As Europe Cuts Its Bond Purchases, Consider These International ETFs

The European Central Bank (ECB) is following the path of the U.S. Federal Reserve, tapering its bond purchases amid rising global inflation.

Just like the U.S. Fed, the ECB shored up its bond market amid the fears of mass credit defaults in last year’s initial pandemic scare. While COVID-19 still remains a wild card, economies are recovering while rising inflation continues to run rampant.

The ECB’s $2.19 trillion emergency bond-buying program is slated to end in March 2022. That falls in the same quarter as when the ECB plans to wind down its purchases.

“The Governing Council judges that the progress on economic recovery and towards its medium-term inflation target permits a step-by-step reduction in the pace of its asset purchases over the coming quarters,” the ECB said. “But monetary accommodation is still needed for inflation to stabilise at the 2% inflation target over the medium term.”

A Pair of International Bond Options

While the ECB eases off the bond-buying accelerator, investors can up their purchases with international bond ETFs. Vanguard has a pair of options worth considering.

For one, there’s the Vanguard Total World Bond ETF (BNDW). BNDW seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds.

BNDW can be ideal for investors who want exposure to debt markets outside the U.S. but do not want to completely disregard fixed income in the United States. In essence, the ETF provides more of a global aggregate bond fund.

Another option is the Vanguard Total International Bond Index Fund ETF Shares (BNDX). BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds.

As mentioned, international bonds can provide a diversification tool for fixed income investors looking to supplement their current core portfolio. The ETF employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.

Highlights of BNDX:

  • Attempts to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged)
  • Employs hedging strategies to protect against uncertainty in exchange rates
  • Provides a convenient way to get broad exposure to non-U.S. dollar-denominated investment-grade bonds
  • Is passively managed, using index sampling

 

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