Looking Overseas For Fixed Income

September 27, 2017

Todd Rosenbluth is director of ETF and mutual fund research at CFRA.

After years of underperforming U.S. alternatives, so far in 2017, international equities have shined brighter.

Having been reminded of the portfolio benefits of investment style diversification, investors added $120 billion of new money into non-U.S. focused ETFs year-to-date through Sept. 25, more even than the $100 billion put into U.S. products, according to Bloomberg data.

However, the demand for overseas investments has not translated to fixed-income strategies, despite the benefits.

According to Fran Kinniry, a principal in Vanguard’s Investment Strategy Group, the asset manager recommends investors have 30% of their fixed-income assets in non-U.S. investments if availability in tax-qualified plans is ample and the investments are currency-hedged approaches. Yet he notes the average investor has less than 10% in the asset class, and much of it is unhedged.

Kinniry believes the benefit of fixed income is to be the diversifier to the equity risk in a portfolio. If it’s not currency-hedged, the fixed-income asset class becomes high risk and not as powerful.

The firm’s asset allocation strategies hold the Vanguard Total International Stock ETF (VXUS) or Admiral (VTIAX) shares of the hedged Vanguard Total International Bond ETF (BNDX).

BNDX holds government and corporate bonds issued in developed markets, including France, Germany, Japan and the U.K. But the fund protects against a sell-off in the euro, yen and pound with forward contracts.


The ETF share class BNDX and Admiral mutual fund class VTABX have a 0.12% expense ratio. Relative to their ETF and mutual fund peers, BNDX has a significantly lower three-year standard deviation of 2.9.

For example, the SPDR Bloomberg Barclays International Treasury Bond ETF (BWX), which invests in similar developed-market bonds without employing hedging, has a three-year standard deviation of 7.5; the international income mutual fund peer average has an average 6.22 standard deviation.

However, the hedging has not helped recent performance, as BWX’s 9.6% year-to-date return as of Sept. 22 has significantly exceeded the 1.3% gain for BNDX.

While ETFs hold only a small portion of the money invested in fixed-income securities, this year’s flow trends are consistent with the U.S.-centric approach.

Year-to-date through Sept. 25, U.S. fixed-income ETFs gathered $89 billion, more than seven times the $12 billion for international fixed-income products. Only one of the 10 most popular fixed-income ETFs this year offers targeted international exposure.


Source: Bloomberg, 9/25/2017



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