Finally arrived: The Vanguard Total International Bond Fund

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Finally arrived: The Vanguard Total International Bond Fund

Postby femur » Wed Feb 06, 2013 11:25 am

from: https://personal.vanguard.com/us/insigh ... sf165080=1

To help add diversity to your portfolio, we're introducing Vanguard Total International Bond Index Fund and adding it to 20 of our all-in-one funds. It's the first international fixed income fund we'll offer to our U.S. investors, providing you with low-cost access to one of the world's largest asset classes. The U.S. Securities and Exchange Commission is reviewing a registration statement filed for the fund, which we expect will be available by the end of the second quarter of 2013.


Vanguard Total International Bond Index Fund will seek to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which covers approximately 7,000 high-quality corporate and government bond issues from 52 countries in Asia, Europe, and Latin America, as well as from Canada.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby WHL » Wed Feb 06, 2013 11:34 am

so, should our 3-fund portfolios now be changed to a 4-fund portfolio? :mrgreen:
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dickenjb » Wed Feb 06, 2013 11:34 am

The corollary piece of big news is it is going into the TR and LS funds. Replacing 20% of TBM it seems.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby hlfo718 » Wed Feb 06, 2013 11:35 am

Wonder why they are hedging the FX for the bond fund?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby femur » Wed Feb 06, 2013 11:36 am

WHL wrote:so, should our 3-fund portfolios now be changed to a 4-fund portfolio? :mrgreen:


Or now a 5-fund if you already split between TBM and TIPS? :D
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Re: Finally arrived: The Vanguard Total International Bond F

Postby femur » Wed Feb 06, 2013 11:38 am

hlfo718 wrote:Wonder why they are hedging the FX for the bond fund?


To eliminate (or reduce) currency risk. Investors looking to international bonds want the benefits of diversifying country risk and interest rate risk, but don't want currency risk.

Swedroe talks about this in his (very good) bond book.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby BBL » Wed Feb 06, 2013 11:39 am

I'll ignore this option for strategic reasons which means it is quite likely to take-off like a missile [much like VNQI did after I strategically ignored it]. :wink:
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Re: Finally arrived: The Vanguard Total International Bond F

Postby ObliviousInvestor » Wed Feb 06, 2013 11:41 am

hlfo718 wrote:Wonder why they are hedging the FX for the bond fund?

Their reasoning is explained here:
https://personal.vanguard.com/us/insigh ... hannel=MFN
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Occupier » Wed Feb 06, 2013 11:42 am

They ain't going to get any of my money. Per the press release the fund is dollar denominated, and if in local currency, hedged. I am one of the board pessimists about the US dollar. If I wanted to take on the extra risks of investing overseas, I want local currencies. But I will admit that view might not be shared by everyone, and the fund does, as is usual for Vanguard, have really low costs. Dave
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Changes in Target Funds

Postby Taylor Larimore » Wed Feb 06, 2013 11:44 am

Femur:

Thank you for the alert.

In addition to information about the upcoming internationaI bond fund, I found this part interesting:
Vanguard Target Retirement Funds will undergo a few additional changes. Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds.

In addition, the current allocations to Vanguard Prime Money Market Fund in the Target Retirement Income and Target Retirement 2010 Funds will be eliminated.


I am glad to see that Vanguard continues to improve its (Morningstar top-rated) Target Funds .

Best wishes.
Taylor
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Re: Finally arrived: The Vanguard Total International Bond F

Postby KyleAAA » Wed Feb 06, 2013 11:46 am

Interesting! This new fund will make up 20% of the fixed income portion of the Target Retirement and Lifestrategy funds.

Additional nuggets many will be interested in:

"Vanguard Target Retirement Funds will undergo a few additional changes. Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds. In addition, the current allocations to Vanguard Prime Money Market Fund in the Target Retirement Income and Target Retirement 2010 Funds will be eliminated."


All in all, I think these changes make the all-in-one funds slightly more attractive. Kinda feels like performance chasing a bit, though.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby VictoriaF » Wed Feb 06, 2013 12:07 pm

This will be a great topic for BH12.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Keep It Simple » Wed Feb 06, 2013 12:09 pm

WHL wrote:so, should our 3-fund portfolios now be changed to a 4-fund portfolio? :mrgreen:


Taylor Larimore,

I'd be interested in hearing your personal view on whether this fund would add value to the three fund portfolio. Obviously it would not add to the simplicity of the three fund portfolio, but do you think it would add any benefit? Assuming it does, would this benefit warrant changing to a 4 fund portfolio and if so, what percentage of your bond portion would you recommend?

Thanks,

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Re: Finally arrived: The Vanguard Total International Bond F

Postby magellan » Wed Feb 06, 2013 12:14 pm

ObliviousInvestor wrote:
hlfo718 wrote:Wonder why they are hedging the FX for the bond fund?

Their reasoning is explained here:
https://personal.vanguard.com/us/insigh ... hannel=MFN

While of course reasonable people can differ, IMO, Vanguard is mistaken here. They make the rookie mistake of considering an asset in isolation, rather than looking at its impact on the overall portfolio.

When the issue of currency fluctuation is analyzed at the portfolio level, its impact on portfolio volatility is negligible. Figure 4 of this 2012 Vanguard fixed income paper shows that currency fluctuations from unhedged international bonds do NOT meaningfully increase portfolio volatility, as long as the allocation to international bonds kept under 40% of total bonds. That same paper shows the cost of hedging at around 15-25 bp, which means Vanguard's new fund will have about the same overall cost as Barclays International Treasury Bond fund (BWX).

During our visit to Vanguard at the Bogleheads conference last year, I suggested they offer both a hedged and unhedged version of the new fund. I thought perhaps the two funds could be implemented using two share classes that hold the same underlying bonds, but one class would add in the currency hedges while the other would not. Apparently they didn't like my idea.

I've maintained a steady allocation to unhedged international bonds for over a decade. I didn't choose unhedged to speculate on currency movements, but rather because I think that's the best way to get the broadest diversification at the lowest cost.

So in light of all of this, my plan is to stay the course with BWX.

Jim
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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Wed Feb 06, 2013 12:18 pm

This is wonderful news. Vanguard investors will finally have access to "the world's largest asset class," and the opportunity to invest beyond U.S. fixed income funds.

"Vanguard is pleased to bring its international fixed income indexing expertise and low-cost approach to U.S. investors," said Vanguard CEO Bill McNabb. International bonds are a major asset class, making up roughly 33% of the world's investable assets. Vanguard believes the size of this asset class makes it worth considering including in your portfolio.

These bonds also help you diversify your portfolio because of the differences in how international and U.S. bond returns are affected by various nations' monetary policies, interest rates, and expected inflation. International and U.S. bond returns don't move in lockstep with one another. The correlation (a measure of how prices move together) between the two types of investments is low. This low correlation gives international bonds the potential to help reduce volatility of portfolio returns. (Diversification does not ensure a profit or protect against a loss in a declining market.)"
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Re: Finally arrived: The Vanguard Total International Bond F

Postby crowd79 » Wed Feb 06, 2013 12:30 pm

Will this fund be added within the Target Retirement funds? It'd be nice to have a tiny portion of international bond exposure.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Wed Feb 06, 2013 12:39 pm

crowd79 wrote:Will this fund be added within the Target Retirement funds?

Yes.

"For the potential diversification benefits of international bonds, we'll be adding Vanguard Total International Bond Index Fund to our 12 Vanguard Target Retirement Funds, four Vanguard LifeStrategy® Funds, two of our three Vanguard Managed Payout Funds, and two Vanguard Variable Insurance Funds.

The new international bond fund will represent 20% of the fixed income allocation of these funds and will complement their three other primary core holdings: Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market II Index Fund."
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Re: Finally arrived: The Vanguard Total International Bond F

Postby JMacDonald » Wed Feb 06, 2013 12:52 pm

Vanguard's view is that currency hedging is a prudent way to reduce risk when investing in international bonds. The strategy helps protect foreign bond investments from falling in value whenever the U.S. dollar strengthens—something that occurred both in 2011 and 2012, particularly against European currencies.Of course, if the dollar declines, the opposite will happen and the strategy will offset the gains the fund otherwise would have realized.

After reading the statement I put in bold print, I am not sure I see the benefit of hedging. It this really a good way to go?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby 555 » Wed Feb 06, 2013 1:03 pm

What about the Emerging Market Dollar Denominated Bond Fund that they were talking about (and will it also be in the funds of funds)?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby rkhusky » Wed Feb 06, 2013 1:13 pm

JMacDonald wrote:
Vanguard's view is that currency hedging is a prudent way to reduce risk when investing in international bonds. The strategy helps protect foreign bond investments from falling in value whenever the U.S. dollar strengthens—something that occurred both in 2011 and 2012, particularly against European currencies.Of course, if the dollar declines, the opposite will happen and the strategy will offset the gains the fund otherwise would have realized.

After reading the statement I put in bold print, I am not sure I see the benefit of hedging. It this really a good way to go?


If the dollar declines, will that be good for US stocks? How do movements in the dollar (up/down) affect an average 3 fund portfolio with 60/40 stock/bond and 30% international?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby NYBoglehead » Wed Feb 06, 2013 1:18 pm

KyleAAA wrote:Interesting! This new fund will make up 20% of the fixed income portion of the Target Retirement and Lifestrategy funds.

Additional nuggets many will be interested in:

"Vanguard Target Retirement Funds will undergo a few additional changes. Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds. In addition, the current allocations to Vanguard Prime Money Market Fund in the Target Retirement Income and Target Retirement 2010 Funds will be eliminated."


All in all, I think these changes make the all-in-one funds slightly more attractive. Kinda feels like performance chasing a bit, though.


Kyle,

I don't think it's performance chasing. At the research paper linked in the main article outlines, international bonds are now make up more than any other asset class in the world's pool of investable assets. Having access to this simply means that "owning the entire market" is much more achievable.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby understandingJH » Wed Feb 06, 2013 1:24 pm

Interesting news, as regards hedged vs. unhedged , I'll have to reread the Vanguard white paper. But I did take the PIMCO Global Bond Fund and compared the differences between the hedged (PGDAX ER 0.80) and unhedged (PADMX ER 0.80) share classes. To me it looks like hedged has less volatility and slightly lower returns.

Image

Of course this is looking at the asset class in isolation as an earlier posted mentioned. And the currency risk problem is one I still don't understand be it stocks or bonds. Over the long term wouldn't it all even out? Nonetheless, I'm not holding market-weight US/Intl stock allocations due to the "currency risk" factor and since under-weighting international seems to be the de-facto standard (though if this was my primary reason it would be the logic fallacy of Argumentum ad populum, I'll admit!). I plan to research this more in the future.

For what it's worth isn't the US bond market something like only 1/3 of the global market? Does this mean the world market-cap aficionados are going to start adding ~66% of their bond allocation to international bonds? (i.e. 45/55 US/Intl Stocks, 34 US/66 Intl Bonds)
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Re: Finally arrived: The Vanguard Total International Bond F

Postby SpringMan » Wed Feb 06, 2013 1:29 pm

Finally arrived but can't purchase it yet. Still waiting for approvals.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby nisiprius » Wed Feb 06, 2013 1:44 pm

understandingJH wrote:To me it looks like hedged has less volatility and slightly lower returns.
Exactly what you'd expect. Currency-hedged bonds should look like bonds, but incur the cost of the hedging. Unhedged bonds should look like bonds times currency, and currency is volatile.
And the currency risk problem is one I still don't understand be it stocks or bonds. Over the long term wouldn't it all even out?
Yes, that's the problem. It all evens out means no extra return. But you're taking extra risk. Extra risk for no extra return is bad.

To put it another way, if you were willing to take extra risk to get extra return, you'd already be taking it. So, you don't want to increase your risk. But, if you displace hedged or dollar-denominated bonds with unhedged foreign-currency-denominated bonds, you have added to the risk of your portfolio, so you need to cut back risk somewhere else. The obvious way to do this is to cut your overall stock allocation. But that means you are cutting back on the higher-returning asset class.

In other words, you either get extra risk for no return, or you can retune your portfolio and get the same risk but lower return. Extra risk is bad in itself. Extra risk may be worth it if you get extra return. Extra risk is not worth it if all it happens is that it "just evens out in the end."

Now, if the volatile asset is uncorrelated, you do get a risk-reduction effect. We've had unresolved arguments about that, and I don't want to open it up again, but I am at the moment pigheadedly, stubbornly convinced that a zero-return asset does not improve a portfolio unless it has, not just low correlation, not just no correlation, but negative correlation with an asset that has a positive return. And I am also stubbornly convinced that there aren't any assets that show consistent, sustained negative correlations with stocks. Because of the vagaries of random sampling, a zero-return asset may show positive correlation over one time period and negative over another, and during the time period that accidentally has negative correlation, it will temporarily and accidentally improve the portfolio's numbers over that particular time period.

Let's just say that adding zero-return volatile assets, such as currency and/or commodities to a portfolio, is not a slam-dunk improvement. Vanguard doesn't think it's an improvement. People who are sure they know which way the dollar is going to move think it's an improvement, but they are speculating in both senses of the word.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby kenyan » Wed Feb 06, 2013 2:22 pm

Hmm. Definitely something to consider when it is time for my annual IPS review. I haven't bothered with the asset class since I didn't have a low-cost, easy way to invest in it. Guess I'll need to see how quickly it gets added to my employer offerings; with a mere 1 basis point difference between Investor Shares of Total Bond/Intermediate-term Bond and Total International, the cost consideration is erased; a diversification benefit is worth considering.
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Hedged vs Unhedged Currencies

Postby EDN » Wed Feb 06, 2013 2:30 pm

Vanguard got this fund right -- you don't want currency exposure in your bond portfolio under traditional approach to investing.

Stocks are growth assets with high expected returns and high relative risk. Adding non-US stocks to a US portfolio provides a diversification benefit (different companies, different locations, etc.) and part of that is that they are held in different currencies. Over time, the net expected return on currency exposure is 0, and currency movements relative to stock price movements is pretty small. Put another way, the difference in risk between a hedged and unhedged equity portfolio is very small, and not worth worrying about hedging (lets ignore that interest rate parity doesn't hold in the short run and does have some impact on hedging decisions if you're so inclined).

Bonds on the other hand are income assets with low expected returns and low relative risk. They are added to a stock portfolio to dampen risk and provide additional income and stability. Adding a currency component, which is relatively high risk compared to bond returns, to a low risk asset when that risk doesn't carry an expected return doesn't make sense (again, ignoring IRP issues).

So the choice of hedging or not hedging is not a matter of costs. Rolling 1mo currency contracts is almost costless (and actually can add value if you use a variable maturity in which contracts you purchase based on the shape of the futures curve), the choice boils down to what impact it has on the characteristics of the underlying portfolio. And what makes sense for stocks does not for bonds.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Chan_va » Wed Feb 06, 2013 3:01 pm

Can someone point me to some information on the volatility and co-relations of international bonds to stocks and US bonds?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby House Blend » Wed Feb 06, 2013 3:11 pm

I'll take a look, but can't get involved in a big way unless my employer's plan adds it to the menu.

Only about 4% of my portfolio is an an IRA, and I'm already using a big chunk of that space for Small Cap Value. So that would limit my stake in TIBI to play money. (Might do it anyway, just for the sake of experiment).

More "interesting" to me is that they've made serious changes (AGAIN!) to their target retirement funds, with the trade of TIPS from long to short, and the addition of TIBI. I will be very curious to see if they make any changes to (a) the stock/bond ratio, (b) glide path, or (c) average duration of the bonds.

Stay the course. Not.

I do like that they've eliminated the MMF from TR Income. Took them a while to notice that there are better ways to put a lid on interest rate risk than using an asset class that returns 0%.

When I put together my Mother's portfolio, I used the TR Income fund as a model, but among the changes I made, I picked a combination of TBM, munis, short bonds, and the (long term) TIPS fund to match their overall duration on the bond side.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Tyr0ne » Wed Feb 06, 2013 3:16 pm

EDN wrote:Vanguard got this fund right -- you don't want currency exposure in your bond portfolio under traditional approach to investing.

Stocks are growth assets with high expected returns and high relative risk. Adding non-US stocks to a US portfolio provides a diversification benefit (different companies, different locations, etc.) and part of that is that they are held in different currencies. Over time, the net expected return on currency exposure is 0, and currency movements relative to stock price movements is pretty small. Put another way, the difference in risk between a hedged and unhedged equity portfolio is very small, and not worth worrying about hedging (lets ignore that interest rate parity doesn't hold in the short run and does have some impact on hedging decisions if you're so inclined).

Bonds on the other hand are income assets with low expected returns and low relative risk. They are added to a stock portfolio to dampen risk and provide additional income and stability. Adding a currency component, which is relatively high risk compared to bond returns, to a low risk asset when that risk doesn't carry an expected return doesn't make sense (again, ignoring IRP issues).

So the choice of hedging or not hedging is not a matter of costs. Rolling 1mo currency contracts is almost costless (and actually can add value if you use a variable maturity in which contracts you purchase based on the shape of the futures curve), the choice boils down to what impact it has on the characteristics of the underlying portfolio. And what makes sense for stocks does not for bonds.

Eric


So glad I came across this thread. Eric, thank you for such a well worded post. Currency risk's place in a portfolio never really clicked for me until I read your post. I would really like to add international bonds for diversification purposes, but didn't feel I understood it well enough until this thread. I keep fighting the urge to blindly accept that anything Vanguard comes out with is automatically good for the investor and not taking unnecessary risks. But this new Int'l Bond fund seems to be no exception to Vanguard's level of standards.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Rick Ferri » Wed Feb 06, 2013 3:23 pm

Are potential investors in this fund expecting higher returns? Hate to disappoint you, but this fund isn't going to yield any more than the Vanguard Total Bond Fund, and may yield less due to higher fees and hedging costs.

This is one of those funds that I know Gus Sauter doesn't believe in, but investors want it, so they get it. Vanguard is considering alternative investments as well. They don't believe in them, but investors what them, so Vanguard will provide them. There is no academic reason to own these funds, but they sure sound good. Not to fault just Vanguard because DFA, iShares, Fidelity and all other large fund companies do the same pandering.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby understandingJH » Wed Feb 06, 2013 3:40 pm

nisiprius wrote:In other words, you either get extra risk for no return, or you can retune your portfolio and get the same risk but lower return. Extra risk is bad in itself. Extra risk may be worth it if you get extra return. Extra risk is not worth it if all it happens is that it "just evens out in the end."

...

Let's just say that adding zero-return volatile assets, such as currency and/or commodities to a portfolio, is not a slam-dunk improvement. Vanguard doesn't think it's an improvement. People who are sure they know which way the dollar is going to move think it's an improvement, but they are speculating in both senses of the word.


Thanks for this perspective, and I have read your posts about being critical of 50/50 US/international stock allocations. I do have a question then. Why doesn't Vanguard (and other fund families) routinely offer hedged international stock indexes? Perhaps this has to do with Eric's explanation that the currency movement is greater for bonds relatively, than it is for stocks. Still, to me there is an appeal of owning a world portfolio at market weight. If the currency risk aspect can be removed, then why not have a "Total World" portfolio with the proper AA? I get the currency risk aspect being the issue with stocks by default (no hedged TSM at Vanguard), but what about bonds, why is Vanguard only using 20% and not 66 or 70% if currency risk isn't an issue?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Wed Feb 06, 2013 3:41 pm

Rick Ferri wrote:Are potential investors in this fund expecting higher returns? Hate to disappoint you, but this fund isn't going to yield any more than the Vanguard Total Bond Fund, and may yield less due to higher fees and hedging costs.

Rick Ferri

Vanguard did not suggest that this fund will yield higher returns that the total bond fund--it might, but they did not offer that as a reason for offering the fund. Vanguard stated that the fund will help investors to increase portfolio diversification...

"These bonds also help you diversify your portfolio because of the differences in how international and U.S. bond returns are affected by various nations' monetary policies, interest rates, and expected inflation. International and U.S. bond returns don't move in lockstep with one another. The correlation (a measure of how prices move together) between the two types of investments is low. This low correlation gives international bonds the potential to help reduce volatility of portfolio returns. (Diversification does not ensure a profit or protect against a loss in a declining market.)"
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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Wed Feb 06, 2013 3:42 pm

Rick Ferri wrote:This is one of those funds that I know Gus Sauter doesn't believe in, ....

Out of curiosity, how do you know that?
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Should You Add non-US Bonds?

Postby EDN » Wed Feb 06, 2013 3:43 pm

Rick Ferri wrote:Are potential investors in this fund expecting higher returns? Hate to disappoint you, but this fund isn't going to yield any more than the Vanguard Total Bond Fund, and may yield less due to higher fees and hedging costs.

This is one of those funds that I know Gus Sauter doesn't believe in, but investors want it, so they get it. Vanguard is considering alternative investments as well. They don't believe in them, but investors what them, so Vanguard will provide them. There is no academic reason to own these funds, but they sure sound good. Not to fault just Vanguard because DFA, iShares, Fidelity and all other large fund companies do the same pandering.

Rick Ferri


I disagree with Rick. Diversification can make as much sense for bonds as it does for stocks. Most of us believe in adding non-US stocks to a domestic equity portfolio despite (a)non-US stocks being more expensive, (b) non-US stocks having lower returns than US stocks over the last few decades. These are some of the reasons I've seen to avoid non-US bonds, but you can't have it one way for stocks and another for bonds.

A low-cost, broadly diversified non-US bond fund allows you to diversify your exposure to global bond markets in the way non-US stock funds diversify your exposure to global equity markets. US and non-US bonds have the same or even lower correlations than US and non-US stocks since 1988.

Are non-US bonds essential? No, but they are worth the consideration. And the more $ you have in bonds, the more it makes sense to diversify. Which one will do better? Who knows, that's why we diversify. And with the potential for rates to rise, investors may find this fund appealing as there is some evidence that non-US bonds provide decent diversification when US bonds are declining. For the 23 years ending 2012, we've seen 9 semi-annual periods where US bonds have declined (Citigroup 1-30YR US Government Bond Index), and the average return for the Citigroup 1-30YR exUS Government Bond Index was positive in 6 of these 9 periods. The correlation between US and non-US bonds was lower when US bonds declined (0.5) than they were when US bonds gained in value (0.7).

Just providing some food for thought.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Wed Feb 06, 2013 3:45 pm

Rick Ferri wrote:There is no academic reason to own these funds, but they sure sound good.

You don't think greater portfolio diversification qualifies as an "academic reason"? Or, is it that you don't think the fund adds to portfolio diversification? If it is the latter, then you are in conflict with Vanguard's conclusion on that point.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Gauntlet » Wed Feb 06, 2013 3:47 pm

Rick Ferri wrote:This is one of those funds that I know Gus Sauter doesn't believe in, but investors want it, so they get it. Vanguard is considering alternative investments as well. They don't believe in them, but investors what them, so Vanguard will provide them. There is no academic reason to own these funds, but they sure sound good. Not to fault just Vanguard because DFA, iShares, Fidelity and all other large fund companies do the same pandering.

Rick Ferri


This makes sense to me. So why add them to so many of their funds of funds so quickly. Why immediately add them to all their retirement funds? Are investors asking for them to be added to these funds? Just seems strange. And for some of these funds why bother? 20% of a 20% bond fund allocation is not much. Maybe I'm missing something?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby magellan » Wed Feb 06, 2013 3:48 pm

Rick Ferri wrote:Are potential investors in this fund expecting higher returns? Hate to disappoint you, but this fund isn't going to yield any more than the Vanguard Total Bond Fund, and may yield less due to higher fees and hedging costs.

Rick,

Your post sent me off to do some quick research. Total Bond currently has a duration of 5.2 years and a yield of 1.63% while PIMCO Foreign Bond US Dollar Hedged has a duration of 5.79 years and a yield of 2.16%. My understanding is that SEC yields are net of expenses.

So in a hypothetical comparison, with Vanguard International Bond holding the same securities as the PIMCO fund, but with an ER of .2% instead of PIMCO's .5, that'd translate into a yield of 2.46%, vs. Total Bond's yield of 1.63%.

Perhaps I'm misunderstanding how SEC yield is calculated w.r.t. ERs, or maybe I've made some other mistake in my analysis. If not though, it seems like the difference in yields is meaningful.

Jim
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Re: Finally arrived: The Vanguard Total International Bond F

Postby leo383 » Wed Feb 06, 2013 3:48 pm

WHL wrote:so, should our 3-fund portfolios now be changed to a 4-fund portfolio? :mrgreen:


Or, one step closer to a Total World Bond Fund, added to the Total World Stock Fund, for the ultimate Bogleheads Two-Fund Portfolio!
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Chan_va » Wed Feb 06, 2013 3:52 pm

magellan wrote:
Rick Ferri wrote:Are potential investors in this fund expecting higher returns? Hate to disappoint you, but this fund isn't going to yield any more than the Vanguard Total Bond Fund, and may yield less due to higher fees and hedging costs.

Rick,

Your post sent me off to do some quick research. Total Bond currently has a duration of 5.2 years and a yield of 1.63% while PIMCO Foreign Bond US Dollar Hedged has a duration of 5.79 years and a yield of 2.16%. My understanding is that SEC yields are net of expenses.

So in a hypothetical comparison, with Vanguard International Bond holding the same securities as the PIMCO fund, but with an ER of .2% instead of PIMCO's .5, that'd translate into a yield of 2.46%, vs. Total Bond's yield of 1.63%.

Perhaps I'm misunderstanding how SEC yield is calculated w.r.t. ERs, or maybe I've made some other mistake in my analysis. If not though, it seems like the difference in yields is meaningful.

Jim


If better yields is what you are after, why not just increase your equities allocation? Do intnl bonds have a different correlation to stocks and bonds? Portfolio diversification means nothing unless one component of the portfolio zigs when the other zags.

Otherwise it's like diversifying from an all ice cream diet by adding gelato.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby nisiprius » Wed Feb 06, 2013 3:53 pm

understandingJH wrote:Why doesn't Vanguard (and other fund families) routinely offer hedged international stock indexes? Perhaps this has to do with Eric's explanation that the currency movement is greater for bonds relatively, than it is for stocks.
Hopefully ValueThinker will drop in and explain it, but it all has to do with the actual mechanics of hedging itself. I think it's something like this. The fund needs to buy some kind of currency futures contracts, and because a bond has a maturity date and a known value, you know how much of the futures contract you need to buy--if the bond is going to be worth 1000 bolivars when it matures on 1/15/2015, you need to buy a contract that offsets the difference in dollar value between 1000 bolivars today and 1000 bolivars on the maturity date. Since stocks have no maturity date and no known future value, you don't know what contract you need to buy and it's very difficult to hedge them.
Chan_va wrote:If better yields is what you are after, why not just increase your equities allocation? Do intnl bonds have a different correlation to stocks and bonds? Portfolio diversification means nothing unless one component of the portfolio zigs when the other zags.

Otherwise it's like diversifying from an all ice cream diet by adding gelato.
Well, Vanguard's paper on Global fixed income: considerations for US investors has some pretty charts that show the exact effects of the diversification, and I think ice cream and gelato is about right. What the paper convinced me is that IF the past characteristics of the asset classes persist, then the optimum mix might well be something more than 0% international bonds. But my gosh the benefits are microscopic. Look at figure 7. A reduction in standard deviation from 9.7 to 9.5? As my kids used to say, big whoop. Other charts make it clear that currency fluctuation means that unhedged bonds do increase portfolio volatility aka "risk", despite correlations, and that yes indeed, currency fluctuations matter.

Image
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Re: Finally arrived: The Vanguard Total International Bond F

Postby momar » Wed Feb 06, 2013 4:00 pm

mptfan wrote:
Rick Ferri wrote:There is no academic reason to own these funds, but they sure sound good.

You don't think greater portfolio diversification qualifies as an "academic reason"? Or, is it that you don't think the fund adds to portfolio diversification? If it is the latter, then you are in conflict with Vanguard's conclusion on that point.

Take a look at vg's paper and tell me if they can really believe this asset class adds anything. At least in their work, the effect is so small to be nonexistent. The statements about the benefits of the fund are not backed up by their figures.
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Academic Articles on Benefits of non-US Bonds

Postby EDN » Wed Feb 06, 2013 4:06 pm

From Altruist:

Craig McCauley, "The Case for Global Fixed Income," Global Investor, October 1996, pp. 29-31. "... presents a compelling case for US investors to substantially increase their exposures to international fixed income markets (on a fully hedged or unhedged basis), and to maintain a permanent exposure to this asset class."

Haim Levy and Zvi Lerman, "The Benefits of International Diversification in Bonds," Financial Analysts Journal, September/October 1988, pp. 56-64. "There appears to be a very large potential for international diversification in stocks and bonds, even if we qualify the expectation of possible gains by recognizing the possible extra costs associated with holding foreign investments."

Delroy Hunter and David P. Simon, "Benefits of International Bond Diversification," Journal of Fixed Income, March 2004, pp. 57-68 (1mb). This paper finds that, during the period 1992 to 2002, there was benefit to diversifying a bond portfolio overseas, but only if you hedged the currency risk.

Cheol S. Eun and Bruce G. Resnick, "International Diversification of Investment Portfolios: U.S. and Japanese Perspectives," Management Science, January 1994, pp. 140-161. "For U.S. investors, the international bond diversification with exchange risk hedging offers a superior risk-return trade-off than the international stock diversification, with or without hedging." This paper supports the prudence of hedging the currency risk on foreign bond investments.

Thomas J. Berger, "Global Bonds and Emerging Debt: Worth Considering or Worth Forgetting?," Institute for Fiduciary Education, October 1 1999 (140kb). This paper points out the diversification benefits of investing a portion of your fixed income portfolio overseas.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby nisiprius » Wed Feb 06, 2013 4:08 pm

Methinks Vanguard has tried to respond to the demand for "international"-everything while taking the physician's pledge, "primum non nocere" (first, do no harm). At great effort and expense, they have managed to come up with a bond fund that is international, but "mostly harmless."
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dumbmoney » Wed Feb 06, 2013 4:11 pm

I thought it was a little interesting that they switched to an index that caps the largest issuer at 20%. The new index has a weight of 23% in Japan (presumably hitting the 20% cap, plus 3% corporate bonds).
I am pleased to report that the invisible forces of destruction have been unmasked, marking a turning point chapter when the fraudulent and speculative winds are cast into the inferno of extinction.
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Real World Illustration on non-US Bond Benefits

Postby EDN » Wed Feb 06, 2013 4:15 pm

Incidentally,

While not apples and apples with what we are discussing, DFA has run a short-term high quality global bond fund for over two decades (5YR Global) that has outperformed the US-only Barclays 1-5YR Government/Corporate Bond Index by 0.6% per year. Part of this return was during a period (in the '90s) when the expense ratio of the fund was over 0.4% (its now about 0.2%), and doesn't include the 10bps or so that would come out of the Index return were it a mutual fund or ETF--so under more equal conditions, the difference would have been closer to 1%. Normally you'd associate higher returns with higher risk, but the average of 2002, 2008, and 2011 for the Global Fund was +6.3% per year vs. +5.2% per year for the US index, in part because the DFA fund holds safer bonds (only AA or better vs. as low as BBB for the index) but I doubt global diversification hurt.

Now, part of the global bond fund advantage is due to things other than global diversification. My only point is that adding non-US bonds is not likely a bad decision.

Eric
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Re: Finally arrived: The Vanguard Total International Bond F

Postby SSSS » Wed Feb 06, 2013 4:16 pm

I want a Total World Bond Fund, including inflation-adjusted and high-yield bonds, maybe called What-Part-of-TOTAL-Don't-You-Understand World Bond Fund
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Rick Ferri » Wed Feb 06, 2013 4:34 pm

mptfan wrote:
Rick Ferri wrote:This is one of those funds that I know Gus Sauter doesn't believe in, ....

Out of curiosity, how do you know that?


Because he told me to my face about 8 years ago when I asked.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Rick Ferri » Wed Feb 06, 2013 4:39 pm

Quote all the academic jargon you wish from years ago when global interest rates were much higher,I don't see this Vanguard news as anything to write home about. The bond funds I already use hold 4,000 securities in aggregate. How much more fixed income diversification do you need? Anyway, I would rather have seen an unhedged, fix country allocation so at at least currency rebalancing would provide some benefit. I just don't see it, but it sure is a popular idea.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby JamesSFO » Wed Feb 06, 2013 4:54 pm

It seems like the next step then is a "Total World Bond Index" fund... That said, it seems like intl bonds should make sense for much the same reason that international stocks do.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby rj49 » Wed Feb 06, 2013 5:04 pm

Rick Ferri wrote:Quote all the academic jargon you wish from years ago when global interest rates were much higher,I don't see this Vanguard news as anything to write home about. The bond funds I already use hold 4,000 securities in aggregate. How much more fixed income diversification do you need? Anyway, I would rather have seen an unhedged, fix country allocation so at at least currency rebalancing would provide some benefit. I just don't see it, but it sure is a popular idea.

Boglehead philosophy is universal; portfolio strategy is personal. To each his own.

Rick Ferri



I'm confused, because I recently read your article on the Total Economy Portfolio, which implied that it's desirable to try to capture the entire spectrum of the economy's wealth through emulating private equity and real estate. And I remember your epic battles with Larry over having a comprehensive bond allocation that included high yield. But you don't feel that owning the world's largest asset class is part of a Total Economy portfolio?
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