Do you diversify into international bond?

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chasiu209
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Do you diversify into international bond?

Post by chasiu209 »

Hi all

I've been weighing my options of adding international bond to further diversify my bond holdings.

Vanguard seems to have published a few articles 'selling' the neccessity of hedging the currency exposure for max diversification benefits. Appears to me they're inherently 'selling' their ETF BNDX - Vanguard Total International Bond ETF. I wonder if an FX hedged bond would just give you a risk-return very similar to a US domestic bond?

https://advisors.vanguard.com/VGApp/iip ... gGlblBonds

I've been searching around market and seems neither PICB - International Corporate Bond Portfolio nor IBND - SPDR Barclays Capital International Corporate Bond ETF are currency hedged.

Sooooo, questions -
1) Do you hold international bonds? If so, hedged or not and which particular instrument?
2) If any of my understandings above are wrong? (A being: FX hedged intl bond gives US-like return; B being both PICB/IBND are not currency hedged)

Appreciate your thoughts! Many thanks!

RC
MnD
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Re: Do you diversify into international bond?

Post by MnD »

I'm gradually accumulating Dodge and Cox Global Bond Fund (mostly corporate US and international bonds including emerging markets) paired with the US government bond fund in the federal employee retirement plan (G Fund). I believe this combination will outperform US Total Bond Market Fund with greater diversification and less risk. I am not a fan of market cap indexing in bond funds. "Invest in the biggest debtors" doesn't make sense to me either domestically or globally.
70/30 AA for life, Global market cap equity. Rebalance if fixed income <25% or >35%. Weighted ER< .10%. 5% of annual portfolio balance SWR, Proportional (to AA) withdrawals.
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riptide
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Re: Do you diversify into international bond?

Post by riptide »

Ben Graham does not recommend international bonds.
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FelixTheCat
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Re: Do you diversify into international bond?

Post by FelixTheCat »

Vanguard recommends international bonds. Look at the LifeStrategy Funds.
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riptide
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Re: Do you diversify into international bond?

Post by riptide »

imgritz wrote:Vanguard recommends international bonds. Look at the LifeStrategy Funds.
But Sir, Ben Graham does not recommend international bonds, I take Graham's advice above all.
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Re: Do you diversify into international bond?

Post by am »

Minimal to no benefit in the past with added complexity. Total bond is more than enough diversification.
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Re: Do you diversify into international bond?

Post by TheRightKost87 »

riptide wrote:
imgritz wrote:Vanguard recommends international bonds. Look at the LifeStrategy Funds.
But Sir, Ben Graham does not recommend international bonds, I take Graham's advice above all.
I don't know how much advice you'll be getting out of Benjamin Graham nowadays...
"The problem with diversification is that it works, whether or not we want it to"
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Re: Do you diversify into international bond?

Post by placeholder »

All my fixed income is in the 401k and the international bond fund there is actively managed and relatively expensive so even if I thought there were some small benefit I probably wouldn't.
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nisiprius
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Re: Do you diversify into international bond?

Post by nisiprius »

I don't use international bonds. The unhedged international bond funds are basically FOREX investments and I'm not interested in investing in FOREX. The hedged funds don't seem to be very different from U.S. bond funds, I don't see any theoretical reason to expect them to be very different. I read Vanguard's Global fixed income: Considerations for U.S. investors paper, full of data and information... and based on their presentation, I came to almost the opposite conclusion. It seemed completely pointless and a completely unnecessary complication.

Sort of like suggesting I should fill my car with a mixture of U.S. and Petro-Canada gasoline in order to get international diversification of my gasoline portfolio.
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Re: Do you diversify into international bond?

Post by berntson »

nisiprius wrote:I read Vanguard's Global fixed income: Considerations for U.S. investors paper, full of data and information... and based on their presentation, I came to almost the opposite conclusion. It seemed completely pointless and a completely unnecessary complication.
I just read the paper. Vanguard has convinced me that if I'm going to own international bonds, they should be hedged. They don't seem to have an argument, though, for actually owning international bonds.

The closest thing to an argument comes on page 10 in figure 7. It shows that a 60/40 portfolio has historically had the least amount of volatility with 30% of stocks in international and 100% of bonds in hedged international. Something somewhere has gone very wrong.

The authors of the paper calmly note in the caption to figure seven that "the least-volatile portfolio (highlighted) holds only international bonds for its fixed income portion." They fail to note that this result is also absurd. A US investor should not expect to be able to reduce risk by avoiding US bonds.
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Re: Do you diversify into international bond?

Post by asif408 »

berntson wrote:The closest thing to an argument comes on page 10 in figure 7. It shows that a 60/40 portfolio has historically had the least amount of volatility with 30% of stocks in international and 100% of bonds in hedged international. Something somewhere has gone very wrong.

The authors of the paper calmly note in the caption to figure seven that "the least-volatile portfolio (highlighted) holds only international bonds for its fixed income portion." They fail to note that this result is also absurd. A US investor should not expect to be able to reduce risk by avoiding US bonds.
They should have also noted that volatility change from 0% to 100% for hedged international bonds is approximately 0.2% for any amount of unhedged international stocks, while the volatility change from 0% to 100% unhedged international stocks is ~1.5% for any amount of hedged bonds. Their argument of lower volatility (0.2%) for owning hedged international bonds is "underwhelming" to say the least.
chasiu209 wrote: Sooooo, questions -
1) Do you hold international bonds? If so, hedged or not and which particular instrument?
2) If any of my understandings above are wrong? (A being: FX hedged intl bond gives US-like return; B being both PICB/IBND are not currency hedged)
I no longer hold international bonds. I owned a small amount at one time but when I researched the literature I found the evidence to be weak and replaced them with my US Total Bond index fund. Hedged bonds, to the best of my knowledge, have very similar returns to the US bonds.
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BigOil
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Re: Do you diversify into international bond?

Post by BigOil »

nisiprius wrote:I don't use international bonds. The unhedged international bond funds are basically FOREX investments and I'm not interested in investing in FOREX. The hedged funds don't seem to be very different from U.S. bond funds, I don't see any theoretical reason to expect them to be very different. I read Vanguard's Global fixed income: Considerations for U.S. investors paper, full of data and information... and based on their presentation, I came to almost the opposite conclusion. It seemed completely pointless and a completely unnecessary complication.

Sort of like suggesting I should fill my car with a mixture of U.S. and Petro-Canada gasoline in order to get international diversification of my gasoline portfolio.
I did precisely the same thing. I came to slightly opposite conclusion than Nisi. I.e. There is a small difference. Small.

Pragmatically low-cost, FOREX hedged funds are not available in my wife's plans nor in nine as a standalone offering . I use institutional extra–low–cost Vanguard Target retirement funds in my plan, Total Bond in wife's. [Vanguard target retirement has hedged international bonds.]

At end of the day it probably doesn't matter much, and probably has the same "spirit" as SCV tilts. Especially with bonds(except high yield) --- they're much less volatile than stock funds, and perform portfolio stabilization duty well.

I'm huge fan of Vanguard target retirement funds, based on their "engineering" whitepaper. International bonds are the cherry on top, not the main course.

I'm often amazed about nitpicking on bond discussions here. It's a very simple duration and risk story to (low-cost) bond fund returns. PIMCO (example) & high-yields take more risk. Bond fund(s) of the appropriate duration are more cost-effective, than the nonsense brokers play in reselling individual bonds to unsuspecting and unsophisticated old people. Like my Mother. Arrgh

Nisi is, however, completely wrong in his gasoline analogy :D ; North American gasoline is completely fungible (reference my screen name), so:
It's more like mixing Starbuck's & Tim Horton's coffee, just in case one of them has a slight miscalculation in the roasting times of the beans...
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Re: Do you diversify into international bond?

Post by chaz »

Not needed.
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Re: Do you diversify into international bond?

Post by jginseattle »

chaz wrote:Not needed.
+1.
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cfs
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Re: Do you diversify into international bond?

Post by cfs »

Selling.

The key word on the original post is "selling" and the best way to sell the product was to include it in as many balanced funds as possible. I sold my target retirement fund due to the addition of total international bond. Now, I wrote sometime ago that the total international bond fund could become Vanguard's second largest bond fond in the not so distant future (second only to Total Bond Market Index, VBMFX) due to their "aggressive selling" and just for fun, here are a couple of funds (with the fund total net assets as of 31 July 2014):

- GNMA (VFIIX) - $26.1 billion (inception 6/27/1980)
- Inflation Protected Securities (VIPSX) - $26.3 billion (inception 6/29/2000)
- Total Bond (VBMFX) - $119.3 billion (inception 12/11/86)
- Total International Bond (VTIBX) - $25.9 billion (inception 5/31/2013)

GNMA with $26 billion after 34 years, Inflation Protected Securities with $26 billion after 14 years, and total international bond with $26 billion after only 14 months. Of course other bond funds (not included above) are doing much better, but the question is for how long. Let the "selling" continue, but in my opinion this total international bond fund is not needed in my imperfect SWAN (sleep well at night) portfolio.

Thanks for reading.
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Re: Do you diversify into international bond?

Post by Christine_NM »

Per Strunk & White, omit needless funds. Writing and investing have a lot in common.
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Re: Do you diversify into international bond?

Post by placeholder »

That's a great thought but how do you determine with a fund is needless?
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Re: Do you diversify into international bond?

Post by Tycoon »

I have no money invested in international bonds.
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siamond
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Re: Do you diversify into international bond?

Post by siamond »

I pondered about it, but the higher fees of international bond funds (vs not so great yields/expected returns) stopped me cold. If I were to take a tiny bit more risk on bonds, I'd rather go with more corporate bonds, as John Bogle himself stated multiple times in the recent past. This being said, I keep it simple, VBMFX has ~ 30% corporate, and that sounds good enough.

Hm, funny, I was checking my 30% number to make sure I wasn't saying something stupid, and... VBMFX has 6.6% of foreign bonds. I never noticed! Ok, cool, as long as they keep the low fees...
https://personal.vanguard.com/us/funds/ ... =INT#tab=2
Last edited by siamond on Fri Aug 15, 2014 7:24 pm, edited 1 time in total.
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Re: Do you diversify into international bond?

Post by Christine_NM »

placeholder wrote:That's a great thought but how do you determine with a fund is needless?
Good question. Why start with international bonds just because they are now easy to buy. Greater availability implies to me a stronger correlation with Total Bond in the future. The buyers/sellers of international bonds now overlap the Total Bond buyers/sellers.
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Re: Do you diversify into international bond?

Post by placeholder »

I don't see how ease of purchase implies that at all.
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Re: Do you diversify into international bond?

Post by 209south »

I seek maximum diversity when it is offered at reasonable cost, so moved 20% of my fixed income to international bonds when Vanguard first offered their two funds...would prefer non-hedged but c'est la vie. To those that say this 'adds complexity' and the 'additional costs don't justify' the move, I would note that reconciling my accounts is a 10-minute a week hobby, and would further note that BNDX has outperformed BND substantially over one-year, six-month and 3-month time periods. I am not performance chasing, and haven't changed my allocation since I first invested in the funds...and would be happy with the allocation even if BNDX had underperformed...but it is interesting to note that these two funds do not trade in lockstep at all - there does appear to be some diversification benefit.
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Re: Do you diversify into international bond?

Post by stemikger »

My 401K does not even offer an international bond fund. When I started here 20 years ago they didn't even offer international equities. I don't invest in either so it's not a problem for me.

International equities might be worth it, but I really don't see any advantage with international bonds if you are long term index investor.
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Re: Do you diversify into international bond?

Post by rakornacki1 »

I do invest in the VG Total International Bond Index Fund (VTABX). I feel that this provides maximum diversification at a low Expense Ratio of 0.20%.
While this tactic is not necessarily recommended in John Bogle's "Common Sense on Mutual Funds", some current VG advisors are offering it.
Good luck.
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Re: Do you diversify into international bond?

Post by Dandy »

Not yet -- at least as a separate product. There is a small allocation in Total Bond. I don't understand enough about the risks/benefits and need.

At a time of low yields it is tempting to jump into "new" fixed income products -- when I get that feeling I usually move away from the ledge and let others jump. Having been in the mutual fund/brokerage industry for most of my working years I have seen a lot of carnage when people buy "new" products or products that are new to them.

Another factor is that my fixed income is focused on asset preservation/stability not growth or yield. I'd rather go longer in a "safer" CD than put much money into International bonds.
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Re: Do you diversify into international bond?

Post by ruralavalon »

No, we don't use international bonds.

Duration of 6.71 years, extra expense, more complication, and little or no apparent benefit.

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Re: Do you diversify into international bond?

Post by bpp »

chasiu209 wrote: Sooooo, questions -
1) Do you hold international bonds?
Yes.
If so, hedged or not and which particular instrument?
Unhedged. 1/3 each of:
BND (US Total Bond)
EMLC (Emerging Markets)
IGOV (Developed Markets ex-US)

Note: IGOV is only 77% foreign (non-Japan), so 23% of it counts towards my domestic (Japan) bond allocation.
2) If any of my understandings above are wrong? (A being: FX hedged intl bond gives US-like return; B being both PICB/IBND are not currency hedged)
I think those are basically right.

Regarding the Vanguard paper, I agree with Nisiprius that the numbers presented in that paper are completely unconvincing of anything. The numbers there shown do not make a strong argument for adding hedged foreign bonds. They do not even make a strong argument against adding unhedged foreign bonds. I also get the feeling, as you say, that they seem to be trying to sell BNDX.
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Re: Do you diversify into international bond?

Post by sdsailing »

No. I am disappointed with Vanguard for pushing these.
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Re: Do you diversify into international bond?

Post by 209south »

BNDX is up 4.58% ytd vs. 2.66% for BND - yes that's recency bias and has no predictive value, but it does indicate that the two funds do not operate in lockstep, and a (reasonably priced) diversification benefit is available. Rather than being 'disappointed with Vanguard for pushing these,' I am gratified that they have sensibly offered investors the opportunity!
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Re: Do you diversify into international bond?

Post by denovo »

sdsailing wrote:No. I am disappointed with Vanguard for pushing these.
Me too. And people with their all in one funds were forced to buy into them. I don't like those anymore.
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chasiu209
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Re: Do you diversify into international bond?

Post by chasiu209 »

denovo wrote:
sdsailing wrote:No. I am disappointed with Vanguard for pushing these.
Me too. And people with their all in one funds were forced to buy into them. I don't like those anymore.
I wonder if the sentiment/conclusion would be different if Vanguard hasn't forced it to some of our portfolios!
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Re: Do you diversify into international bond?

Post by rob »

If I thought market timing worked... I would be selling all my non US bonds based on the fact everyone seems to recommend them now days :-/ I have them as part of my bonds and have close to when they were first available.
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chasiu209
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Re: Do you diversify into international bond?

Post by chasiu209 »

Thanks for all the previous feedback, fellow Bogleheads.

Looks like 90%+ of us don't agree with intl bond allocation.

With recent USD strength, I wonder if the remaining 'supporters' (I have certain allocation for PICB / IBND but never really pull the trigger and buy them) will be backing out..... Indeed PICB and IBND have been performing poorly lately.
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siamond
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Re: Do you diversify into international bond?

Post by siamond »

I pondered about it for a while, but... I don't bother with Int'l Bonds either. I can understand that some people are eager to find better yield out of the US, but the ER is simply too high. And yes, the currency risk goes in the way. Just doesn't seem sensible compared to the fundamental reason to use bonds (e.g. stability). I am a big believer in Int'l diversification, but only for equities (and REITs).
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