International Bonds Could Help Ease the Current Market Pain

Stocks and bonds are both feeling the current market pangs of an environment that’s dominated by inflation fears. For the latter asset class, getting international exposure could help ease the pain.

As the Federal Reserve looks to offload a number of its assets it purchases during the height of the pandemic, including bond-focused exchange-traded funds (ETFs), it’s also raising interest rates. It’s all a perfect storm that’s raining down heavy on the bond markets.

“We’ve seen the worst bond rout in the last 30-ish years,” said Scott DiMaggio, co-head of fixed income for Alliance Bernstein, in a New York Times article.

The appeal of international bonds is their varied economic cycles within their respective countries. The added diversification can allow investors to capitalize on countries that are prospering today versus those that are not.

“Over the last 15 years, in eight of those years, U.S. bonds have outperformed international bonds, and in seven of years, international bonds have outperformed the U.S.,” said Jeffrey Johnson, head of fixed-income products for Vanguard. “Different countries operate at different phases of the economic cycle, and they can have different inflation dynamics and geopolitical situations.”

Getting International Bond Exposure in One Fund

Rather than pore over numerous international bond options, investors can get diversified exposure via one fund: the Vanguard Total International Bond Index Fund ETF Shares (BNDX). The fund comes with a low expense ratio of just 0.07%.

BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. 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 Barclays 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.

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