Finally arrived: The Vanguard Total International Bond Fund

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Karl » Thu Feb 07, 2013 5:05 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.


Those were two concerns I had. While talking about how nifty hedging is, Vanguard entirely failed to point out it costs money. Question for the experts here: how much do you estimate such hedging to cost? I know it costs, though I have no clue how much.

While it will have expenses of .20% for anyone with $10,000, that's still pretty expensive by Vanguard standards. At least it looks expensive when compared to their domestic bond funds that can all be had for 10-12 basis points. Even Total International Stock Admiral is 18 basis point, so here we have a bond fund that costs more than its equity relative.

I don't know if I'll buy it or not. It's certainly interesting, and I think it's a great move on Vanguard's part to finally provide any international bond fund. We've only been asking for the entire time I've been on this board (so for the last 14+ years).

I must say that with how low interest rates are I'm not real excited by a "total" fund that I certainly assume will have an intermediate maturity. I've moved most of my bond allocation to short-term bonds. Yeah, I'm giving up some yield with ST, but there's little risk that I'll miss out on massive capital gains as zero pretty much sets a floor for bond yields. While T-bills (and their Japanese equivalents) have gone marginally under zero in history, I don't seriously imagine that 10-year bonds are going to less than zero.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby ObliviousInvestor » Thu Feb 07, 2013 5:13 pm

Karl wrote:While it will have expenses of .20% for anyone with $10,000, that's still pretty expensive by Vanguard standards. At least it looks expensive when compared to their domestic bond funds that can all be had for 10-12 basis points. Even Total International Stock Admiral is 18 basis point, so here we have a bond fund that costs more than its equity relative.

The new fund's cost seems about on par with what I would expect based on other Vanguard funds.

Vanguard Total Bond has a 0.10% ER, while Vanguard Total Stock has a 0.06% ER. (In other words, "total bond" is more expensive than "total stock" domestically as well -- by an even greater margin than internationally, apparently.)

Going international with your stocks adds 0.12% to the ER (0.18% vs 0.06%). Going international with your bonds looks like it will add 0.10% to the ER (0.20% vs 0.10%).

Edited to add: All of the above assumes Admiral shares.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Karl » Thu Feb 07, 2013 5:13 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?


I think the point is to take advantage of economies of scale as adding to these other funds means a huge pile of assets to start Total International Bond with.

I don't think even greater diversification is going to hurt Target Retirement, when the whole point of these funds has always been maximum diversification. Adding foreign bonds is fully in keeping with that more-diversification-the-better spirit.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby kenyan » Thu Feb 07, 2013 5:21 pm

I wonder...

As far as I know, after this fund opens, Vanguard will offer two index funds that provide a minimal benefit - less then 5 bp - to purchasing Admiral Shares instead of Investor Shares. Total International is only 4 bp cheaper, and this fund will be 3 bp cheaper.

I'm thinking the rationale for this must be buried somewhere in the fund-of-funds strategy - TR funds only use Investor Shares. If Vanguard provided the typical 10-14 bp Admiral Shares benefit to these funds, it would drive up costs on Investor Shares. Since they abruptly shoved these funds into the TR offerings, people might get upset if their costs increased...but TR costs should not increase due to the fact that Investor Shares are so (relatively) cheap for these two funds.

Ok, I think that was sort of rambling, but perhaps someone will understand my point.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby LadyGeek » Thu Feb 07, 2013 5:23 pm

dkturner wrote:
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.

Thanks. So that would explain why I see 6 funds, all appearing identical. Like this one: N-1A/A 1 tibn1aa.htm TOTAL INTERNATIONAL BOND INDEX FUND N-1A/A

Approximate Date of Proposed Public Offering: May 1, 2013

Subject to Completion. Preliminary Prospectus Dated February 6, 2013

- There's a $20/year account maintenance fee for balances below $10k.
- Investor share expense ratio: 0.23%
- Admiral share expense ratio: 0.20%
- Management and other expenses are set as placeholders: 0.xx%
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Re: Finally arrived: The Vanguard Total International Bond F

Postby 555 » Fri Feb 08, 2013 2:27 am

Karl 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."


"Those were two concerns I had. While talking about how nifty hedging is, Vanguard entirely failed to point out it costs money. Question for the experts here: how much do you estimate such hedging to cost? I know it costs, though I have no clue how much."


The underlined part is absolutely false. If you look at the 2012 Vanguard paper
http://www.vanguard.com/pdf/icrifi.pdf (20 page PDF)
which has been referenced already in this thread, and in the link in the OP,
you'll find an answer in Fig 10 Pg 14.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 3:26 am

Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby umfundi » Fri Feb 08, 2013 3:38 am

normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.

And, in the meantime, you are doing what?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 4:05 am

umfundi wrote:
normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.

And, in the meantime, you are doing what?

Keith


I currently hold the PIMCO Foreign Bond Fund (Unhedged)(PFUIX) in my Vanguard brokerage account.

http://investments.pimco.com/Products/p ... Code=INSTL

https://personal.vanguard.com/us/secfun ... IntExt=EXT

When Vanguard offers a unhedged foreign bond fund with a lower expense ratio, then I'll probably start switching over.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Karl » Fri Feb 08, 2013 4:13 am

normaldude wrote:An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.


Couldn't one also get more currency exposure by having a larger percentage of their equities be foreign? Perhaps do a 50/50 US/international split, which is certainly more foreign than most investors own, to make up for the fact that all their bond exposure is in US dollars?

Does it matter in what asset class you get your currency exposure? Seems more cost-effective to get currency exposure in Vanguard International Stock Indexes vs through bonds where you might use the PIMCO fund mentioned in the post above where it has an ER of 50 basis points.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 4:24 am

Karl wrote:
normaldude wrote:An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.


Couldn't one also get more currency exposure by having a larger percentage of their equities be foreign? Perhaps do a 50/50 US/international split, which is certainly more foreign than most investors own, to make up for the fact that all their bond exposure is in US dollars?

Does it matter in what asset class you get you currency exposure?


If the world goes into an extended great depression, all global stock funds will get crushed.

And if the Fed prints a ridiculous amount of dollars during this time, the dollar could get crushed, leading to USD hyperinflation.

TIPS funds theoretically should do ok in such an hyperinflationary period, but TIPS are based on government CPI numbers which can be fudged by a corrupt government. Personally, I've seen restaurant prices in my area shoot up about 40% over the past 5 years. Yet, government CPI numbers say that inflation is non-existent.

ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt

So in the above scenario (extended global depression, US dollar hyperinflation), holding an unhedged international bond fund makes sense. Gold would also be good, but gold has a whole different set of issues that is beyond the scope of this thread.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Bustoff » Fri Feb 08, 2013 8:08 am

normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.


If you believe an unhedged fund will do worse when the dollar is strong and better when the dollar is weak, it follows that a hedged fund will do better when the Bank of Japan and every other central bank is committed to devaluing their currency as much as possible. Because all that sets the stage for a stronger dollar going forward.
Maybe Vanguard knows what they are doing after all. 8-)
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Re: Finally arrived: The Vanguard Total International Bond F

Postby midareff » Fri Feb 08, 2013 8:29 am

normaldude wrote:
umfundi wrote:
normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.

And, in the meantime, you are doing what?

Keith


I currently hold the PIMCO Foreign Bond Fund (Unhedged)(PFUIX) in my Vanguard brokerage account.

http://investments.pimco.com/Products/p ... Code=INSTL

https://personal.vanguard.com/us/secfun ... IntExt=EXT

When Vanguard offers a unhedged foreign bond fund with a lower expense ratio, then I'll probably start switching over.



Are you owning this because you think it is a foreign bnd fund? With 77.53% of its assets in US Bonds ... per M*s most current data.


Top 10 Country Breakdown

PFIUX
% Bonds

United States

77.53

As of 09/30/2012
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 8:42 am

Bustoff wrote:
normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.


If you believe an unhedged fund will do worse when the dollar is strong and better when the dollar is weak, it follows that a hedged fund will do better when the Bank of Japan and every other central bank is committed to devaluing their currency as much as possible. Because all that sets the stage for a stronger dollar going forward.


I agree. And that's why it's better to have an unhedged foreign bond fund, for diversification purposes. After all, the whole purpose of diversification is that you don't want your assets all moving in tandem. Your US bonds are already going to be in US dollars. So for diversification purposes, it makes sense to have part of your bond portfolio in non-USD, so whether the dollar skyrockets or crashes, you're covered either way.

Bustoff wrote:Maybe Vanguard knows what their doing after all. 8-)


I never said Vanguard didn't know what they were doing. In fact, I even said "good", in praising the Vanguard intl bond fund offering. Vanguard offers 170 different funds. I'm not going to buy all of them. I'm only going to buy the ones appropriate for my portfolio. And for my portfolio, I prefer to hold a unhedged foreign bond fund. PIMCO offers both hedged & unhedged versions of their foreign bond fund, and I hope Vanguard will evenutally do the same.
Last edited by normaldude on Fri Feb 08, 2013 8:55 am, edited 2 times in total.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 8:45 am

midareff wrote:
normaldude wrote:
umfundi wrote:
normaldude wrote:Good, but I'll wait until Vanguard offers an unhedged version.

An unhedged International Bond Fund would be useful in protecting against the possibility of Fed QE25+ printing so many dollars that the dollar gets crushed.

And, in the meantime, you are doing what?

Keith


I currently hold the PIMCO Foreign Bond Fund (Unhedged)(PFUIX) in my Vanguard brokerage account.

http://investments.pimco.com/Products/p ... Code=INSTL

When Vanguard offers a unhedged foreign bond fund with a lower expense ratio, then I'll probably start switching over.


Are you owning this because you think it is a foreign bnd fund? With 77.53% of its assets in US Bonds ... per M*s most current data.

Top 10 Country Breakdown

PFIUX
% Bonds

United States

77.53

As of 09/30/2012


If that's what morningstar says, then morningstar messed up.

Go directly to the original source (PIMCO):

http://investments.pimco.com/Products/p ... Code=INSTL

Click on "portfolio", and look at "top countries". USA is not listed.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Gauntlet » Fri Feb 08, 2013 9:18 am

Folks may find this blog post on the subject by "Long-term returns" to be helpful.

http://www.longtermreturns.com/2013/02/ ... -fund.html
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Re: Finally arrived: The Vanguard Total International Bond F

Postby magellan » Fri Feb 08, 2013 10:14 am

normaldude wrote:If that's what morningstar says, then morningstar messed up.

Go directly to the original source (PIMCO):

http://investments.pimco.com/Products/p ... Code=INSTL

Click on "portfolio", and look at "top countries". USA is not listed.

IMO, it's nearly impossible for anyone but an expert to break down the holdings in this fund. To some extent, shareholders have to just rely on blind faith that the fund is really doing what it says it's doing, and that the fund's managers are competent.

Here's why. According to the fund's latest holdings report (.xls), 29% of total assets are United states securities. Also, 15% of the fund's assets are in short term securities, which also seem to also be USD based. So with a very quick glance, it appears at least 44% of the fund's assets are dollar based.

OTOH, the fund lists total assets at 119% of net assets. Any fund that lists total assets above 100% is likely either doing a lot of securities lending, holding a lot of derivatives, or doing both. The holdings report doesn't show signs of securities lending activity, but there's plenty of derivatives activity.

IMO there's nothing wrong with a fund using derivatives to achieve its objectives in the most cost efficient manner possible. Vanguard does this too. The problem is that these holdings make the fund impossible for mere mortals to understand.

Here's an example. Rows 1516-1520 in the PIMCO holdings spreadsheet linked above show that the fund holds JPY/USD interest rate swaps with a notional value of over $150 Billion $1.5 billion. Three holdings have a notional value that's over 30 times quite high in relation to the fund's total net asset value of around $5 billion. There are several other multi-billion dollar derivative contracts listed as well. Yet, these contracts show up as rounding errors in terms of total assets. (EDIT: I was wrong about the notional value on these specific securities, they're valued in Yen, so it's $1.5B not $150B).

So does this mean that the fund uses 30x leverage to magnify its results? I doubt it. OTOH, the fund is using sophisticated techniques to produce a portfolio that synthetically matches their desired risk characteristics.

Does this fund have the risk characteristics of an unhedged foreign bond fund? It probably does, but I doubt anyone but PIMCO can know that for sure. Personally, I think highly of PIMCO and their ability to manage this type of thing competently. I'd probably trust them to operate competently in this space more than any other firm. Still, IMO there is substantial operational risk here. I wonder if Vanguard's offering will have a similarly complex holdings report?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby louis c » Fri Feb 08, 2013 11:09 am

I have been an proponent of this fund for quite some time, particularly given Vanguard's low cost approach, but after much deliberation I have decided not to include it in my portfolio.

From a risk-reward standpoint, I think treating currency diversification entirely within the equity space is the more efficient way to go. That is, by increasing international within my equity allocation, plus increasing TIPS/I-Bond exposure within my bond allocation, combined will provide a better risk/return alternative to this fund. No, I do not have the specific math to back that up, but it just makes sense it is a more efficient means of hedging dollar risk, and that is the primary goal for me. I am interested to hear others' view of this aspect.

I struggled for some time on the question of country diversification within bonds, and specifically the need to decrease US bond exposure due to single country default risk. Then I deliberated over the fact that we have a huge segment of the investing universe that (in the US anyway) is largely ignored. I heard the same argument made for REITs. I decided REITs vs. international bonds was an apples to oranges argument, and I will still hold REITs as a separate class.

Though I have made this decision, I do respect those who choose to include this fund. I do not think it is a slam-dunk decision either way.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby SSSS » Fri Feb 08, 2013 11:21 am

louis c wrote:From a risk-reward standpoint, I think treating currency diversification entirely within the equity space is the more efficient way to go.


This fund does not provide currency diversification. Some of the bonds are USD-denominated, and the rest are covered by USD hedging contracts.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby louis c » Fri Feb 08, 2013 11:42 am

SSSS wrote:
louis c wrote:From a risk-reward standpoint, I think treating currency diversification entirely within the equity space is the more efficient way to go.


This fund does not provide currency diversification. Some of the bonds are USD-denominated, and the rest are covered by USD hedging contracts.


Yes, understood, and if this fund is added for basic asset diversification, so be it - I think that is a good reason.

I struggled with why I needed the diversification in the first place, given the fairly marginal benefit involved. For me it was single country risk. How would that risk manifest? By country default. What would be the consequence of that? I think it would be a sharp US dollar decline. If so, this fund, being hedged, would not help with that risk. So, considering the next alternative, an unhedged fund...Vanguard does not offer one, and other funds have higher expenses relative to risk/returns, so why not just increase international within my existing equity allocation? This way I improve my hedge of currency risk without increasing my overall equity exposure.

I understand the arguments apart from this one for why people will want to own the fund - the strongest argument in my opinion is asset diversification. "Own everything" is a good philosophy in my view.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby ftobin » Fri Feb 08, 2013 1:01 pm

Would it not be unreasonable to think of hedged international bonds just like domestic corporate bonds? There is no currency risk, just default risk (and rate risk, of course).

If so, besides the cost argument, I don't see a reason for not including pseudo-domestic corporate bonds in my portfolio if I was including other real domestic corporate bonds.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Mel Lindauer » Fri Feb 08, 2013 1:09 pm

VictoriaF wrote:
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


Yes, I'll be making the Bogleheads 12 announcement on March 1st right here on the forum. Stay tuned and make sure you get registered early, since we've sold out all of our recent events and had to turn folks away.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dumbmoney » Fri Feb 08, 2013 3:40 pm

ftobin wrote:Would it not be unreasonable to think of hedged international bonds just like domestic corporate bonds? There is no currency risk, just default risk (and rate risk, of course).


Not exactly, because interest rate risk is different for each currency.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dumbmoney » Fri Feb 08, 2013 3:45 pm

SSSS wrote:This fund does not provide currency diversification. Some of the bonds are USD-denominated, and the rest are covered by USD hedging contracts.


Foreign dollar bonds are included in the existing Total Bond Market fund. The new international bond fund holds only non-dollar bonds.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby nisiprius » Fri Feb 08, 2013 4:10 pm

normaldude wrote:So for diversification purposes, it makes sense to have part of your bond portfolio in non-USD, so whether the dollar skyrockets or crashes, you're covered either way.
From the point of view of someone living, earning, and spending in the United States, the dollar doesn't skyrocket or crash. A dollar is worth a dollar, by definition. I do not need to call up the bank to find out today's price on a roll of quarters; it is $10.00.

I am concerned about inflation, the possibility that a dollar may buy less stuff, but the obvious response to that is to use financial instruments that are linked to inflation.

I am not sure why I would be concerned with the price of a dollar in, say Euros, because Euros are not an important component in my personal spending nor in the CPI. I don't (usually) buy rolls of Euros. In some vague rough sorta-kinda, the value of a basket of foreign currencies might be expected to tend move with inflation--because we all know that every other government in the world has sound fiscal policy and stable currency. But many other assets, such as stocks, commodities, and real estate, also sorta-kinda tend to move with inflation.

I made a homemade effort to get some data on this. I'm not sure if I did it right, but this is how it came out. Blue is the purchasing power of a dollar, red is the purchasing power of the basket of world currencies as used in the trade-weighted dollar index. It does not look to me as if using world currencies did much but add volatility:

Image

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Re: Finally arrived: The Vanguard Total International Bond F

Postby shawcroft » Fri Feb 08, 2013 4:42 pm

nisiprius wrote:The burden of proof is on those who say that foreign currencies are particularly effective at hedging inflation.


Another fascinating graph, Nisiprius. Thanks for the effort

I, too, have some skepticism about foreign currencies being very effective at hedging inflation....Since my mother raised a fool but not a stubborn idiot, I am always eager to learn.

I had thought international bonds might provide some diversification benefit to a portfolio.....ah,so!

At least we have until June, 2013 to discuss this new fund- ad nauseum- until some of us have to commit and buy it.....
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 6:34 pm

ftobin wrote:Would it not be unreasonable to think of hedged international bonds just like domestic corporate bonds? There is no currency risk, just default risk (and rate risk, of course).

If so, besides the cost argument, I don't see a reason for not including pseudo-domestic corporate bonds in my portfolio if I was including other real domestic corporate bonds.


If the US govt were to default, there would be a relative flight to quality away from US bonds (govt & corporate), to non-US bonds. A US sovereign default would affect the credit rating & credit spreads of all US corporate bonds.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby normaldude » Fri Feb 08, 2013 6:51 pm

nisiprius wrote:From the point of view of someone living, earning, and spending in the United States, the dollar doesn't skyrocket or crash. A dollar is worth a dollar, by definition. I do not need to call up the bank to find out today's price on a roll of quarters; it is $10.00.


Because if the Fed prints enough dollars, and we see USD hyperinflation, a wheelbarrow of $100,000 will buy you a loaf of bread.

nisiprius wrote:I made a homemade effort to get some data on this. I'm not sure if I did it right, but this is how it came out. Blue is the purchasing power of a dollar, red is the purchasing power of the basket of world currencies as used in the trade-weighted dollar index. It does not look to me as if using world currencies did much but add volatility:

Image

The burden of proof is on those who say that foreign currencies are particularly effective at hedging inflation.


You're charting for normal conditions. You're making the same mistake that the hedge fund LTCM made, when they didn't account for the possibility that Russia could default, and markets could behave irrationally for an extended period. It's also the same mistake that S&P and Moody's made during the housing bubble, when they were using financial models that assumed there would never be a national housing decline, and incorrectly gave AAA ratings to CDOs/CMOs that would later default.

Under normal conditions, currency diversification adds very little. I'm talking about rare events (Great Depression, WWII), and events that have never happened before (US govt default, USD hyperinflation).

I'm sure a German economist could have made a similar chart to yours in 1920, and come to the false conclusion that holding German marks is just as good as having currency diversification. Then hyperinflation hit, and crushed the value of existing German marks to near worthlessness.

http://en.wikipedia.org/wiki/Hyperinfla ... r_Republic

Image Image Image

It's easy to weather the storm when the seas are calm. I'm more interested in preparing for the big disasters (Great Depression, WWII, US govt default, USD hyperinflation). If I had been in charge of building the Titanic, I would have included enough lifeboats for all the passengers. And most people would have mocked me for the extra expense, since 99% of people thought the ship was "unsinkable".
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Re: Finally arrived: The Vanguard Total International Bond F

Postby LadyGeek » Fri Feb 08, 2013 7:38 pm

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Re: Finally arrived: The Vanguard Total International Bond F

Postby ftobin » Fri Feb 08, 2013 7:39 pm

normaldude wrote:If the US govt were to default, there would be a relative flight to quality away from US bonds (govt & corporate), to non-US bonds. A US sovereign default would affect the credit rating & credit spreads of all US corporate bonds.

I'm having trouble thinking through what happens to dollar-hedged ex-US bonds in this situation. I presume the real rate of US bonds increases, decreasing value of the dollar, and hence the value of the ex-US bonds since they are in US dollars. However, since other non-US bonds would have their real rate fall in the flight to (new) quality, would this counter-balance the situation completely?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby abuss368 » Fri Feb 08, 2013 10:12 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


My thoughts exactly. I put this out on many threads a year or two back. Would not surprise me.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby natureexplorer » Fri Feb 08, 2013 11:04 pm

dickenjb wrote:The corollary piece of big news is it is going into the TR and LS funds. Replacing 20% of TBM it seems.
You call it corollary; I call it collateral damage. Once again Vanguard is proving the TR and LS funds are active funds.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby abuss368 » Fri Feb 08, 2013 11:32 pm

Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."

"Fully hedged foreign bonds mimic U.S. bonds (with the disadvantage of added complexity and costs stemming from the hedging process)... Foreign-currency-denominated bonds play no role in well-constructed investment portfolios."
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Re: Finally arrived: The Vanguard Total International Bond F

Postby soar » Fri Feb 08, 2013 11:48 pm

abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."

"Fully hedged foreign bonds mimic U.S. bonds (with the disadvantage of added complexity and costs stemming from the hedging process)... Foreign-currency-denominated bonds play no role in well-constructed investment portfolios."


I don't see that foreign bonds have been mimicking US bonds in the last 5 years for example. Look at Australian Treasuries or German Bunds. I also don't see that "the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars". The US dollar cash flows of the dollar-denominated bonds are almost zero. That's certainly not true of AUS Treasuries and Bunds. You can certainly say that 5 years is too short a time. However I am skeptical of generalizations such as that quoted from Swensen for whom I have the highest regard. Perhaps someone can show that his statements are true.

If this is true of bonds, why is is also not true of stocks?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby soar » Sat Feb 09, 2013 12:03 am

normaldude wrote:I'm talking about rare events (Great Depression, WWII), and events that have never happened before (US govt default, USD hyperinflation).


That's not quite correct. The US has defaulted several times e.g. The Continental Currency Default of 1779, The Default of 1790 and The Greenback Default of 1862. If you had lived in those times you would have suffered severe losses.

Which brings us back to the question of whether the Total International Bond Fund offers diversification to the US investor. It would appear that Vanguard believes that it does.

https://personal.vanguard.com/us/insigh ... t-02062013
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dumbmoney » Sat Feb 09, 2013 12:37 am

abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."


That is not how hedged bond funds work. What is being hedged is currency, not the stream of bond payments. (If you want a deterministic stream of payments, then you don't want any kind of bond fund - you want a bond ladder).

For example, if an Australian bond fund investor experiences a return 1% higher than Australian$ cash over some period of time, then a hedged U.S. investor in Australian bonds would ideally experience a return 1% higher than US$ cash. This will generally not be identical to the return of U.S. dollar bonds.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby abuss368 » Sat Feb 09, 2013 7:43 am

dumbmoney wrote:
abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."


That is not how hedged bond funds work. What is being hedged is currency, not the stream of bond payments. (If you want a deterministic stream of payments, then you don't want any kind of bond fund - you want a bond ladder).

For example, if an Australian bond fund investor experiences a return 1% higher than Australian$ cash over some period of time, then a hedged U.S. investor in Australian bonds would ideally experience a return 1% higher than US$ cash. This will generally not be identical to the return of U.S. dollar bonds.


The quotes were right out of David Swensen's book Unconventional Success. I can provide page numbers if you would like to see yourself. Are you implying Dr. Swensen is incorrect?
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Re: Finally arrived: The Vanguard Total International Bond F

Postby JamesSFO » Sat Feb 09, 2013 8:24 am

abuss368 wrote:
dumbmoney wrote:
abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."


That is not how hedged bond funds work. What is being hedged is currency, not the stream of bond payments. (If you want a deterministic stream of payments, then you don't want any kind of bond fund - you want a bond ladder).

For example, if an Australian bond fund investor experiences a return 1% higher than Australian$ cash over some period of time, then a hedged U.S. investor in Australian bonds would ideally experience a return 1% higher than US$ cash. This will generally not be identical to the return of U.S. dollar bonds.


The quotes were right out of David Swensen's book Unconventional Success. I can provide page numbers if you would like to see yourself. Are you implying Dr. Swensen is incorrect?


Maybe it is just a matter of how to interpret the last part of the last sentence of Swensen? Because for the payments at two different interest rates to end up the same would require that the hedging costs consume all of the spread? Certainly if the spreads are narrow and hedging is expensive than one would expect the cash flows to be more similar.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Beagler » Sat Feb 09, 2013 8:38 am

orre wrote:
normaldude wrote:I'm talking about rare events (Great Depression, WWII), and events that have never happened before (US govt default, USD hyperinflation).


That's not quite correct. The US has defaulted several times e.g. The Continental Currency Default of 1779, The Default of 1790 and The Greenback Default of 1862. If you had lived in those times you would have suffered severe losses.

Which brings us back to the question of whether the Total International Bond Fund offers diversification to the US investor. It would appear that Vanguard believes that it does.

https://personal.vanguard.com/us/insigh ... t-02062013


And The Liberty Bond Default of 1934.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby dumbmoney » Sat Feb 09, 2013 4:11 pm

abuss368 wrote:
dumbmoney wrote:
abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."


That is not how hedged bond funds work. What is being hedged is currency, not the stream of bond payments. (If you want a deterministic stream of payments, then you don't want any kind of bond fund - you want a bond ladder).

For example, if an Australian bond fund investor experiences a return 1% higher than Australian$ cash over some period of time, then a hedged U.S. investor in Australian bonds would ideally experience a return 1% higher than US$ cash. This will generally not be identical to the return of U.S. dollar bonds.


The quotes were right out of David Swensen's book Unconventional Success. I can provide page numbers if you would like to see yourself. Are you implying Dr. Swensen is incorrect?


The statement ("If, however, the investor hedges each of the foreign bond's cash flows...") is technically correct, but it doesn't apply to bond funds. It applies to a (fixed, non-rolling) bond ladder.

So yeah, I think Swensen made a mistake, since I don't think he meant to restrict his analysis to bond ladders.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby JMacDonald » Sat Feb 09, 2013 4:35 pm

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.

I have tried to find information on index that Vanguard is going to use to track the new fund, but I have been unable to fund anything. I think it would be interesting to see what performance of this index is. Does anyone know where some information on the index can be found? Thanks.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby JamesSFO » Sat Feb 09, 2013 5:41 pm

JMacDonald 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), 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.

I have tried to find information on index that Vanguard is going to use to track the new fund, but I have been unable to fund anything. I think it would be interesting to see what performance of this index is. Does anyone know where some information on the index can be found? Thanks.


Try this site: https://ecommerce.barcap.com/point/page.dxml?pageId=4&collar=&appId=1 it lists the UNhedged versions.

I had a hard time finding it on this site https://indices.barcap.com/index.dxml
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Re: Finally arrived: The Vanguard Total International Bond F

Postby abuss368 » Sat Feb 09, 2013 8:58 pm

dumbmoney wrote:
abuss368 wrote:
dumbmoney wrote:
abuss368 wrote:Everytime this subject come up, I consider David Swensen's thoughts from the excellent book "Unconventional Success":

"By asset size, foreign-currency-denominated bonds represent a formidable market, falling just short of the aggregate market value of U.S.-dollar-denominated debt. Yet, in spite of the market's size, foreign bonds offer little of value to U.S. investors."

"Consider bonds of similar maturity and similar credit quality, with one denominated in U.S. dollars and the other denominated in foreign currency. Because monetary conditions differ from country to country, the two bonds would likely promise different interest rates. An investor might expect that different interest rates and different economic conditions would lead to different investment results. If, however, the investor hedges each of the foreign bond's cash flows by selling sufficient foreign currency in the forward markets to match the anticipated receipt of interest and principal payments, then the U.S. dollar cash flows of the dollar-denominated bond match exactly the U.S. dollar cash flows of the foreign-currency-denominated bond hedged into U.S. dollars."


That is not how hedged bond funds work. What is being hedged is currency, not the stream of bond payments. (If you want a deterministic stream of payments, then you don't want any kind of bond fund - you want a bond ladder).

For example, if an Australian bond fund investor experiences a return 1% higher than Australian$ cash over some period of time, then a hedged U.S. investor in Australian bonds would ideally experience a return 1% higher than US$ cash. This will generally not be identical to the return of U.S. dollar bonds.


The quotes were right out of David Swensen's book Unconventional Success. I can provide page numbers if you would like to see yourself. Are you implying Dr. Swensen is incorrect?


The statement ("If, however, the investor hedges each of the foreign bond's cash flows...") is technically correct, but it doesn't apply to bond funds. It applies to a (fixed, non-rolling) bond ladder.

So yeah, I think Swensen made a mistake, since I don't think he meant to restrict his analysis to bond ladders.


I can tell you it was not related to individual bonds. I know for a fact he also means international bond funds. He does not like international bonds or bond funds!
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Timcom99 » Sat Feb 09, 2013 9:17 pm

Total Bond is going to take a beating when the Total International fund goes live. A good portion of Total Bond is held in Target Date and Life Stragety type funds. When the Total International goes live these funds are going to sell off some of their Total Bond and buy the Total International. Total Bond supposedly held 5.6% in foreign bonds anyway according to the Vanguard Website.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2
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Re: Finally arrived: The Vanguard Total International Bond F

Postby umfundi » Sat Feb 09, 2013 9:22 pm

Timcom99 wrote:Total Bond is going to take a beating when the Total International fund goes live. A good portion of Total Bond is held in Target Date and Life Stragety type funds. When the Total International goes live these funds are going to sell off some of their Total Bond and buy the Total International. Total Bond supposedly held 5.6% in foreign bonds anyway according to the Vanguard Website.

https://personal.vanguard.com/us/funds/ ... =INT#tab=2


How can an index fund "take a beating"?

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Re: Finally arrived: The Vanguard Total International Bond F

Postby Timcom99 » Sat Feb 09, 2013 9:39 pm

How can an index fund "take a beating"?

The huge outflow of money will cause its Expense Ratio to go up me thinks.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby nisiprius » Sat Feb 09, 2013 9:50 pm

Timcom99 wrote:How can an index fund "take a beating"?

The huge outflow of money will cause its Expense Ratio to go up me thinks.
Well, as long as you're making predictions anyway, how about some indication of magnitude and not just direction? Just how bad a "beating" are we talking about? I'm currently holding VBTLX, Total Bond Market Admiral shares, with an 0.10% ER. I don't want to pin you down to unreasonable precision, just some rough idea.

Do you think the expense ratio I will have to pay will go up to:

--over 1.00%
--over 0.50%
--over 0.17%, which is the expense ratio for Fidelity Spartan U. S. Bond Index Fund, Advantage shares
--over 0.11%
--to 0.11%?

[NOTE--added--I sort of goofed. The effective expense ratio for Fidelity Spartan U. S. Bond Index Fund, Advantage Class (FSITX) is only 0.10%. So this leads to the additional question: if the Vanguard ER climbed, why couldn't I just sell it and buy Fidelity's fund? Unlike an ETF, when you sell a mutual fund you get end-of-day NAV no matter what; redemptions are the fund company's problem, not mine.]
Last edited by nisiprius on Sun Feb 10, 2013 10:33 am, edited 1 time in total.
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Re: Finally arrived: The Vanguard Total International Bond F

Postby Timcom99 » Sat Feb 09, 2013 9:57 pm

Do you think the expense ratio I will have to pay will go up to:

--over 1.00%
--over 0.50%
--over 0.17%, which is the expense ratio for Fidelity Spartan U. S. Bond Index Fund, Advantage shares
--over 0.11%
--to 0.11%?

Not that bad nisiprius. Maybe to 0.12% from the current 0.10%. Maybe I should have used a kick in the pants instead of a beating :)
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Re: Finally arrived: The Vanguard Total International Bond F

Postby umfundi » Sat Feb 09, 2013 10:08 pm

Timcom99 wrote:How can an index fund "take a beating"?

The huge outflow of money will cause its Expense Ratio to go up me thinks.

Or, they lose a bunch of Facebook "friends"? As in high school, lack of popularity is likely an indicator of future success.

Really, the folks at Vanguard are much more intelligent than I am. (And probably than you are.) I have to believe they have thought this through.

The answer probably lies somewhere between Ferri and Swedroe's essential non-event, and some of these posts that declare the end of bond fund investing as we knew it.

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

Postby Timcom99 » Sat Feb 09, 2013 10:25 pm

umfundi wrote:
Timcom99 wrote:How can an index fund "take a beating"?

The huge outflow of money will cause its Expense Ratio to go up me thinks.

Or, they lose a bunch of Facebook "friends"? As in high school, lack of popularity is likely an indicator of future success.

Really, the folks at Vanguard are much more intelligent than I am. (And probably than you are.) I have to believe they have thought this through.

The answer probably lies somewhere between Ferri and Swedroe's essential non-event, and some of these posts that declare the end of bond fund investing as we knew it.

Keith :|


Yep, you are right Keith. Vanguard will get it right as it always has. :D
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