Indeed, 2014 has been a very good year for some marquee fixed income exchange traded funds. The Vanguard Total Bond Market ETF (NYSEArca: BND) and the iShares Core U.S. Aggregate Bond ETF (NYSEArca: AGG) are two of the top asset-gathering ETFs this year while the iShares 20+ Year Treasury Bond ETF (NYSEArca: TLT) has surged 19% compared to a meager 2.6% gain for the S&P 500.
The Vanguard Total International Bond ETF (NasdaqGM: BNDX) is another bond ETF that has been flexing its muscles this year. Up 5.5% year-to-date, BNDX has regularly been hitting new all-time highs in recent weeks. Those are all-time highs because BNDX debuted in June 2013. But while the ETF is not old, its sturdiness this year cements its status as one of the most successful ETFs to debut in 2013. [Global Bond ETF off to a Fast Start]
The passively managed BNDX tracks the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, which gives investors exposure to non-US dollar denominated investment-grade bonds. Because BNDX only holds investment-grade bonds, credit and default risk are low as 70.7% of the fund’s holdings are rated AAA or AA, according to Vanguard data.
Another way of looking at BNDX is that it is one of the more noteworthy bond ETFs that taps into the booming theme of currency hedging. BNDX uses one-month forward contracts on the dollar to hedge currency, a trait not found on rival global bond ETFs.
When foreign currencies depreciate relative to the U.S. dollar, foreign investments, which are denominated in the local currency, can decline in value when converted back in to a stronger U.S. dollar.
BNDX’s currency hedged status is an important point for investors to consider at a time when the U.S. dollar is among the strongest developed market currencies. BNDX’s largest country is 22% to Japan with another 45% spread out among Eurozone nations.
With neither the Bank of Japan nor the European Central Bank doing anything but signaling they will keep interest rates low and work to suppress the yen and euro, BNDX’s utility increases. [The Right Time for Currency Hedged ETFs]
BNDX has an average duration of seven years and charges 0.2% per year, making it less expensive than 81% of comparable funds, according to Vanguard. S&P Capital IQ rates BNDX marketweight.
Investors have clearly warmed to the idea that currency hedging can be useful with asset classes beyond equities. It took BNDX just six months of trading to amass $760 million in assets under management and that number swelled to $1.7 billion as of the end of August.
Vanguard Total International Bond ETF
Tom Lydon’s clients own shares of BNDX.