Diversify Core Exposure With These International Bonds ETFs

Global economies around the world in varying stages of their economic cycles. Therefore, international bonds can offer investors a taste of diversification that can serve its purpose in any bond portfolio.

Today, U.S. debt exposure accounts for just over 30% of the global supply of bonds, according to Alliance Bernstein. The rest of the supply comprises international debt options that are available for all investors to access if they want to diversify their bond exposure.

“Gone are the days when the US fixed-income market dominated the world’s supply of bonds. Today, the US represents less than a third of the global bond universe,” an Alliance Bernstein report said last year regarding international bond exposure. “And the global bond market is much more diverse than the US bond market.”

Debt Option Flexibility

Given that diversity, fund managers have more flexibility in choosing debt options that can be tailored to the specific goals of the fund. Whether it’s a focus on credit quality, yield, or other bond parameters, the opportunities can be seemingly endless when diving into the large pool of international debt offerings.

“Not only does it offer more opportunities from which an active manager can choose, but its differing landscapes provide significant variety and diversification sources,” the report added.

When it comes to getting core international exposure, an ETF with a broad approach can serve this purpose. As such, investors could take a look at the Vanguard Total World Bond ETF (BNDW). The fund seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index. That index measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S.-dollar-denominated bonds. The ETF has a low expense ratio of just 0.05%.

BNDW uses a fund-of-funds structure that holds the aforementioned BNDX as well as the Vanguard Total Bond Market Index Fund ETF Shares (BND) to get its global bond exposure. Also, as of March 8, the fund has a 30-day SEC yield of 3.87%.

An ETF for Strictly International Bonds

Fixed income investors who want to diversify their bond portfolios that are already dominated by U.S. exposure can opt for the Vanguard Total International Bond Index Fund ETF Shares (BNDX). It offers exposure to strictly international debt sans the U.S.

BNDX seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized. Furthermore, the fund’s 30-day SEC yield is 3.14% as of March 8. It carries a low expense ratio of 0.07%.

For more news, information, and strategy, visit the Fixed Income Channel.