ETF is supposed to track the Lehman Brothers Global Treasury ex-US Index. On the surface this seems like a great idea to me. However, after further review I must reverse the call on the field. I don't EVER purchase something based simply on an index description. I like to look under the hood and give it a good sniff test. While the fund has performed decently (up about 4.3% since inception while hovering between $52 and $55) during its brief stint, something about it just irks me.

That something is the fact that fully 70% of its holdings are presently held in three Mexican Fixed Rate Bond issues. You can see all the fund details, including the holdings here. The BWX prospectus states the following:

As of September 30, 2007, there were 670 issues from 18 countries denominated in 11 currencies included in the Global Treasury Ex-US Capped Index.

My, does that seem misleading? 667 of the issues and 17 of the countries make up only 30% of the assets. The other 70% is in the 3 Mexican issues. Granted, the average credit quality of the fund is AA2 but as we have seen recently, credit ratings can be very volatile and misleading as well. I appreciate the credit rating agencies and their input but sometimes I feel that it is prudent to override them and make a common sense call. A solid quote from Jeremy Grantham in his GMO January Newsletter better describes my feeling:

Optimal investing seems likely to be a mix of a few important judgmental overrides interspersed with long periods of cold, disciplined blocking and tackling.

Owning foreign treasuries seems like a good idea to me…as long as those treasuries are not primarily in emerging markets. If they are in emerging markets I would like to see them better diversified. As it stands, BWX looks to me like it is way too exposed to a black swan event in Mexico or in the dollar/peso exchange rate (the fund holds bonds in the foreign currency). If they can't make it more diversified, I don't want any part of it right now.

Disclosure: None

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