These three international fixed income ETFs can yield more than the Selic – 05/26/2023 – De Grão a Grão

These three international fixed income ETFs can yield more than the Selic – 05/26/2023 – De Grão a Grão

In recent years, the number of international institutions available to Brazilian investors has multiplied. However, international diversification is a challenge for Brazilians. This is because the number of investment alternatives abroad is significantly higher than the domestic one.

Without knowing where to invest, investors usually run more risk, investing in stocks or in bonds of Brazilian companies. Today I discuss three diversification alternatives in international fixed income that may appreciate more than the Selic.

The Selic rate is currently at 13.75% per annum. However, this remuneration has its days numbered. This rate is similar to another rate widely followed by investors, the DI rate.

According to the DI futures contract traded on B3, the accumulated yield of the CDI over the next five years should be equivalent to 11% per year. For the CDI average to be 11% per year over the next 5 years, a possible trajectory would be for the Selic to fall by around 1% per year over this period.

The equivalent of the Selic rate in the US is the so-called federal funds. It is currently at 5.1% per year.

The question that remains is: will an investor who sends funds abroad and invests in Fed Funds should earn more than investing in CDI or Selic?

To understand the total return that an investor can have when investing abroad, it is necessary to estimate the probable appreciation of the Dollar in the period.

It is possible to assume an average exchange rate appreciation for the Dollar of 4% per year over the next 5 years. This was the annual arithmetic average of appreciation over the last 20 years. Anticipating the criticism, yes, the arithmetic mean is a better estimator than the geometric mean.

Responding to the previous question, if the dollar appreciates 4% a year, the return on Fed Funds should be lower than the Selic in the coming years.

However, it is possible to invest diversified in international fixed income and possibly earn more than Selic.

There are three exchange-traded funds (ETFs) which have bonds with an average interest rate of more than 8% per year and an average maturity of 5 years.

The codes for the three ETFs are: HYG, USHY and JNK. In this order, they are the three largest ETFs traded in the US High Yield Bonds.

The name High Yield means high yield. Associated with this higher yield is greater risk. The securities in the portfolio have an average credit risk rating of BB, by risk agencies.

This greater credit risk is mitigated by the enormous dispersion of portfolios. The three ETFs have over a thousand titles in their portfolios. One of them, the USHY, for example, with 1923 securities in its portfolio, is the most diversified among them.

With an expected return of more than 8% per year, plus an appreciation of the dollar of 4% per year, these ETFs must yield to the investor the equivalent of more than 12% per annum.

Therefore, an expected return greater than that estimated for the Selic over the next 5 years.

The point of attention is the possibility of higher interest rates in the US. If this occurs, bond rates rise and the mark-to-market will be negative on these ETFs in the short term.

Despite being a fixed-income investment, it must be remembered that these investments carry a higher risk than the CDI or Selic. Therefore, you need to carefully assess whether they are in line with your investor profile.

Michael Viriato is an investment advisor and founding partner of Investor House.

Talk directly to me via email.

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