Vanguard International BOND Fund

[kramer]

What role does something like this play in International Investing?

Google Search - Venezuela Devalues Currency

Venezuela is a kleptocracy run by a pseudo-dictator that does not have fair or transparent or free markets. It does not even qualify for inclusion on a Frontier Market Index, let alone a developing market index or, most importantly, a developed market index as we are discussing here. A hedging contract could not even be purchased on Venezuelan Bolivars, let alone a low cost hedging contract -- it is a thoroughly non-convertible currency.

So to answer your question, it is not even tangentially relevant to this discussion.

 

[Lsbcal]

My guess is that if you looked at bonds of countries that eventually devalued their currencies, you would find that the bond market had anticipated this sort of thing and thus the bonds were not investment grade.

Most likely the countries that devalue would be off the list of a fund like Vanguard's well before any devaluation event. Decent active bond fund managers like Gross at PTTRX would not hold such bonds.

 

[RonBoyd]

So to answer your question, it is not even tangentially relevant to this discussion.

Did you miss the "something like this" part? If so, let me point it out to you.

 

[kramer]

Did you miss the "something like this" part? If so, let me point it out to you.

Hi Ron, I did my best to answer your question. If you can be more specific, I will do my best to answer. Thanks.

 

[MichaelB]

I think Kramer was being polite in his earlier comments on Venezuela.

There are two discussions going on. One is currency hedging of an int'l bond fund. I agree with Kramer that one of the utilities of that asset class is the currency exposure, hedging makes it more expensive and less useful. In addition, risk level of the fund is less important than total portfolio risk, and, as pointed out, an unhedged fund is a more effective diversifying agent.

What role does something like this play in International Investing?

The Venezuelan devaluation does not have much application to this discussion because it is an event of a currency not freely traded in an open market and who's bonds are not rated by any agency. They are not eligible to be part of the portfolio. The Int'l bond fund will be composed of sovereign bonds of govt's that have high credit ratings and whose currencies trade freely.

 

[samclem]

The Int'l bond fund will be composed of sovereign bonds of govt's that have high credit ratings and whose currencies trade freely.

It will be both government bonds and corporate bonds. From Vanguard:

Vanguard Total International Bond Index Fund will seek to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which covers approximately 7,000 high-quality corporate and government bond issues from 52 countries in Asia, Europe, and Latin America, as well as from Canada.
As of December 31, 2012, the index's top country holdings included Japan (23%), France (12%), Germany (11%), and the United Kingdom (9%). The index caps its exposure to any single bond issuer, including a government, at 20% to meet regulated investment company (RIC) tax diversification requirements.

 

[MichaelB]

It will be both government bonds and corporate bonds. From Vanguard:

Right. Not just OECD members but EM countries as well. My point is still valid - to be part of the investment portfolio the bond needs to be highly rated and based in a freely traded currency.

 

[samclem]

Right. Not just OECD members but EM countries as well. My point is still valid - to be part of the investment portfolio the bond needs to be highly rated and based in a freely traded currency.

Yes, I was just making it clear that the fund is not solely govt bonds, it will also hold bonds of private companies.
Of course we still have the different issue of the much-damaged credibility of rating agencies, but we'll overlook that.

 

[MichaelB]

Yes, I was just making it clear that the fund is not solely govt bonds, it will also hold bonds of private companies.
Of course we still have the different issue of the much-damaged credibility of rating agencies, but we'll overlook that.

Got it. No disagreement.

 

[pb4uski]

Also see Should You Add International Bonds to Your Portfolio? While I agree there is no need to rush, I may get to the 20% of bond allocation over a couple years.

So Should You Buy The New Fund?

The flip side of the decision to currency-hedge the Total International Bond Index Fund is that its performance will be much more closely correlated to the performance of U.S. bond funds than would be the case if the fund were not currency-hedged. In other words, the decision of whether or not to include this fund in your portfolio will probably not be on the list of most important investing decisions you’ll ever make.

As a general rule, I think it’s wise to watch something for a few years — long enough to have a good handle on how it tends to behave — before putting a large portion of your portfolio into it.

Because my wife and I currently use the Vanguard LifeStrategy Growth fund (with its 80% stock, 20% bond allocation) for our retirement savings, that means 4% of our retirement portfolio (20% of the 20% bond allocation) will be put into this new fund. That’s a pretty modest allocation — not enough to cause me any worry whatsoever.

That said, if we instead used a DIY portfolio of individual index funds, I would probably be inclined to wait and watch the fund for some years before moving anything into it.

There’s no need to rush.

 

[veremchuka]

As of December 31, 2012, the index's top country holdings included Japan (23%), France (12%), Germany (11%), and the United Kingdom (9%). The index caps its exposure to any single bond issuer, including a government, at 20% to meet regulated investment company (RIC) tax diversification requirements.

I wonder if that 23% for Japan is a misprint and it should be 13%? The reason is in the top holdings they are way over allocated to Japan. In decreasing order 13% would still put Japan 1st.

 

[RobLJ]

+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.)


I've done well with GIM (Templeton Foreign), EDD (dangerous--see 2009), and Fidelity New Markets.

I've bought GIM at a discount on several occasions from about 7 or 8 years ago to four years ago, sold 25% or so several times when it went to premium, then bought it back. I've now got gains that equal the position. If we get a downturn, I'll probably buy some more on a limit order.

I had a bit of EDD in '08 and bought more twice on the way down and 3-4 more on the way back up in 2009, sold in 2010 and 2011, then bought a little back for the yield and discount. It's volatile.

I think GIM, if bought at a discount (the yield pays while you wait), and Fidelity are fine funds. Fidelity is currency hedged but that's not a bad thing, necessarily.
I'm interested in foreign dividend funds also, but only recently bought Matthews China Dividend. We'll see how that works out in 5 years. I sold Fidelity China back in 2007; got lucky on the timing on that one too.
The above is all market timing, of course. I wouldn't suggest anyone try to duplicate it; I probably can't. But I do think the GIM illustrates the attractiveness of buying closed end funds at a discount, then managing the position when it goes to premium. Probably more trouble than it's worth.

 

[RonBoyd]

Pimco ETF: A new way to bet against the dollar

Pimco (PTTRX), the world's largest bond fund, just launched a new exchange traded fund based on a basket of currencies likely to benefit from dollar weakness. The ETF began trading Tuesday under the ticker FORX (FORX).

I didn't research this but it is actively managed so expense might be an issue.

Unlike other currency-based ETFs, FORX is actively managed and includes positions in currencies and local-currency bonds. That gives investors more direct foreign exchange exposure and is more predictable than indirect currency bets in the commodities and stock markets, according to Mather.

The ETF is made up of currencies from 19 countries. Its largest holdings are in the currencies of Norway and Canada. Russia, Mexico and Sweden are also top holdings in the portfolio.

 

[pb4uski]

Interesting article on this new fund:

New international bond fund shows promise - CBS News

 

[foxfirev5]

I'll wait to see the composition, duration etc but it looks pretty good at first glance. An ER of .20% for a $10k investment in an Int'l bond fund is attention getting. The devils in the details but I'll take a look for diversification's sake.

 

[jimnjana]

+1


I think GIM, if bought at a discount (the yield pays while you wait), and Fidelity are fine funds. Fidelity is currency hedged but that's not a bad thing, necessarily.
.

I like GIM as well. Also TGINX. I went with VWO as my foreign stock holding, a little yield to boot. I traded out of GIM a few years ago, but got back in after the distribution cut.

 

[Chuckanut]

Any thoughts on this fund as the dollar rises against the Euro?

 

[phil70]

I briefly moved some of my fixed income into foreign bonds, but unwound it because I could find no studies that indicate foreign fixed income would improve my overall portfolio performance. I tend to use Lawrence Swedroe's guidance. He advises a pretty heavy allocation to foreign equities - but not foreign bonds.

Your fixed income allocation should be an anchor providing lower volatility and a source of income/cash so that you do not need to liquidate equities at the wrong time. On that theory, anything that is more complicated/risky than domestic fixed income is not serving this goal and should not be considered part of your fixed income allocation.

You will definitely have increased risk due to exchange rates, which can hedge against a falling dollar - but a foreign equity allocation will do the same and hopefully provide a greater return to compensate you for your risk.