More investors are looking beyond the traditional U.S. fixed-income options and into the international markets to diversify their bond portfolios. In response, Vanguard is planning to launch a currency-hedged international bond exchange traded fund with a mix of corporate and sovereign debt.
According to a press release, the Vanguard Total International Bond Index ETF is expected to begin trading by the end of the second quarter. The ETF will has an expected expense ratio of 0.20%.
The proposed ETF will try to reflect the performance of a new benchmark, the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, which is comprised of around 7,000 high-quality corporate and government bonds from 52 countries. The index caps exposure to a single issuer at 20%.
As of the end of last year, top country allocations include Japan 23%, France 12%, Germany 11% and the U.K. 9%.
The fund managers will help mitigate currency risk through hedging strategies, allowing the ETF’s performance to more closely matches that of the international bond market.
“We really think the primary purpose of our bond allocation is to act as a diversifier to equities,” Fran Kinniry, a principal in the Vanguard Investment Strategy Group, said in an InvestmentNews article. “If you look at the difference between hedged and unhedged non-U.S. bonds, the currency fluctuation is so dominant, you primarily have a currency fund.”
“Vanguard is pleased to bring its international fixed income indexing expertise and low-cost approach to U.S. investors,” Vanguard CEO Bill McNabb said in the press release. “International bonds can serve as an important diversifier, especially for U.S. investors who currently have modest exposure to the asset class.”
McNabb pointed out that Vanguard research found allocations to hedged international bonds helps broaden and diminish risk in a diversified portfolio.
Vanguard suggests 20% of a bond portion in a U.S investor’s portfolio can be used to allocate toward hedged international bonds.
For more information on fixed-income assets, visit our bond ETFs.
Max Chen contributed to this article.