"New International Bond Fund Shows Promise"

[Taylor Larimore]

Bogleheads:

Boglehead adviser, Allan Roth, has written this informative CBS MoneyWatch article, about Vanguard's soon-to-be available, foreign bond fund.

http://www.cbsnews.com/8301-505123_162- ... s-promise/

Best wishes.
Taylor

[JMacDonald]

Hi Taylor,
Thanks for the link. Allen Roth adds another point of view about this fund. I am still on the fence if I want it.

[InvestorNewb]

I wonder how it will compare to BND...

[allsop]

I'm curious about the level of withholding taxes, though.

[JamesSFO]

I wonder how it will compare to BND...

BND is just a share class of the Vanguard Total Bond Market Fund https://personal.vanguard.com/us/funds/snapshot?FundId=0928&FundIntExt=INT. A US bond fund.

The difference is that this bond fund will track an international bond index.

[kenyan]

Good to see an estimate of the hedging costs. My annual IPS review is in July, so I'll definitely take a close look at whether or not to include this. Excess cost, comparing Investor Shares only (including hedging) are 6-11 basis points over domestic TBM and Int-Term Index. Is the additional diversification worth it? Admiral Shares cost spreads are larger, but I can't purchase those in my employer account.

[tc101]

Kenneth Volpert, Vanguard head of the taxable bond group, confirmed that Vanguard would have hedging costs to buy forward contracts in currencies and must continually buy them to stay in a hedged position. He estimated those costs between 0.05 and 0.10 percent annually. That would put the total annual costs of the fund between 0.25 and 0.30 percent. That's still far below any other international bond fund.

By the time you add in the hedging cost, the expenses are not much lower than the international bond ETFs - BWZ, IGOV and ISHG - which all have an expense ratio of .35%.

The choice comes down to whether or not you want currency hedging. I want the exposure to foreigh currency risk/reward because it is one more diversifier.

[kenyan]

I want the exposure to foreigh currency risk/reward because it is one more diversifier.

I believe the argument is that currency risk is an uncompensated risk - you are not provided any expected reward for your risk (well, perhaps the 5 basis points you are not paying for hedging contracts). It may provide some additional diversification, though. Whether or not that diversification can be better achieved using international equities is another matter.

[Jay69]

Has Larry made a comment about this fund yet? I keep looking for his name to pop up on one of these threads.

[tc101]

I believe the argument is that currency risk is an uncompensated risk - you are not provided any expected reward for your risk

The risk is that the foreign currencies will go down in relation to the dollar. The reward is if the foreign currencies go up in relation to the dollar. Don't those balance each other out? Or am I missing something?

[abuss368]

Bogleheads:

Boglehead adviser, Allan Roth, has written this informative CBS MoneyWatch article, about Vanguard's soon-to-be available, foreign bond fund.

http://www.cbsnews.com/8301-505123_162- ... s-promise/

Best wishes.
Taylor

Hi Taylor,

Are you considering investing in this new bond fund?

I would be very interested in Mr. Bogle's thoughts on this new fund.

Best.

[Taylor Larimore]

Hi Taylor,

Are you considering investing in this new bond fund?

I would be very interested in Mr. Bogle's thoughts on this new fund.

Abuss:

I have not made up my mind about incorporating the new international bond fund into our portfolio. I see no reason to hurry with the decision.

Mr. Bogle likes to say: "Don't do something; just stand there."

Best wishes.
Taylor

[Akiva]

Kenneth Volpert, Vanguard head of the taxable bond group, confirmed that Vanguard would have hedging costs to buy forward contracts in currencies and must continually buy them to stay in a hedged position. He estimated those costs between 0.05 and 0.10 percent annually. That would put the total annual costs of the fund between 0.25 and 0.30 percent. That's still far below any other international bond fund.

By the time you add in the hedging cost, the expenses are not much lower than the international bond ETFs - BWZ, IGOV and ISHG - which all have an expense ratio of .35%.

The choice comes down to whether or not you want currency hedging. I want the exposure to foreigh currency risk/reward because it is one more diversifier.

The hedging is purely symmetric. If there's inflation (the dollar goes down, other currencies up), then you want unhedged. If there's deflation (dollar up, other currencies down), then you want hedged. Typically people expect their international stock portfolio to counteract their domestic currency losing value. So having a bond portfolio do this as well is a bit duplicative and adds volatility with no additional expected return. I think that the vast majority of people are better off with the hedged option then the unhedged one.

[momar]

I believe the argument is that currency risk is an uncompensated risk - you are not provided any expected reward for your risk

The risk is that the foreign currencies will go down in relation to the dollar. The reward is if the foreign currencies go up in relation to the dollar. Don't those balance each other out? Or am I missing something?

What does that have to do with whether it is compensated?

Its like betting on coin flips.

[tc101]

What does that have to do with whether it is compensated?
Its like betting on coin flips.

Maybe I am not clear on what exactly it means for risk to be compensated. I thought the possibiliy of a gain due to dollar up, other currencies down was a type of compensation, but maybe not.

[Akiva]

What does that have to do with whether it is compensated?
Its like betting on coin flips.

Maybe I am not clear on what exactly it means for risk to be compensated. I thought the possibiliy of a gain due to dollar up, other currencies down was a type of compensation, but maybe not.

It isn't compensation because it is exactly offset by the possibility of loss if the opposite occurs.

[Mikejenny]

Has Larry made a comment about this fund yet? I keep looking for his name to pop up on one of these threads.

I haven't seen anything by Larry yet but Rick posted something pretty neutral about it a few days ago
Mike

[Archie Sinclair]

What does that have to do with whether it is compensated?
Its like betting on coin flips.

Maybe I am not clear on what exactly it means for risk to be compensated. I thought the possibiliy of a gain due to dollar up, other currencies down was a type of compensation, but maybe not.

It isn't compensation because it is exactly offset by the possibility of loss if the opposite occurs.

Exactly, if you don't think the likelihood of gain exceeds the likelihood of loss, it's just simple gambling. Like betting on red or black at a roulette table, or betting heads or tails.