Vanguard Group, after years of deliberating about whether international bonds were an investment class worthy of its focus, filed paperwork with the Securities and Exchange Commission detailing plans to market two bonds—one focused on investment-grade debt outside the United States and the other on sovereign credits from the emerging markets.
Vanguard, the third-largest U.S. ETF fund sponsor by assets, said it will offer conventional mutual fund shares of the two new bond funds as well as ETF shares. The two funds and the estimated expense ratios of the ETF versions are:
- Vanguard Total International Bond Index Fund, 0.30%
- Vanguard Emerging Markets Government Bond Index Fund, 0.35%
The international bond fund will be hedged, meaning that whatever currency exposure a given bond has will be neutralized by the fund’s hedging strategy, Vanguard said in a press release on the two proposed funds. The emerging markets fund will meanwhile own dollar-denominated credits, according to the filing.
International bonds have become an increasingly popular investment in recent years. That’s particularly true of the emerging markets. The single-biggest international bond fund is focused on developing market credits. It’s the iShares JPMorgan USD Emerging Markets Bond Index Fund (NYSEArca: EMB), and it has $3.15 billion in assets, according to data compiled by IndexUniverse. The iShares fund, like the one Vanguard is planning, holds dollar-denominated bonds.
State Street Global Advisors has two broad international bond funds that have also attracted significant assets. SPDR Barclays Capital International Treasury Bond ETF (NYSEArca: BWX) has $1.65 billion in assets, while its SPDR DB International Government Inflation-Protected Bond ETF (NYSEArca: WIP) is a $1.3 billion fund.
The Investment Grade Fund And Its Index
Vanguard said its international bond fund will track the Barclays Global Aggregate ex-USD Float Adjusted Index (hedged).
The benchmark includes a wide spectrum of more than 7,000 global government, agency and corporate securities in 57 countries in Asia, Europe, Canada and South America, Vanguard said in its press release.
By hedging currency exposure, Vanguard said the fund’s returns should more closely correlate with the underlying performance of international bonds without currency distortions. Vanguard, citing Lipper Inc. research, said most international bond funds offered today don’t use hedging strategies.
Vanguard said the investment-graded international bond portfolio will be available in a mutual fund wrapper in the “Investor,” “Admiral” and “Institutional” share classes for 0.40 percent, 0.30 percent and 0.25 percent, respectively. That would make the “Institutional” share class the only category cheaper than the ETF.
Two great funds duke it out on fees, but holding costs tell a different story.
By including factor tilts in smart beta’s definition, you get a mishmash of ETFs.
When ETF-friendly advisors give advice to prospects, it’s worth noting what they shouldn’t say.
UAE and Qatar leaving iShares frontier ETF ‘FM’ poses problems, but will make the fund better.