As fund flows during the month of July indicated, more investors continue to head overseas in order to get international bond exposure according to data from Morningstar. For those looking to overcome their U.S. bond home country biases, Vanguard has three funds that are worthy of consideration.
Dollar Down, International Bonds Up
The expectation of falling rates has been applying downward pressure on the dollar. Therefore international assets, both stocks and bonds, have been deriving the benefits of a weaker greenback. That helped more flows into international bond funds, as seen in the organic growth rate of global bond (unhedged) and emerging-markets (EM) local-currency bond funds.
Those who want to dip into international bonds, but aren’t quite ready to disregard the U.S. bond market, will find the Vanguard Total World Bond ETF (BNDW) appealing. The fund tracks the Bloomberg Global Aggregate Float Adjusted Composite Index, so it incorporates investment-trade U.S. and non-U.S. dollar-denominated bonds. That skew towards investment-grade adds quality exposure, which should appease the risk averse.
BNDW uses a fund of funds structure, incorporating the Vanguard Total Bond Market ETF (BND) for U.S. bond exposure as well as the Vanguard Total International Bond Index Fund ETF Shares (BNDX). The portfolio composition results in almost a 50-50 split with slightly more exposure (50.1% as of September 15) going to BND. It features a low expense ratio of 0.05%.
2 Funds for International Purists
The aforementioned BNDX tracks the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). Again, investors get a portfolio of investment-grade bonds to mitigate credit risk. Emerging markets only get a 7% weighted exposure (as of July 31) so developed international markets are the focus with this fund. It also features a low expense ratio of 0.07%.
Of course, those who don’t mind the additional credit risk and potential volatility to attain a higher yield can opt for the Vanguard Emerging Markets Government Bond Index Fund ETF Shares (VWOB). The fund tracks the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index, giving investors a broad-based option in EM bonds. It provides easier exposure to this corner of the bond market as opposed to investors or advisors canvassing the seas of EM opportunities and choosing individual debt issues.
VWOB comes with a higher expense ratio of 0.15%, but with that, its 30-day SEC yield is 5.88% as of September 11.
Both funds can serve as a complement to a fixed income portfolio that’s already heavily tilted towards U.S. bond exposure. For those looking to get the best of both the U.S. and international bond worlds, BNDW might be the more suitable option.
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