Vanguard Plans Int’l Bond Funds—Finally

October 31, 2011


Emerging Market Bond Fund

The Vanguard Emerging Markets Government Bond Index Fund will be based on the Barclays Emerging Markets Sovereign Index (USD).

The benchmark features about 200 government bonds in 39 countries.

By investing solely in U.S.-dollar-denominated international bonds, the fund will not subject U.S.-based investors to currency risk.

However, Vanguard did not say the emerging markets fund would be hedged, which means that if the dollar should weaken on international currency markets, investors, as in any dollar-denominated asset, wouldn't be protected from that weakening.

Indeed, international emerging bond ETFs denominated in local currencies have been gaining in popularity in the past year. For example, the WisdomTree Emerging Markets Local Debt Fund (NYSEArca: ELD) has pulled in $1.15 billion since its launch in the summer of 2010.

Van Eck also rolled out the Market Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC) in the summer of 2010 and the iShares Emerging Markets Local Currency Bond Fund (NYSEArca: LEMB) came to market earlier this month.

Funds like ELD, EMLC and LEMB are designed to benefit when the dollar is declining in currency markets, as it has for much of the past decade. However, when markets are roiled, investors quickly scurry back to dollar-denominated assets, hurting returns on such funds.

Vanguard said the emerging markets portfolio will be available in a mutual fund wrapper in the “Investor,” “Admiral” and “Institutional” share classes for 0.50 percent, 0.35 percent and 0.30 percent, respectively. As with the investment-grade fund, that would make the “Institutional” share class of the emerging markets debt fund the only one cheaper than the ETF.

Special Purchase Fees For Mutual Funds

Vanguard also said to help offset the transaction costs associated with international bonds, the Total International Bond Index Fund and the Emerging Markets Government Bond Index Fund will assess purchase fees of 0.25 percent and 0.75 percent, respectively, on the non-ETF conventional shares.

Vanguard offers its own clients commission-free trades when they are buying and selling Vanguard ETFs.


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