Any reason not to buy the International Bond Index Fund?
Any reason not to buy the International Bond Index Fund?
The "standard" 3 fund portfolio contains US and international stocks, but only US bonds. Is there any good reason to not split bonds in 50% US and 50% international (except for the somewhat higher fees for international bonds)?
In particular I'm thinking about the following allocation:
35% Vanguard Total Stock Market Index Fund VTSAX
35% Vanguard Total International Stock Index Fund VTIAX
15% Vanguard Total Bond Market Index Fund VBTLX
15% Vanguard Total International Bond Index Fund VTABX
In particular I'm thinking about the following allocation:
35% Vanguard Total Stock Market Index Fund VTSAX
35% Vanguard Total International Stock Index Fund VTIAX
15% Vanguard Total Bond Market Index Fund VBTLX
15% Vanguard Total International Bond Index Fund VTABX
Re: Any reason not to buy the International Bond Index Fund?
Higher fees, higher risk, questionable benefit.
Re: Any reason not to buy the International Bond Index Fund?
That's my reasoning, too. VTABX (Total International Bond Admiral) has a higher ER, lower credit quality, and longer average duration than VBTLX (Total Bond Admiral). But there yield is nearly 100 bp lower than VBTLX. So VTABX offers more risk than VBTLX, but lower expected return.John3754 wrote:Higher fees, higher risk, questionable benefit.
In the interests of intellectual honesty, I should note that since VTABX's inception, it has always had more default risk, more maturity risk, a higher ER, and a lower yield than VBTLX. But, since VTABX's inception, it has nevertheless outperformed VBTLX. Of course, IMO, that sheds no light on how either fund will perform in the future. My understanding is the current yield of a bond fund represents the best estimate of its expected return, so I'd expect VBTLX to outperform VTABX handily going forward.
I remain unconvinced that VTABX--or any hedged international bond fund--offers any meaningful diversification from domestic bond funds. The Vanguard research paper certainly didn't do anything to convince me otherwise. I don't personally believe that hedged funds offer any meaningful diversification of economic or geopolitical risks. So I've got no reason to use VTABX right now, and have no current plans to do so in the future.
Don't assume I know what I'm talking about.
Re: Any reason not to buy the International Bond Index Fund?
On the other hand, I don't think an allocation to VTABX will result in any great harm, either.
Don't assume I know what I'm talking about.
Re: Any reason not to buy the International Bond Index Fund?
G-Money wrote:I remain unconvinced that VTABX--or any hedged international bond fund--offers any meaningful diversification from domestic bond funds. The Vanguard research paper certainly didn't do anything to convince me otherwise.
+1 on both pointsG-Money wrote:On the other hand, I don't think an allocation to VTABX will result in any great harm, either.
If you search this forum you'll find several threads on the pros & cons that will give you more perspective on both sides of the issue
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- nisiprius
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Re: Any reason not to buy the International Bond Index Fund?
My honest, personal, arrogant opinion is that there is no reason not to buy it other than simplicity, and also no reason to buy it other than that you are simply "looking to add exposure to foreign bonds" (Vanguard's words).
I think you should be sure that you have personally spent some quality time reading through Vanguard's own paper, Global fixed income: Considerations for U.S. investors.
Be sure you can express to yourself--I actually write these things down--the specific goal or thing you think international bonds are going to do for you.
If I just plain sorta-kinda liked the idea of having international bonds in my portfolio, I would try to resist doing anything for about six months before committing, and then after committing I would try to stick to my guns. In my investment diary I try to be honest with yourself, and I might even write something like "Naïve diversification. I just don't know so I'm going to split 50/50." Notice that Vanguard says "U.S. investors considering international bonds should balance the diversification benefits against both the costs involved and the inherent benefits of preserving a core allocation to the U.S. bond market" but doesn't say how to do it.
Stop reading here. Propaganda, spin, and personal opinion ahead.
I am really struck by the numbers in that paper. You are contemplating a 50/50 split between both international and domestic in both stocks and bonds. On the one hand, that paper says that
...it would have cut the standard deviation from 9.6 to 9.5.
I think you should be sure that you have personally spent some quality time reading through Vanguard's own paper, Global fixed income: Considerations for U.S. investors.
Be sure you can express to yourself--I actually write these things down--the specific goal or thing you think international bonds are going to do for you.
If I just plain sorta-kinda liked the idea of having international bonds in my portfolio, I would try to resist doing anything for about six months before committing, and then after committing I would try to stick to my guns. In my investment diary I try to be honest with yourself, and I might even write something like "Naïve diversification. I just don't know so I'm going to split 50/50." Notice that Vanguard says "U.S. investors considering international bonds should balance the diversification benefits against both the costs involved and the inherent benefits of preserving a core allocation to the U.S. bond market" but doesn't say how to do it.
Stop reading here. Propaganda, spin, and personal opinion ahead.
I am really struck by the numbers in that paper. You are contemplating a 50/50 split between both international and domestic in both stocks and bonds. On the one hand, that paper says that
On the other hand, if we look at figure 7 to see how much mitigation your portfolio would have obtained by using international bonds, we see that...For the average investor seeking to further mitigate volatility in a diversified portfolio, this paper finds that foreign bonds can play such a role.
...it would have cut the standard deviation from 9.6 to 9.5.
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Re: Any reason not to buy the International Bond Index Fund?
Notice that Vanguard does it here:nisiprius wrote: Notice that Vanguard says "U.S. investors considering international bonds should balance the diversification benefits against both the costs involved and the inherent benefits of preserving a core allocation to the U.S. bond market" but doesn't say how to do it.
https://personal.vanguard.com/us/funds/ ... IntExt=INT
and in all the other Target Retirement funds.
As to how they do it, one can only guess. My guess is MPT, but not feeding in historical returns and variance, instead including other projections and I don't know how they do the projections.
Adding international bonds to the TR funds seems to be due to Vanguard catching the usbondphobia bug that has been going around. Or maybe they just added it for marketing purposes, making money off of the usbondphobia that has been going around.
Re: Any reason not to buy the International Bond Index Fund?
If you are doing this with an eye on portfolio variance reduction i would suggest allocating to US REITs (VNQ for instance) over international bonds. Lower ER, owns real assets, generates a better yield. Hold in tax preferred accounts.
~Moshe
~Moshe
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Re: Any reason not to buy the International Bond Index Fund?
You may want to read this: http://www.etf.com/sections/features/22 ... =1&start=2
"The tyranny of compounding expenses is the eighth deadly sin." - George Sisti
Re: Any reason not to buy the International Bond Index Fund?
+1Stan Dup wrote:You may want to read this: http://www.etf.com/sections/features/22 ... =1&start=2
To paraphrase, buying a currency hedged international bond fund is like buying a US bond fund but with a higher ER and lower yield. Buying an unhedged fund just opens you up to currency risk without the requisite upside benefit.
Stick to an international stock fund and keep your bonds in the US doing what they are meant to do, throwing off cash while preserving capital (and as a result lowering portfolio volatility).
~Moshe
My money has no emotions. ~Moshe |
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- ruralavalon
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Re: Any reason not to buy the International Bond Index Fund?
John3754 wrote:Higher fees, higher risk, questionable benefit.
+ 1 to both.G-Money wrote:On the other hand, I don't think an allocation to VTABX will result in any great harm, either.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy
Re: Any reason not to buy the International Bond Index Fund?
Does this mean it is not advisable to buy Vanguard Target funds? I thought it will simplify investment with three funds or four fund strategy.
Re: Any reason not to buy the International Bond Index Fund?
The bond portion of Target Retirement is only 20% International Bond Index. The 50% sounds too high and doesn't leave much room for inflation indexed.
Lar
Lar
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Re: Any reason not to buy the International Bond Index Fund?
As per other posters given that the currency risk is hedged the impact on total returns and volatility will be small.
If the US has some kind of economic crisis the dollar will fall, and the fund, which hedges, will take that pain (but not the pain, presumably, of higher interest rates).
Compared to TBM you will have less credit risk (no corporate bonds). You do have event risk if a sovereign nation goes sub investment grade (then the fund will sell, at a loss). You are also betting on Japan which has one of the largest debt to GDPs of any developed country, plus aging demographics. Italy looks very similar but with a better government deficit position: huge debt load, aging demographcs, stagnant economy, political instability in a very Italian fashion (it doesn't seem to matter much in other words). Separatism.
So that's say 25% of the bonds you are buying (20% Japan 5% Italy say). Interestingly Britain nearly had (September 2014) the separatism experience. It is inconceivable that the UK would default on a debt but interest rates would probably have been higher, bond prices lower. Which only goes to show that presuming that Catalonia or the Lombard League (or Quebec) will never pull it off, is, at best, an assumption: the vote was close, and there was a moment when Scottish independence was very much in the cards.
Once again the Eurozone is sleepwalking into crisis. It's rather as if it's a 10 alarm fire, and the local Fire Department is still debating how many hoses to load.
So Corporate bond risk in TBM replaced with odd political events in strange places. You pay your money and you take your choice.
If the US has some kind of economic crisis the dollar will fall, and the fund, which hedges, will take that pain (but not the pain, presumably, of higher interest rates).
Compared to TBM you will have less credit risk (no corporate bonds). You do have event risk if a sovereign nation goes sub investment grade (then the fund will sell, at a loss). You are also betting on Japan which has one of the largest debt to GDPs of any developed country, plus aging demographics. Italy looks very similar but with a better government deficit position: huge debt load, aging demographcs, stagnant economy, political instability in a very Italian fashion (it doesn't seem to matter much in other words). Separatism.
So that's say 25% of the bonds you are buying (20% Japan 5% Italy say). Interestingly Britain nearly had (September 2014) the separatism experience. It is inconceivable that the UK would default on a debt but interest rates would probably have been higher, bond prices lower. Which only goes to show that presuming that Catalonia or the Lombard League (or Quebec) will never pull it off, is, at best, an assumption: the vote was close, and there was a moment when Scottish independence was very much in the cards.
Once again the Eurozone is sleepwalking into crisis. It's rather as if it's a 10 alarm fire, and the local Fire Department is still debating how many hoses to load.
So Corporate bond risk in TBM replaced with odd political events in strange places. You pay your money and you take your choice.
Re: Any reason not to buy the International Bond Index Fund?
Just to inject a different opinion, I will say that the reason I would not buy the Vanguard international bond fund is because it is hedged. Hedging costs money and gives a false sense of security (the hedged duration is not actually matched to that of the bonds purchased, as I understand it). It also adds some (probably small) amount of counterparty risk.
Plus, my base currency is not the dollar, so even if I did want to hedge, this fund would not be the right one for me.
YMMV.
Plus, my base currency is not the dollar, so even if I did want to hedge, this fund would not be the right one for me.
YMMV.
Last edited by bpp on Sun Oct 19, 2014 5:00 pm, edited 1 time in total.
- ruralavalon
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Re: Any reason not to buy the International Bond Index Fund?
No, Vanguard Target Retirement funds are still useful as a very simple single-fund portfolio. For example VTTHX is only 3.8% in international bonds, certainly not enough to destroy the fund's utility. In fact the small allocation is part of the reason for saying that adding international bonds has little or no impact on overall portfolio performance.annabel wrote:Does this mean it is not advisable to buy Vanguard Target funds? I thought it will simplify investment with three funds or four fund strategy.
"Everything should be as simple as it is, but not simpler." - Albert Einstein |
Wiki article link: Bogleheads® investment philosophy