Fixed income exchange traded funds focused on U.S. Treasuries have spent plenty of time in the limelight this year, but other bond funds have commanded well-deserved attention as well.
The Vanguard Total International Bond ETF (NYSEArca: BNDX) is a prime example. BNDX stands out as “right place, right time” ETF. Home to nearly 3,000 bonds with an average duration of seven years, BNDX has been gathering new assets and hitting new highs at a torrid pace due in large part to its status as one of the premier currency hedged bond ETFs.
That status has proven efficacious in a year in which the U.S. dollar has gained steam, sending billions of new assets into currency hedged ETFs. [Prime Time for Currency Hedged ETFs]
While the Federal Reserve has wrapped up its quantitative easing program, the Bank of Japan and European Central Bank, among others, have picked up the global QE torch. Japan is BNDX’s largest country weight at 22.1%. Eurozone nations combine for over half of the ETF’s weight.
“Meanwhile, with inflation in the Eurozone having decelerated to just above zero percent, the European Central Bank (ECB) has more recently been buying long-term bank loan and covered bonds in an effort to stimulate the region’s economies. However, ECB Chief Mario Draghi has indicated that the efforts might be expanded. ‘We will do what we must to raise inflation and inflation expectations as fast as possible,’ Draghi said, adding that ‘unconventional measures might entail the purchase of a variety of assets, one of which is sovereign bonds ,’” said S&P Capital IQ in a new research note.
BNDX ries to reflect the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index, which includes government, agency, corporate and securitized non-U.S. investment-grade fixed income investments issued in foreign currencies but also includes a hedge to its currency exposure. [Spotlight on Global Hedged Bond ETF]
With bond yields in the U.S. and other developed markets plummeting, BNDX is up nearly 8% this year and hit an all-time high last Friday. As has been seen with several well-known equity-based currency hedged ETFs, the stronger dollar has been a boon for BNDX.
“While actions by the ECB and BOJ could be positive for bond holders, their efforts are also weakening the Euro and the Yen versus the US dollar. Year to date, the Euro is down 9.5% relative to the dollar, while the Yen is down 11% as of late November. Indeed, only two currencies (Pakastani Rupee and the Indonesian Rupiah) are stronger than the dollar in 2014, with the Canadian dollar and the South Korean won among the many down more than 5%,” said S&P Capital IQ.
Investors have taken note of the BNDX story. The ETF had just over $830 million in assets under management in early January, already enough to make the fund one of the most successful ETFs to debut in 2013, but that AUM total has since swelled to $2.8 billion. [Fine Starts for These New ETFs]
“According to Vanguard, foreign currency accounts for two-thirds of the volatility investors experience when buying international bonds. As such, in an effort to isolate the credit and interest rate risk, BNDX employs currency hedging. As the bond index rebalances at the end of each month, Vanguard rolls forward one-month foreign exchange derivatives to offset any moves in the various currencies,” said S&P Capital IQ, which rates BNDX overweight.
BNDX has a 30-day SEC of about 1.1% and charges just 0.2% per year, making it less expensive than 81% of rival ETFs.
Vanguard Total International Bond ETF
