Vanguard Plans Int’l Bond Funds—Finally

October 31, 2011

Vanguard finally takes the plunge with plans to launch two international bond ETFs.


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.



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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