Question about US vs. International Bonds

RunningBum said:
For Vanguard, at various ages, portfolio size, and stock/bond split that I tried, he always put 42% of bonds in Vanguard Emerging Markets Government Bond fund. Over 70% of its holdings are rated Baa or less. No way do I put that much in such a fund. The expense ratio is 0.25%, with a purchase fee of 0.75%. That's crazy.

Oh, and the stock part is split 7 ways, so you're probably going to be doing a lot of rebalancing to keep those ratios rather going fishing. 20% of the stock component is an energy fund. Why?

I'll take a hard pass at this guy's recommendations.
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I get it if someone doesn't want to take a more complex asset allocation strategy. I get it that some people might disagree with someone else's choice of allocation (gasp!)

The information I was trying to offer was one guy's split between domestic and international bonds (you said 58% domestic, 42% international, and that sounds right... I didn't check). The other point I was making was that his choices for funds were sensitive to expenses. You quoted 0.25% with purchase fee of 0.75%. I didn't check that, nor did I check it against other international bond funds. But again I'll say I'd guess that other international bond funds aren't going to be any cheaper. As to the ratings of the holdings, again, I doubt other international bond funds that track the index are going to have a higher rating.
 
sengsational said:
I get it if someone doesn't want to take a more complex asset allocation strategy. I get it that some people might disagree with someone else's choice of allocation (gasp!)

The information I was trying to offer was one guy's split between domestic and international bonds (you said 58% domestic, 42% international, and that sounds right... I didn't check). The other point I was making was that his choices for funds were sensitive to expenses. You quoted 0.25% with purchase fee of 0.75%. I didn't check that, nor did I check it against other international bond funds. But again I'll say I'd guess that other international bond funds aren't going to be any cheaper. As to the ratings of the holdings, again, I doubt other international bond funds that track the index are going to have a higher rating.
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Vanguard Total Intl Bond Index has an expense fee of 0.11%, with no purchase fee. Much higher rated bonds too-only 28.5% below A, as opposed to over 70%.

Don't get snippy when someone else does some checking that you didn't do and finds these recs don't hold up to your claims.
 
OP here. Decided to google the question and spend some time reading various opinions. I'm simplifying, but I'd say about 80% of the people thought buying international bonds wasn't really worth the trouble. The other 20% argued it reduced volatility, or that it was consistent with the principle of having a portfolio that reflected the world market. Some (e.g., Morningstar) recommended a 20% allotment when young but decreasing amounts with age and conservatism.

So opinions were all over the map, but it seemed to me that the majority opinion reflected what I've read in this thread -- most people think owning international bonds doesn't make a whole lot of difference, one way or the other. They don't think it's a bad idea; they just aren't persuaded that is has much benefit.

I ended up transferring half my international bonds stateside, so now I'm at 10% international in Vanguard, zero in Fidelity. I figured that since my US bond fund had performed marginally better than my international fund over the past decade, I might as well have the money in US bonds. It's only a couple hundred dollars difference, but what the hell.
 
RunningBum said:
Vanguard Total Intl Bond Index has an expense fee of 0.11%, with no purchase fee. Much higher rated bonds too-only 28.5% below A, as opposed to over 70%.

Don't get snippy when someone else does some checking that you didn't do and finds these recs don't hold up to your claims.
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A bit of apples and oranges, I think, given he's going with emerging markets bonds vs total international bonds. Not trying to convince anyone that's right or wrong. As I said originally, you'd be hard pressed to find a cheaper alternative. I'll grant that if you want total international (not emerging international), then Marotta didn't pick the absolute cheapest possible as his default, but included an option for one with an expense ratio of 0.080%. You could do a lot worse than any in his list, as far as I can tell.

I didn't see 2020 results yet, but 2019:


Code: 
Foreign bond funds used in the Gone-Fishing Portfolios had the following 2019 expeses & returns:

0.080%    17.79% iShares Core International Aggregate Bond ETF (IAGG) [Fidelity]
0.500%    17.65% Invesco Emerging Markets Sovereign Debt Portfolio (PCY) [Schwab]
0.390%    15.48% iShares JP Morgan USD Emerging Markets Bond (EMB) [TD Ameritrade]
0.250%    14.46% Vanguard Emerging Markets Government Bond ETF (VWOB) [2019 Default, 2020 Default]
0.600%    13.42% WisdomTree Emerging Markets Corp Bd ETF (EMCB) [eTrade]
0.250%    12.04% Vanguard Emerging Markets Government Bond Inv/Adm (VGOVX/VGAVX) [Vanguard]

0.110%     7.76% Vanguard Total Intl Bond Index Admiral (VTABX) [RB]

As to the claim of "purchase fee of 0.75%", it's an EFT, and about transaction fees, the prospectus says "None through Vanguard", so if your broker is charging something, that is certainly a problem. I suppose that's why there are a bunch of alternatives for the bond allocation provided in the portfolio recommendations to align with different brokerage houses.

ER Eddie said:
I couldn't find any low-cost Fidelity international bond index funds. Know of any?
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Going to Marotta's Gone Fishing articles, I have found iShares Core International Aggregate Bond ETF (IAGG), with an expense ratio of 0.080%. Pretty dang cheap, as I indicated it would be. I should have just retrieved that information and posted it.
 
Geez, those are prices. Here are Vanguard’s:

IMG_0477.JPG
 
Markola said:
Geez, those are prices. Here are Vanguard’s:
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The left most column is the expense ratio for 7 different choices of international bond funds / etf's.

5 of them have the word "emerging" and 2 don't. The ones that don't say "emerging" have lower expense ratios.
 
sengsational said:
A bit of apples and oranges, I think, given he's going with emerging markets bonds vs total international bonds.
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The OP is asking about how much international bonds to hold, not emerging markets, so you pointed him to a source for apples when they were looking for oranges.

As to the claim of "purchase fee of 0.75%", it's an EFT, and about transaction fees, the prospectus says "None through Vanguard", so if your broker is charging something, that is certainly a problem.
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That wasn't just my claim, Marotta recommended (in a $100K portfolio with 50% equity):

20.9% Vanguard Emerging Markets Government Bond Inv/Adm (VGOVX/VGAVX) $20,900

That's not an ETF. It's a mutual fund with a 0.75% purchase fee. He should have recommended the ETF, but he didn't.

In my opinion (the rest of my reply being facts), that's just crazy to recommend that much in emerging market bonds. On that basis alone I wouldn't listen to anything this guy recommends. And the fact that he recommended a mutual fund with a purchase fee that the corresponding ETF doesn't have just seals the deal.
Going to Marotta's Gone Fishing articles, I have found iShares Core International Aggregate Bond ETF (IAGG), with an expense ratio of 0.080%. Pretty dang cheap, as I indicated it would be. I should have just retrieved that information and posted it.
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Except that would not have answered the OP's question of how much international bonds to hold. And in my opinion you shouldn't have to search through all options to find the ones that make sense and that ones that are bat-sh*t crazy. I didn't go looking for the worst case. You said the guy has a calculator (without giving a link, which is lazy IMO). I found it and went to the calculator for VG because that's what I use, and reported back my findings.
 
IIRC, During Vanguards 2021 Outlook Webcast earlier this week they recommended having 20% of your fixed income assets in currency hedged International Bond Funds.

My fixed income asset allocation is 50% in my 401k Stable Value Fund, 40% in US Bond Funds, and 10% in Vanguard Total International Bond ETF. I'm not sure if having international bond funds in my portfolio makes that much of a difference but I like having some diversification.
 
RunningBum said:
And in my opinion you shouldn't have to search through all options to find the ones that make sense and that ones that are bat-sh*t crazy.
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Thanks for being the BSC police :LOL:
 
Splash said:
IIRC, During Vanguards 2021 Outlook Webcast earlier this week they recommended having 20% of your fixed income assets in currency hedged International Bond Funds.

My fixed income asset allocation is 50% in my 401k Stable Value Fund, 40% in US Bond Funds, and 10% in Vanguard Total International Bond ETF. I'm not sure if having international bond funds in my portfolio makes that much of a difference but I like having some diversification.
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Wasn't their recommendation 30%, earlier? I wonder if they lowered it?

Do you happen to know whether their Total International Bond fund is "currency hedged"? (I've got 10% in that fund myself.)
 
I apparently have a different take than many here, and am a big believer in International diversification - both in equities and fixed income.

The (likely massive, unprecedented) spending that's likely to happen in the US in 2021 and over the next several years is something we should all be concerned about. We simply don't have the money to spend like is already being talked about, and debt is going to increase like crazy. That's going to put further pressure on an already stressed to the max economic system and lead to likely big increases in inflation. For that reason, I'm "iffy" on US bonds AND US equities this year. (On the one hand, all the spending is going to put a lot of additional $$ into the economy so that may continue to artificially inflate stocks for a little big longer, but at one point, things are IMHO likely to pop and if so, the downside won't be pretty).

I hold both developed and emerging markets bonds. PFORX is a good core international bond fund albeit with a longer duration (8.23 - similar to Vanguard Total International Bond ETF at 8.5), and you can't go wrong with the managers at PIMCO who arguably are among the best around. It has an adjusted ER of .5 which I realize will give the cost conscious among us pause, but it's worth it, IMHO given the track record of performance which is north of 5% total return for the 1, 3, 5 and 10 year periods. I'll take that kind of consistency from a bond fund all day long, .5% ER or not. It holds 43% Govt, 5.9% Corps, 18.6% Securitized and 14% Cash.

Emerging is a bit trickier. I originally chose Fidelity New Markets Income (FNMIX) and it did well for quite a long time - until it didn't, as many actively managed funds do. I actually picked this back in the days I was focused on yield, as yield is ~4%. But Total Return has been much more variable. 5-year is 6.56%. 10-year, 5.31%. 15-year, 6.55%. But 3-year only 1.57%, 1-year 2.22% and YTD -1.38%. 73% Govt, 18.5% Corporates, 8% Cash. 2 recent manager changes, though - long time manager stepped down end of 2019 and the new lead manager stepped down Sept 2020. Have been thinking of looking for an alternative to this one and sold off some in 2020. Like most actively managed Emerging Market FI funds, high ER of .82.

I also own DBLEX (DoubleLine Emerging Markets) as Gundlach was originally involved in managing it (is not any longer). Performance #s: YTD -0..09; 1-year: 3.68; 3-year: 4.27; 5-year: 7.51; 10-year: 5.12. Duration 3.69. 16% Govt, 75% Corporates, ~8% Cash. High ER of .9%.

Hope that helps..I personally think the US is going to get hit hard economically this year (FI and equities) so am actually thinking of INCREASING my already high International allocations in FI and equities. Probably increase my allocation to Asia and Europe Developed markets as the valuations of both are much more compelling than US at the moment, IMHO.
 
I have no internation bonds. I've been moving my FI to quality lately. FUAMX is my largest bond holding now.
After looking at this thread and last week's political news I looked up a couple of foriegn sovereigns. Since they're yields are negative, I'll stay away for now.
I still don't see much sense in foriegn corporates. My FI is primarily for SHTF situations and I still see nothing safer than US Federal debt.
 
ER Eddie said:
Quick question about US vs. International Bond mix. I've got mine set at 80/20 in Vanguard. Is that about right?

Also, do you know of any good Fidelity international bond index funds? I am currently 100% in US bonds in my Fidelity account, and I think I should diversify a bit. However, last time I looked, I couldn't find any low-cost Fidelity international bond index funds. Know of any?

Thanks.
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I, too was considering moving a percentage of my bond holdings to include international. But about 80% of my retirement accounts are in two employer plans and, of course, they do not offer any international bond funds as an option. Maybe once I roll over employer funds into IRA accounts I'll take another look into doing this.
 
Splash said:
IIRC, During Vanguards 2021 Outlook Webcast earlier this week they recommended having 20% of your fixed income assets in currency hedged International Bond Funds.

My fixed income asset allocation is 50% in my 401k Stable Value Fund, 40% in US Bond Funds, and 10% in Vanguard Total International Bond ETF. I'm not sure if having international bond funds in my portfolio makes that much of a difference but I like having some diversification.
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My naive thinking is would it not be better to be un-hedged? For example imagine buying a single long term bond (corporate or municipal or government) from Singapore, Australia, India, etc,. It seems that part of the motivation for buying would be to protect against relative home country currency devaluation. That any currency hedging layered on top would reduce the return and muddle the investment thesis.
 
triangle said:
My naive thinking is would it not be better to be un-hedged? For example imagine buying a single long term bond (corporate or municipal or government) from Singapore, Australia, India, etc,. It seems that part of the motivation for buying would be to protect against relative home country currency devaluation. That any currency hedging layered on top would reduce the return and muddle the investment thesis.
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Hedging is to protect your fixed income assets, which are intended to be predictable, from wild currency swings, yet still achieving greater sector diversification. Risk assets like equities are for seeking outsized returns.
 
Markola said:
Hedging is to protect your fixed income assets, which are intended to be predictable, from wild currency swings, yet still achieving greater sector diversification. Risk assets like equities are for seeking outsized returns.
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But it would seem that part of the motivation to invest in foreign bonds would be to gain exposure to that country's people, economy, and government dynamics, which would be somewhat reflected in that nation's currency fluctuations. Otherwise why not continue in one's home country for the given bond risk/return category.

I don't really have any international bonds, so I have not thought about this in depth. I just don't understand how one (the fund manager) could buy a foreign bond and have enough money left over to start hedging against the bond that one just bought.
 
^^^^^^^This is a pretty good discussion of how some bond funds do not hedge, hoping for enhanced returns from currency swings, and how risky that is, vs. hedged bond funds aiming for stability and how they do it. Keep in mind, bonds are debt instruments and the traditional objective is to get paid back a predictable sum on a predictable schedule. Gambling on their prices for high returns is speculation. Many investors prefer to speculate on the equities side and keep their bond side for ballast.

https://www.thebalance.com/what-is-currency-hedging-416913
 
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Markola said:
... some bond funds do not hedge, hoping for enhanced returns from currency swings, and how risky that is, vs. hedged bond funds aiming for stability ...
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Its really a matter of time horizon. A couple of years ago I took an online class from the University of Geneva, specifically focused on risk management. There, they showed pretty clearly that currency swings tend to cancel each other out over time. So for a long-term investor hedging is an unnecessary cost.

But short term, for a fund manager who is watching his graphs on M* every quarter, hedging may be an important survival skill.
 
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