Vanguard International BOND Fund

[pb4uski]

Looks like this is finally coming to fruition. I'll probably make 20-25% of my bond allocation international.

https://personal.vanguard.com/us/insights/video/2582-IntBondFund-RET

 

[mathjak107]

The international bond fund from fidelity has been taking some pretty big dips lately.

Just a heads up.

The 2 international bond funds i own have been losers so far ytd .
Go figure.

 

[samclem]

The international bond fund from fidelity has been taking some pretty big dips lately.

That might be seen as good news for those who are just buying in to this asset class.

pb4uski,
Thanks for the heads up. This will be something we'll be adding to our mix. I need to read up on some things that concerned me in the past about index funds of foreign government bonds. In some cases they had to buy issues that were clearly mispriced and "real" investors weren't buying them (just the EMF or ECB IIRC). I don't think this Vanguard fund will be similarly affected since it deals private corporate bonds subject to real market pricing.

 

[kramer]

If folks are interested in more details, there are a couple of long threads on this at the Bogleheads investing forum (the best investing forum on the internet, IMO).

This fund is not for me because it is 100% foreign currency hedged. That is the *last* thing I want in an international bond fund.

I still have not found an inexpensive (unhedged) foreign bond fund. A couple of times I have almost pulled the trigger on one of the ishare developed international treasury bond offerings (IGOV), but the Expense Ratio of 0.35% has just been too high for me.

 

[mathjak107]

fidelity new market income is dominated in us dollars and has had excellent performance..

 

[mathjak107]

That might be seen as good news for those who are just buying in to this asset class.

pb4uski,
Thanks for the heads up. This will be something we'll be adding to our mix. I need to read up on some things that concerned me in the past about index funds of foreign government bonds. In some cases they had to buy issues that were clearly mispriced and "real" investors weren't buying them (just the EMF or ECB IIRC). I don't think this Vanguard fund will be similarly affected since it deals private corporate bonds subject to real market pricing.

well a dip is always good news if you are buying in. of course the big question is will head way lower once you are in.

not that i try to out guess things but everything is relative.

boy i thought the stuff i bought when we dipped in 2008-2009 was a great deal when i got in on a 5% dip.

little did i know it was the tip of the iceburg. lol

 

[pb4uski]

....This fund is not for me because it is 100% foreign currency hedged. That is the *last* thing I want in an international bond fund.

Why is that? Since my obligations (my retirement) is USD, I thought fx hedging was good. Am I missing something?

I guess it would be nice if they offered hedged and unhedged versions.

 

[anethum]

Why is that? Since my obligations (my retirement) is USD, I thought fx hedging was good. Am I missing something?

I guess it would be nice if they offered hedged and unhedged versions.

The USD has been on a long decline. If you think it is likely that this trend will continue, you would want unhedged local currency bonds.

 

[Lsbcal]

If one wants exposure to just international bonds then a hedged bond fund is probably best. Otherwise you are getting a currency fund which uses international bonds as a vehicle.

PTTRX, Pimco Total Return, currently has about 19% exposure to both non-US developed and EM bonds.

 

[CoolChange]

...
I still have not found an inexpensive (unhedged) foreign bond fund. A couple of times I have almost pulled the trigger on one of the ishare developed international treasury bond offerings (IGOV), but the Expense Ratio of 0.35% has just been too high for me.

+1

I am also still looking for a good (inexpensive, ideally unhedged, without the government/sovereign index issues already mentioned) non-USA bond fund or set of funds for my target AA. I have decided it is time for me to shift my AA away from its current high equity allocation; but, I would like to avoid skewing my AA to United States returns any more than it already is. (No, I am not predicting doom and gloom for the USA; but, I am a believer in geographic diversification for a variety of reasons.)

While I will definitely be looking at this new fund, I would also appreciate other suggestions. (I am not interested in putting the work into owning my own portfolio of individual foreign bonds at this point in my life.)

 

[Midpack]

Thanks, I enjoyed the video and the heads up. Intl Bonds is an asset class that I've been aware of, but never invested in, because VG hasn't offered an index fund to be perfectly honest. I'll be researching, and watching this thread with some interest.

Sounds like Vanguard is diving in fairly aggressively.

Here's a reasonbly current thread with more POVs (mostly re: currency hedging) Bogleheads • View topic - International Bonds - Good Idea Or Not? FWIW.

Thought this was interesting (not supporting or criticizing at all) from the linked thread, just never thought about it

Vanguard's Wellesley Income Fund is currently (as of 7/31) 9.1% in foreign bonds.

 

[karluk]

Looks like this is finally coming to fruition. I'll probably make 20-25% of my bond allocation international.

https://personal.vanguard.com/us/insights/video/2582-IntBondFund-RET

The transcript of the video states, without explanation, that holding foreign bonds without hedging for currency risks exposes investors to "uncompensated" risk. I gather that Vanguard's studies show that holding unhedged foreign bonds increases price volatility without a corresponding increase in long term performance. Judging from the some of the comments here, a lot of people LIKE being exposed to currency risk, apparently on the theory that it protects them against a catastrophic plunge in the value of the dollar.

 

[Lsbcal]

...(snip)... Judging from the some of the comments here, a lot of people LIKE being exposed to currency risk, apparently on the theory that it protects them against a catastrophic plunge in the value of the dollar.

Some advisors (Swedroe, et. al.) have suggested getting your currency risk in equities. FWIW, my equities have a large international unhedged component.

Depends on how you view bonds. Most want a high degree of safety with equities taking on the risk component, i.e. return of principle plus some real return. Currency exposure can really mess that up as the dollar can strengthen over periods of many years plus we don't really know if there is a long term trend. If the trend is down it is a slow decline and extremely irregular:

 

[walkinwood]

I haven't seen any information on the duration of this fund. It says corporate and government - does that include mortgage backed securities? I guess we'll have to wait and see.

Also, couldn't find the benchmark on Barclay's site, so must be a custom Global index without the US component.

https://indices.barcap.com/index.dxml

 

[kramer]

Why is that? Since my obligations (my retirement) is USD, I thought fx hedging was good. Am I missing something?

I guess it would be nice if they offered hedged and unhedged versions.

Hedging is a hidden cost of the fund (maybe 0.25%), so that is one big negative for a low return fund. Even if all your liabilities are in US dollars, you should want some currency diversification. It helps protect against inflation if the dollar weakens (personally, I have no opinion on the future of the dollar). Also, your social security and pensions will be denominated in dollars as well as your future earning power, so your portfolio is probably more skewed to dollars than you may realize.

For me, personally, I live abroad and do not spend too much in dollars. And so I struggle to get enough non-dollar exposure. It is a simple diversification issue. However, many domestic investors, if their equity allocation is high enough and the foreign portion of this allocation is high enough, can get enough exposure to foreign currency strictly through equity ownership (since their spending will be mostly dollars, their requirement for diversification is less than mine).

When I analyze my portfolio via this dimension (non-dollar exposure, I tend to divide it into three categories):

dollar/non-dollar/dollar-inflation-protected

 

[karluk]

If that graph of the US dollar index had ended circa 2005, I would say that the fluctuations are completely random. So the question is whether the relatively low value of the US dollar since 2005 is the beginning of a long term downward trend. If it is, then of course investors should welcome the exposure to foreign currency risks. If not, then the fact that the US dollar is currently close to its multi-decade low should make investors very nervous about taking on unhedged currency risks.

Unfortunately, my crystal ball just fogged up, so I don't know where the graph is headed next.

 

[samclem]

Observations:
- In general, when there have been shocks to the international system, the USD has done very well. Of course, no one knows if it will continue, but the dollar has been counted out before. When I look for rival currencies, nothing seems to be objectively better/stronger.
- Dollar's inflation/decline: There's no doubt we've printed a LOT of them lately, it just remains to be seen if we've got the will to reign in that money supply once the velocity of money on our system picks up again
- Our monetary policy in the US is not highly disciplined. But the important thing (in this discussion) isn't some arbitrary objective standard but a relative standard based on what other countries are/will be doing.

 

[NotMyFault]

This may be a little off topic but..,

I do not have a good understanding of monetary policy and all this talk of currency risk. Can anyone suggest some entry level books on these topics?

Thanks
NMF

 

[Midpack]

I do not have a good understanding of monetary policy and all this talk of currency risk. Can anyone suggest some entry level books on these topics?

A whole book might be overkill. You probably know this, but basically:

'Currency Risk' is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged.

For example, if you are a U.S. investor and you have stocks in Canada, the return that you will realize is affected by both the change in the price of the stocks and the change in the value of the Canadian dollar against the U.S. dollar. So, if you realize a 15% return in your Canadian stocks but the Canadian dollar depreciates 15% against the U.S. dollar, this will amount to no gain at all.

Currency Risk Definition | Investopedia

It's not a complicated concept, but an important added risk associated with international investments. Currency risk is also known as translation risk or exchange rate risk if you're inclined to explore on Google.

 

[NotMyFault]

A whole book might be overkill. You probably know this, but basically:Currency Risk Definition | Investopedia

It's not a complicated concept, but an important added risk associated with international investments. Currency risk is also known as translation risk or exchange rate risk if you're inclined to explore on Google.

Thanks I will google velocity of money later. Easy to slip in a post from the iPhone at work. Hard to get away with in depth research.

NMF

 

[pb4uski]

Hedging is a hidden cost of the fund (maybe 0.25%), so that is one big negative for a low return fund. Even if all your liabilities are in US dollars, you should want some currency diversification. It helps protect against inflation if the dollar weakens (personally, I have no opinion on the future of the dollar). Also, your social security and pensions will be denominated in dollars as well as your future earning power, so your portfolio is probably more skewed to dollars than you may realize.
.....

I'm not sure if your suggestion that my portfolio is more skewed to dollars than I realize is true. 15% of my retirement investments are in international stocks, and on top of that are non-US operations of my domestic stock investments.

 

[heirloom]

Thanks a lot for posting this. I just emailed Vanguard last month asking if they were considering an EM or Int'l debt fund. The same weekend I saw they are on FB, so I asked the same question only I said int'l in one and EB in the other. Surprisingly they emailed me saying they noticed I asked a similar question on their social media site and wanted to know if I meant Int'l when I typed EB. Who would think they would notice the same person was asking the same question on FB??

ANYHOW...

The international bond fund from fidelity has been taking some pretty big dips lately.

Like someone else mentioned...FNMIX did beautiful last year...20% return. Vang tot intl bond fund will have 20% Japan in it...sounds good to me.

Hedged vs unhedged.....I haven't purchased either of these yet, but here is a comparison of Wisdom Tree hedged Japanese fund vs EWJ unhedged fund. I feel safer myself with a hedged fund.

DXJ Basic Chart | WisdomTree Japan Hedged Equity Stock - Yahoo! Finance

 

[kramer]

I'm not sure if your suggestion that my portfolio is more skewed to dollars than I realize is true. 15% of my retirement investments are in international stocks, and on top of that are non-US operations of my domestic stock investments.

Chances are that most of the non-US operations of domestic stocks are hedged. Also, I would guess that international companies with US sales are less likely to hedge their dollar exposure. In other words, it might balance out and you end up with 15% (or maybe even less) foreign currency exposure in your situation. And for most people, the present value of their social security (and home, etc) is a significant percentage of their net worth, further diluting their foreign currency exposure.

I am not advocating a certain level of foreign currency exposure. What I am saying is that this is a diversification issue, and those who are unexposed to this risk factor have an inferior portfolio, even if their future spending is in dollars only. If I were not an expat, I would be happy with the exposure I receive solely in my international equities (which represent slightly more than half my equity holdings). Since I am an expat, I would like exposure closer to an international basket of market-weighted currencies.

I also consider things like commodities futures funds exposure to foreign currency.

I think this is a bigger issue for US investors with a bond heavy portfolio who have less currency diversification opportunity within their equity portfolio. They are more exposed to inflation risk than they may realize.

 

[RonBoyd]

What role does something like this play in International Investing?

Google Search - Venezuela Devalues Currency

CARACAS, Venezuela — Venezuela announced Friday that it was devaluing its currency, a step that had long been deemed necessary but could push the spiking inflation even higher.

The devaluation, which lowered the currency’s value against the dollar by nearly a third, was aimed at solidifying government finances and easing a tight market for dollars that has choked back imports and led to shortages of basic goods

 

[heirloom]

[What role does something like this play in International Investing?
/QUOTE]

That's why you want to make sure your int'l bond funds are hedged. China always did the same thing so they would sell more products at a lower price. Big Ben started doing the same thing with the QE he has been doing. I think he is finished taking the value of the dollar down, but all the other countries are doing the same thing now. Europe is talking about devaluing the Euro now.