Editor’s Note: Global ETF Profits, an advisory that I co-edit with Benjamin Shepherd, focuses on how investors can use exchange-traded funds (ETF) to profit from short- and long-term trends. Here’s our latest take on two of our favorite bond funds.

Back in March we identified iShares Barclays 3-7 Year Treasury Bond (NYSE: IEI) as one hedge that has a place in any well-diversified portfolio.

Many readers questioned this call, noting that the Federal Reserve’s policies set the stage for massive inflation. We stand by our original investment thesis: US households remain in debt-repayment mode, and as long as wage growth remains subdued, deflationary pressures will rule the day.

Although our recommendation came a bit early, the yield on the benchmark 10-year note peaked at 4.01 percent on April 5 and since then has plunged nearly 120 basis points. Such moves are commonly regarded as a prelude to recession; we would argue that moves in the bond market alone aren’t a reliable indicator of economic trends, especially when the role of nonmarket entities in the economy is extremely high.

That being said, our case for Treasuries isn’t based on the potential collapse of the US economy; rather, we believe economic growth will decelerate, and that inflation won’t rear its head for at least another year.

US gross domestic product grew 2.4 percent in the second quarter, prompting many economists to lower their estimates of full-year US economic growth to less than 2 percent. Although downside risks have increased, we maintain that the US economy should beat these pessimistic forecasts.

The current recovery is unquestionably weak relative to previous rebounds, and a host of uncertainties threaten to constrain economic growth. For example, consumer spending, household incomes and employment growth remain weak, prompting many investors to stay on the sidelines.

But the Federal Reserve will do anything in its power to achieve respectable economic growth; don’t expect Ben Bernanke and his cohorts to raise rates dramatically over the next 12 months.

Inflation is a danger over the long term–one of the reasons we prefer shorter-duration bonds.

In terms of sovereign bonds, we’ve recommended iShares JP Morgan USD Emerging Market Bond (NYSE: EMB) since mid-April. The exchange-traded fund (ETF) invests primarily in sovereign debt, though debt issued by national energy companies and other quasi-sovereign entities accounts for roughly 15 percent of the portfolio.

The ETF has returned almost 10 percent since our recommendation; including dividends this comes out to a 25 percent annualized return. When we added the fund to the model Portfolios, we noted that issues from the Russian Federation accounted for 9 percent of its investable assets. At the time, these holdings were undervalued. Russia is a country investors love to hate, so it’s no surprise that its debt is usually discounted on the assumption that there’s a substantial amount of political and default risk. Of course, neither assumption is valid.

Although Russia’s relationships with its neighbors can be tempestuous, it’s the largest trading partner of most the countries in the region. And the country has gotten its fiscal house in order since the Russian debt crisis.

Although the low hanging fruit has been picked with this fund, strong economic growth in Brazil and Turkey should provide additional juice. 

For more information on ETF investing click here.