Finally arrived: The Vanguard Total International Bond Fund

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Barry Barnitz » Wed Feb 06, 2013 4:11 pm

Hi:

New wiki page in development: Vanguard four fund portfolio - Bogleheads

regards,
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Adding to the Three Fund Portfolio ?

Postby Taylor Larimore » Wed Feb 06, 2013 4:14 pm

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,
K.I.S

Sorry, K.I.S., I do not yet feel sufficiently informed to confidently answer your question about adding an international bond fund (and complexity) to the Three Fund Portfolio. We can learn together. Our wiki has a good analysis here:

Developed Market Bonds

Best wishes
Taylor
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Where's the Non-US Stock Benefit?

Postby EDN » Wed Feb 06, 2013 4:26 pm

nisiprius wrote:
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


Nisiprius,

Over the same period (1988-2012), no combination of the Wilshire 5000 Index and MSCI All Country World exUS Index outperformed the Wilshire 5000. And the safest combination of US and Foreign stocks over this period reduced annual volatility by less than 0.2 relative to the US index by itself (and came with 0.6% lower annual returns).

Yet I assume you still hold some non-US stocks, if for no other reason that a Japanese investor could convince you its a pretty good idea. I'm still unclear why a non-US bond allocation seems to be such an unreasonable position to have?

I think Vanguard did everything right here. Won't be for everyone, but loading up on US debt because 2 decade past simulations don't show a statistically significant advantage to doing otherwise strikes me as tremendously short-sighted.

I too am confused by this: we have some posters who believe in "Total Markets" when it applies to companies within a country or within the global equity markets...but not bonds? Others think adding Junk Bonds makes sense but diversifying globally across investment grade bonds doesn't? Or adding one more fund to a 3 fund portfolio bridges some imaginary line of complexity? Makes no sense to me.

My prediction: in 5 years, US/non-US bond allocations will be just as common as they are for stocks, for reasons that are completely obvious to me.

Eric

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Dale_G » Wed Feb 06, 2013 4:27 pm

I am glad that we may finally see an International bond from Vanguard. Barclay's is of no help (that I can find), but since this is a Global - ex US bond index, it should include bonds from both developed and emerging markets.

It appears that Vanguard may have abandoned plans for separate developed and emerging markets bond funds.

I presently hold PFUIX - unhedged developed international bonds, and PCY - dollar denominated emerging market bonds in my IRA. I'll likely give up PFUIX with its 0.5% e.r. and opt for the new Vanguard fund with an Admiral class e.r. of about 0.2%. No decision on PCY until I find out what % of the Vanguard fund will be in EM.

On hedged/unhedged - volatility is good, especially on the upside.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Jay69 » Wed Feb 06, 2013 4:40 pm

Mr. Larry Swedroe, whats your take?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby drs85 » Wed Feb 06, 2013 4:45 pm

Out of pure curiosity, would there be a tax-advantage in a taxable account with holding this fund there similar to holding an international index fund vs. domestic index fund? Or is it once a bond always a bond with taxes?
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Re: Finally arrived: The Vanguard Total International Bond F

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

understandingJH wrote: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)



You might want to look at the PIGLX portfolio before you think of it as a foreign bond fund. It's US bond holdingfs are 4 X larger than the
the next largest, the Netherlands. http://portfolios.morningstar.com/fund/ ... ture=en-US besides the derivates and long short cash positions.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Random Musings » Wed Feb 06, 2013 4:55 pm

Mark my words, five to ten years from now, Vanguard will increase the international bond portion from 20% to 30% in their TR funds as more people give "comfortable" with that holding. :wink:

Now whether or not they'll do this before or after they add a 5% REIT portion in, my crystal ball hasn't told me yet.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby LadyGeek » Wed Feb 06, 2013 8:30 pm

We have 2 threads (so far) covering the same announcement, but from a different perspective. See: Target Retirement Funds to add international bonds
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Re: Finally arrived: The Vanguard Total International Bond F

Postby iceport » Wed Feb 06, 2013 8:36 pm

Am I the only one that thinks the immediate move to add this sub-class to the target retirement funds is more for the benefit of the new fund than it is for the old funds?

--Pete

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Re: Finally arrived: The Vanguard Total International Bond F

Postby 555 » Wed Feb 06, 2013 8:59 pm

Random Musings" wrote:Mark my words, five to ten years from now, Vanguard will increase the international bond portion from 20% to 30% in their TR fund..."

No. Actually what they'll do is to put 10% of their bond allocation into their emerging-markets government-bond (dollar denominated) index fund to bring their international portion of bonds to 30%.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Jay69 » Wed Feb 06, 2013 9:29 pm

petrico wrote:Am I the only one that thinks the immediate move to add this sub-class to the target retirement funds is more for the benefit of the new fund than it is for the old funds?

--Pete


I was half thinking the same, a great way to get an inflow of cash quick into the new fund. On the other hand that does get the fee down for the one who may choose to use it.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby umfundi » Wed Feb 06, 2013 9:44 pm

Argue about rebalancing. I don't have to do that.

Argue about International Bond Fund. I don't have to do that.

Vanguard LifeStrategy Funds are wonderfully boring!

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Re: Finally arrived: The Vanguard Total International Bond F

Postby stlutz » Wed Feb 06, 2013 10:42 pm

Am I the only one that thinks the immediate move to add this sub-class to the target retirement funds is more for the benefit of the new fund than it is for the old funds?


That was my thought exactly. Seems like a way to "force" investment into the new asset, which suggests to me that VG is actually skeptical about whether investors will really snap up the new fund.

While I sometimes promote the LS funds on these boards, this situation does show the disadvantage of funds of funds--you're kind of at the whim of whatever trend/performance the fund company decides to chase.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby KyleAAA » Wed Feb 06, 2013 11:25 pm

To be fair, people have been clamoring for a total international bond fund for quite some time. And international bonds DO make up almost 40% of the investable universe, after all. That's almost as much as domestic and international equities COMBINED. I'd hardly call it a trend.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby LadyGeek » Wed Feb 06, 2013 11:32 pm

Being adventurous, I went searching for the actual SEC filings.

Is this it? Series: S000035729 Vanguard Total International Bond Index Fund

Form N-1/A (Initial registration statement filed on Form N1A for open-end management investment companies). I'm confused on the name of Vanguard Charlotte Funds, so I'm not sure I'm looking in the right place.

There are 6 funds updated on 2013-02-06, 2 filed on 2011-10-31.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dkturner » Thu Feb 07, 2013 6:37 am

LadyGeek wrote:Being adventurous, I went searching for the actual SEC filings.

Is this it? Series: S000035729 Vanguard Total International Bond Index Fund

Form N-1/A (Initial registration statement filed on Form N1A for open-end management investment companies). I'm confused on the name of Vanguard Charlotte Funds, so I'm not sure I'm looking in the right place.

There are 6 funds updated on 2013-02-06, 2 filed on 2011-10-31.


Without going into the intricate legal structure of the Vanguard Group's family of funds it tends to create clusters of funds within a single legal entity. It gives different names to these clusters, and uses the name of the actual legal entities in its regulatory filings. I believe the Charlotte Funds is/are one of its newer entities, named after Charlotte, NC, where Vanguard has a major operations center.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby stemikger » Thu Feb 07, 2013 6:43 am

VictoriaF wrote:This will be a great topic for BH12.

Victoria


I doubt it will get Mr. Bogle's blessing. He still does not invest in international equities. I will stick to the plain vanilla Balanced Index Fund. This is where Mr. Bogle saves for his Grandchildren. I don't particulary like how Vanguard keeps changing the Target Retirement Funds. It kind of makes me uncomfortable because I feel there is a part of it that they feel they have to keep up with what the other fund families are doing.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Bustoff » Thu Feb 07, 2013 7:44 am

Anyone know what risk level Vanguard will assign to this fund ?

Will Vanguard account holders get an opportunity to invest before the institutional money drives up the price ?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby VictoriaF » Thu Feb 07, 2013 8:04 am

stemikger wrote:
VictoriaF wrote:This will be a great topic for BH12.

Victoria


I doubt it will get Mr. Bogle's blessing. He still does not invest in international equities. I will stick to the plain vanilla Balanced Index Fund. This is where Mr. Bogle saves for his Grandchildren. I don't particulary like how Vanguard keeps changing the Target Retirement Funds. It kind of makes me uncomfortable because I feel there is a part of it that they feel they have to keep up with what the other fund families are doing.


It will certainly be covered in two panels, one at Vanguard with the Chief Investment Officer and his management team, and the other with the Bogleheads authors and professionals. The discussions normally center on the types of investors who may be interested in a new fund, on how the fund fits in one's portfolio (including some indication of the appropriateness for taxable or tax-deferred accounts), and whether lifecycle funds (Target Retirement Funds) would include the new fund and in what manner.

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

Postby Bustoff » Thu Feb 07, 2013 8:33 am

VictoriaF wrote:This will be a great topic for BH12.
Victoria


When is BH12. I would like to attend.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby SSSS » Thu Feb 07, 2013 8:39 am

Bustoff wrote:Will Vanguard account holders get an opportunity to invest before the institutional money drives up the price ?


Aren't ex-US bonds a larger asset class than the entire world's stock markets (including US) combined? All the money at Vanguard probably wouldn't be enough to move something like that.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Grt2bOutdoors » Thu Feb 07, 2013 8:40 am

Bustoff wrote:Anyone know what risk level Vanguard will assign to this fund ?

Will Vanguard account holders get an opportunity to invest before the institutional money drives up the price ?


It should get a rating of "5". Ever own an international bond? Ask institutional money managers who were holding Argentian bonds in 1999 how reliable foreign governments are when it comes to paying back loans. :oops: They tore up the promissory notes and basically said, we'll give you back 35 cents on the dollar (that was only after the threat of bringing the matter before the courts), before that the offer was zero. So, most people lost 65% on bonds that were yielding 9% at issuement, the year prior. Still want to own International Bonds based on the ah hem, "full faith and credit" of we can do whatever we want with your money?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby VictoriaF » Thu Feb 07, 2013 9:05 am

Bustoff wrote:
VictoriaF wrote:This will be a great topic for BH12.
Victoria


When is BH12. I would like to attend.


It's usually held in mid-October near Philadelphia. Mel will post the official announcement with the registration details.

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

Postby SSSS » Thu Feb 07, 2013 9:18 am

Grt2bOutdoors wrote:They tore up the promissory notes and basically said, we'll give you back 35 cents on the dollar (that was only after the threat of bringing the matter before the courts)


Which courts? How do you sue a sovereign government for non-payment of sovereign debt?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby convert949 » Thu Feb 07, 2013 9:19 am

femur wrote:
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

And, should the Intermediate Term Tips fund be replaced by the Short Term Tips fund as they are also doing...

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Re: Finally arrived: The Vanguard Total International Bond F

Postby randomwalk » Thu Feb 07, 2013 9:24 am

SSSS wrote:Which courts? How do you sue a sovereign government for non-payment of sovereign debt?


Not only can you sue, but the lawsuits are still ongoing:

Argentinian politicians and global debt campaigners have responded with fury to a US court judgment that risks plunging the country back into default.

Elliott Capital Management and Aurelius Capital Management, regarded as "vulture funds" by Buenos Aires, won a ruling in a New York court on Wednesday that could force Argentina to hand over $1.3bn (£816m) in repayments and interest to the tiny minority of bondholders who refused to sign up to a hard-fought writedown of its debts after the country defaulted in 2001.

Judge Thomas Griesa upheld his own ruling of last month backing Elliott Associates, and said: "Argentina owes this and owes it now."

In a strongly worded statement, Griesa said that Argentina should make repayments to the so-called holdouts at the same pace that it is repaying the vast majority of bondholders who did agree to a debt-swap. He also warned that US-based bank BNY Mellon, which handles Argentina's debt payments to US-based bondholders, would be acting "in active concert" with the republic, if it failed to comply with the ruling.


http://www.guardian.co.uk/world/2012/no ... -argentina

You can also try to seize the presidential plane:

Argentina has hired a private jet for President Cristina Kirchner's trip to Asia and the Middle East later this month due to the risk that creditors might try to seize her official aircraft.

The government chartered the aircraft after its attorneys warned that Tango 01 could suffer the same fate as an Argentine navy training ship that was held for 2 ½ months in Ghana last year. A local judge ordered it to be seized at the behest of NML Capital Ltd., an investment fund controlled by businessman Paul Singer's hedge fund Elliot Management Corp. The company didn't respond to a request for comment.


http://online.wsj.com/article/SB1000142 ... 86888.html

More details from the Economist: http://www.economist.com/node/21564542
Last edited by randomwalk on Thu Feb 07, 2013 9:29 am, edited 2 times in total.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby stemikger » Thu Feb 07, 2013 9:27 am

Rick Ferri wrote:
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.

Rick Ferri


+1 :D
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Bustoff » Thu Feb 07, 2013 11:57 am

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.
Rick Ferri


Rick - Why doesn't Gus Sauter and Vanguard believe in them ?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby JMacDonald » Thu Feb 07, 2013 12:11 pm

Bustoff wrote:
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.
Rick Ferri


Rick - Why doesn't Gus Sauter and Vanguard believe in them ?

Rick gaves these reasons why he doesn't believe in them so maybe it is similar to Gus:
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
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Total Market Investing without 75% of the Bond Market?

Postby EDN » Thu Feb 07, 2013 12:26 pm

Bustoff wrote:
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.
Rick Ferri


Rick - Why doesn't Gus Sauter and Vanguard believe in them ?


Vanguard believes in providing investors broad-based (mostly cap weighted) exposure to global markets at low costs. Going by the government bond market, less than 25% of the developed world for bonds resides in the US. Hard to see how ignoring 75% of the developed world's bond markets is not an issue, while instead offering kitschy strategies like Junk Bonds, Convertible Debt and other fixed income alternatives is acceptable. Like it or not, Vanguard has 4 funds that pretty much define their brand: US Total Stock Index, Total International Stock Index, Total US Bond Index, and Total International Bond Index. That is Total Market investing for all intents and purposes.

Eric

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Wild Willie » Thu Feb 07, 2013 12:27 pm

As some of the posters have alluded to, the best part of all this besides the obvious increased diversification IMHO is the reduced duration in the TR funds due to changing the TIPS fund to short term TIPS. That, and the decrease in the allotment to MM funds, make this a win/win IHMO, especially since I am 100% TR Income (VTINX). :sharebeer

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Groundhog » Thu Feb 07, 2013 12:50 pm

Preliminary Prospectus found here:

http://www.sec.gov/Archives/edgar/data/1532203/000093247113001639/tibn1aa.htm

Approximate Date of Proposed Public Offering: May 1, 2013

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Re: Finally arrived: The Vanguard Total International Bond F

Postby sschullo » Thu Feb 07, 2013 12:54 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


Sometimes "popular ideas" are appropriate. I want as much fixed income diversification as is available. I figured that having a international bond fund with low costs is a hedge against the dollar. Does it always work? Of course not. I just don't see that investing in only domestic bonds is as diversified as one can get. Doing this by country as you suggest would not be appropriate for me--too complicated--but I see your point. I remember you wrote a year or two ago that one of the reasons you don't recommend international bonds was their cost--5 times more expensive than the TBM.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Rick Ferri » Thu Feb 07, 2013 1:09 pm

I figured that having a international bond fund with low costs is a hedge against the dollar.


Folks, this bond fund is currency hedged. This means currency risk is being taken out of the equation. There will be very little diversification against a fall in the US dollar by using this fund.

Vanguard wrote: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). The fund's currency hedging strategy is designed to help mitigate the effects of changes in currency rates on the fund's returns.


All you'll get here is less yield due to higher fees than existing diversified Vanguard US bond funds.

Rick Ferri
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Re: Finally arrived: The Vanguard Total International Bond F

Postby umfundi » Thu Feb 07, 2013 1:18 pm

Rick Ferri wrote:All you'll get here is less yield due to higher fees than existing diversified Vanguard US bond funds.
Rick Ferri

Rick,

Is this significant enough to reconsider using LifeStrategy or Target Retirement Funds? I would think not, but what do I know?

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

Postby Rick Ferri » Thu Feb 07, 2013 1:23 pm

umfundi wrote:
Rick Ferri wrote:All you'll get here is less yield due to higher fees than existing diversified Vanguard US bond funds.
Rick Ferri

Rick,

Is this significant enough to reconsider using LifeStrategy or Target Retirement Funds? I would think not, but what do I know?

Keith


No. The change is irrelevant and insignificant (although does add a touch of cost). This addition is just a gimmick to draw attention to the offering and get guaranteed seed capital for the fund. The change will make no difference in return over the long-term whatsoever.

Rick Ferri
Choose a few low-cost index funds in different asset classes, rebalance occasionally, and forgetaboutit!

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Re: Finally arrived: The Vanguard Total International Bond F

Postby deci02 » Thu Feb 07, 2013 1:25 pm

Wondering how much the foreign tax credit comes into play with international bonds? Due to my international stock holdings I'm already having to carryover amounts of the credit (IRS Form 1116).

Seems like having to continually defer some of the credit amount year after year would be an additional cost of this new fund to me if held in taxable. This cost would be less favorable to bear in the lower return fixed income allocation of a portfolio than in the potentially higher return of foreign equities IMO.

Any comments from those who hold international bonds in taxable or are educated on this subject would be most appreciated.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby sschullo » Thu Feb 07, 2013 1:26 pm

Rick Ferri wrote:
I figured that having a international bond fund with low costs is a hedge against the dollar.


Folks, this bond fund is currency hedged. This means currency risk is being taken out of the equation. There will be very little diversification against a fall in the US dollar by using this fund.

Rick Ferri

thanks for the clarification.
Steve
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Phineas J. Whoopee » Thu Feb 07, 2013 1:38 pm

SSSS wrote: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

What? No loan shark slice?

(On a more serious note, I wonder what it would take to securitize sharked loans. What might their ratings be: low due to poor borrower credit; but high due to vigorous servicing?)

PJW

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Re: Finally arrived: The Vanguard Total International Bond F

Postby kenyan » Thu Feb 07, 2013 1:43 pm

Rick Ferri wrote:All you'll get here is less yield due to higher fees than existing diversified Vanguard US bond funds.

Rick Ferri


At least for me, there is no appreciable difference in fees from existing bond funds. My employer account is the bulk of my retirement investments, within which I can only purchase Investor Shares. The difference in fees for Investor Shares is 1 basis point between TBM/IT-index and TIBM. I do have a different account with Institutional Shares of TBM, but that does cannot house all of my bonds.

Now, I suppose the currency hedging might add a hidden drag as well.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby nydad » Thu Feb 07, 2013 1:45 pm

Rick says: "This addition is just a gimmick to draw attention to the offering and get guaranteed seed capital for the fund. The change will make no difference in return over the long-term whatsoever."

Do you really believe that is the case? What is the basis for this argument? Is it because the allocation is too small to make an appreciable long-term difference? A few basis points over many years does add up - one way or the other... It's too bad we can't do a race - test the three-fund portfolio against the 4-fund portfolio and see who wins after 30 years...

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Compounding » Thu Feb 07, 2013 1:48 pm

Based on Rick Ferri's postings on this thread, I think it might be time to amend this excerpt from the Boglehead's Wiki on Developed Market Bonds:

"Author Rick Ferri posits three tests for including an asset class in a portfolio:

Does an asset class provide exposure to a unique investment risk?
Does the asset class provide a real return (higher than the inflation rate)?
Is the asset class available in a broadly diversified, liquid, low-cost fund?

Ferri judges international bond funds as passing the first two requirements, but failing on the cost issue. Should the cost of available international bond index funds (or ETFs) fall to 0.20% or lower, the asset class would pass Ferri's third requirement and merit consideration for strategic asset allocation in portfolios."


Ironically, the proposed cost of the new Vanguard Foreign Bond Admiral Fund: 0.20%. This Wiki excerpt and his responses on this thread are somewhat contradictory. A change of heart here for Rick? (who I am a big fan of, BTW)

- Brian

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

Postby SSSS » Thu Feb 07, 2013 1:59 pm

Phineas J. Whoopee wrote:(On a more serious note, I wonder what it would take to securitize sharked loans. What might their ratings be: low due to poor borrower credit; but high due to vigorous servicing?)


Isn't that basically what Lending Club is?

I put $500 into Lending Club last year and have lost about $50 so far, but I enjoy reading the collection attempt logs.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby tadamsmar » Thu Feb 07, 2013 2:55 pm

Trying to understand Rick's logic.

Why bother to buy a US Treasury Bond fund? Why not just buy a few Treasury bonds to get a duration similar to the fund? The market should pretty much arbitrage the bond rate to the fund rate.

But that logic does not work so well for corporate bonds because of default risk.

So I guess owning international bonds diversifies default risk. But that's kind of a tin hat idea. And, since they are currency risk hedged, it might not even satisfy those in tin hats.

Of course, you might want to be in international bonds so as to enjoy higher returns from default risk.

It would kind of make sense to invest in an international fund that had a diversifiable risk like default risk.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby magellan » Thu Feb 07, 2013 4:24 pm

deci02 wrote:Any comments from those who hold international bonds in taxable or are educated on this subject would be most appreciated.

I held American Century International Bond (BEGBX) in taxable for almost a decade and it never showed any foreign taxes paid on a 1099. I have no idea why this is the case. Also, we've discussed this on previous threads and other bogleheads commented that they saw the same thing with different international bond funds.

Of course, since we don't understand why this is so, perhaps it'll change next year :)

Jim

PS - I hold BWX in tax deferred now, so I can't say for sure about it. When I was researching BWX few years ago, it hadn't paid any foreign taxes since inception.

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Rick Ferri » Thu Feb 07, 2013 4:54 pm

Compounding wrote:Based on Rick Ferri's postings on this thread, I think it might be time to amend this excerpt from the Boglehead's Wiki on Developed Market Bonds:

"Author Rick Ferri posits three tests for including an asset class in a portfolio:

Does an asset class provide exposure to a unique investment risk?
Does the asset class provide a real return (higher than the inflation rate)?
Is the asset class available in a broadly diversified, liquid, low-cost fund?

Ferri judges international bond funds as passing the first two requirements, but failing on the cost issue. Should the cost of available international bond index funds (or ETFs) fall to 0.20% or lower, the asset class would pass Ferri's third requirement and merit consideration for strategic asset allocation in portfolios."


Ironically, the proposed cost of the new Vanguard Foreign Bond Admiral Fund: 0.20%. This Wiki excerpt and his responses on this thread are somewhat contradictory. A change of heart here for Rick? (who I am a big fan of, BTW)

- Brian


Im agnostic at 0.20%. Take it or leave it. The for me with this fund is not the 0.20% fee, it's currency hedging. I see no point in paying even 0.20% for a international bond fund that overlays a currency hedge (which has unreported hidden hidden costs).

There is no real diversification here, folks. There is only higher cost.

Rick Ferri
Choose a few low-cost index funds in different asset classes, rebalance occasionally, and forgetaboutit!

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Carpe » Thu Feb 07, 2013 4:59 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


A higher return would imply a higher risk level, and I don't believe offering higher returns for higher risk is the objective of this new fund. As long as the fees and hedging costs are not excessive, a return that is the same as or close to the Total Bond Fund would imply a similar risk level, with the benefit of added diversification.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby mptfan » Thu Feb 07, 2013 5:01 pm

Rick Ferri wrote:There is no real diversification here, folks. There is only higher cost.


Bill McNabb disagrees with you. This is what he wrote:

"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.)"
I eat risk for breakfast. :)

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Re: Finally arrived: The Vanguard Total International Bond F

Postby stemikger » Thu Feb 07, 2013 5:04 pm

Im agnostic at 0.20%. Take it or leave it. The for me with this fund is not the 0.20% fee, it's currency hedging. I see no point in paying even 0.20% for a international bond fund that overlays a currency hedge (which has unreported hidden hidden costs).

There is no real diversification here, folks. There is only higher cost.

Rick Ferri


I totally agree Rick and this sounds like the exact response I would expect to hear from Mr. Bogle.
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