Grab Yourself a Bit of Yield

 | Jan 20, 2012 | 11:00 AM EST
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This commentary originally appeared Jan. 20 at 9:45 a.m. EST on ETF Profits -- our pros have decades of combined investing experience to help you make the most profitable decisions when constructing your ETF portfolio. Click here to learn more.

As I seek to beef up the current-return portion of my portfolio, I'm faced with a bit of a challenge: It's no secret, or surprise, that decent yields are hard to come by. With interest rates at a record low in the U.S., it has become difficult to beat inflation with (after-tax, after-expenses) yields from high-quality corporate bonds and U.S. Treasuries.

That has taken many bond investors beyond U.S. borders, but the results aren't always very exciting. The PIMCO Canadian Bond Index Fund (CAD), for instance, has a 30-day SEC yield of only about 2%, despite having a duration of more than nine years. The broad-based WisdomTree Euro Debt Fund (EU), which features significant credit, exchange rate, and interest risk, offers a paltry 2.0%. But there is one country -- for those of you wishing to avoid emerging markets -- that provides an exceptional risk-adjusted yield: Australia.

Australia wasn't immune to the recent financial crisis, but it was one of the first to hike interest rates after the fact. It currently has some of the highest interest rates in the world, and I deem it to be of relatively low credit risk, given the size of the deficit and its abundance of natural resources. The WisdomTree Australia & New Zealand Debt Fund (AUNZ) -- which is split about 90-10 between debt from the two countries -- offers up a 30-day SEC yield of about 3.6%, and an embedded income yield north of 4%.

Those numbers certainly aren't staggering, but it's a pretty solid yield opportunity for the risk. After all, this country is still holding on to its AAA rating and has massive mineral and resource wealth, and its currency has appreciated significantly against the greenback over the last three years (CurrencyShares Australian Dollar Trust (FXA) is up an eye-popping 70% over that period). The interest rate risk isn't overwhelming, either: AUNZ has an effective duration of only about four years, meaning AUNZ won't be hammered if rates begin to climb.

The Australian economy is not without a few scars. The country is coming off of a rough year for employment, with December job losses having come in worse than expected. But the government has taken aggressive steps to cut spending, and it has pledged to swing to a surplus by 2013. The Australian economy is still projected to grow by more than 3% in 2011, which would dwarf expansion in other developed markets. By comparison, Germany, the safe haven of Europe, faces the very real possibility of an economic contraction in early 2012. In other words, the credit risk of relatively short-term Australian debt is minimal.

AUNZ won't make me or anyone else rich overnight. In fact, it's highly unlikely that returns in any one year will exceed 10% or 12%. But this ETF features both higher returns and lower risks than do many other developed-market debt funds, meaning AUNZ can be an effective way to both boost current returns and smooth overall portfolio volatility -- especially considering the "dollar diversification" this holding brings. For investors willing to look beyond U.S. borders and expand their portfolio of bond holdings, AUNZ certainly merits a close look.

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