Bond questions: Adding foreign bonds? Bond Tax implication

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Topic Author
van_sun_38
Posts: 41
Joined: Tue Apr 07, 2020 12:56 pm

Bond questions: Adding foreign bonds? Bond Tax implication

Post by van_sun_38 » Thu May 21, 2020 12:48 pm

Hi Bogleheads members,

I have 2 questions regarding bonds:

1) I just ran the Vanguard Portfolio Watch analysis and one of the recommendations is:

"Adding some currency-hedged, foreign bonds could potentially increase your portfolio diversification. An allocation of about 20% to 50% of your bonds in a low-cost, currency-hedged, international bond fund is a reasonable approach to capture the diversification benefits."

What do you think of the recommendation? I have never thought of foreign bonds. What foreign bond(s) do you recommend to add?

2) In my taxable account, the majority of my bond holdings are in VWIUX (Vanguard Intermediate-Term Tax-Exempt Fund Admiral Shares). Since it is "tax-exempt", should I assume that I won't have to pay much tax when I sell the fund? Am I missing something here?

Thank you!

bloom2708
Posts: 7722
Joined: Wed Apr 02, 2014 2:08 pm
Location: Fargo, ND

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by bloom2708 » Thu May 21, 2020 1:23 pm

1. I ignore the advice to buy foreign bonds. Many do the same. You will have to decide if foreign bonds has a place in your portfolio. They don't add much safety and they don't add much return.

2. The interest/dividends are exempt from Federal tax. State tax may still apply.

You do still pay tax on the gain or loss from the shares when sold. Long term rate if >1 year held. Short term/ordinary income rate if held <1 year (dividends reinvested adds new shares).

For higher tax brackets VWIUX (Int-Term Tax-Exempt) makes some sense. When the bond market wobbled, some of these funds were perhaps not as stable as some might have wanted. But, the Fed is backing them up and it holds many bonds. Many are staying the course with the fund.
"We are here to provoke thoughtfulness, not agree with you." Unknown Boglehead

SanjiWatsuki
Posts: 7
Joined: Thu Feb 15, 2018 10:40 pm

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by SanjiWatsuki » Thu May 21, 2020 1:47 pm

USD hedged international bonds are a rather interesting category. According to the 2019 Vanguard white paper about Going Global on Bonds, the currency hedging has a cost but it's decreased over time to 0.1-0.2%. A quick Portfolio Visualizer backtest suggests there was a minor risk-adjusted return benefit from adding some hedged international bonds in the 1999-2020 time frame.

After the bonds are currency hedged, you're mostly left with exposure to things like foreign yield curves, inflation, interest rates which can help diversify. In exchange, you pay the hedging cost and the expense ratios tend to be a bit higher. On the Vanguard side, the international BNDX has a 0.08% expense ratio compared to BND's 0.035%. Vanguard's paper on rising interest rates and global bonds argues that these unique risks reduce risk to your local interest rate changing.

----------

Appeal to authorities include:

Bill Bernstein says not to bother with them because hedged international bonds are just like having expensive US bonds.


Rick Ferri doesn't like them. He doesn't think the possible lower correlations are worth the higher expense, lower yields, and hedging costs.

Larry Swedroe has written that "foreign bonds are interesting. Adding them in on hedged basis to me is good idea as it diversifies rate risks and provides opportunities to look for more "attractive" places on the yield curve as DFA does."

David Swensen has written "Fully hedged foreign bonds mimic U.S. bonds (with the disadvantage of added complexity and costs stemming from the hedging process)."

John Bogle recommends against the use of international bonds.
> The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either one.

statefan03
Posts: 19
Joined: Wed Mar 25, 2020 12:31 pm
Location: NC

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by statefan03 » Thu May 21, 2020 1:56 pm

I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

retired@50
Posts: 2558
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by retired@50 » Thu May 21, 2020 1:59 pm

statefan03 wrote:
Thu May 21, 2020 1:56 pm
I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't understand the "foreign bond hate" either. I've had them in my portfolio since the inception of VTABX. No complaints.

Regards,
This is one person's opinion. Nothing more.

Topic Author
van_sun_38
Posts: 41
Joined: Tue Apr 07, 2020 12:56 pm

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by van_sun_38 » Thu May 21, 2020 5:26 pm

retired@50 wrote:
Thu May 21, 2020 1:59 pm
statefan03 wrote:
Thu May 21, 2020 1:56 pm
I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't understand the "foreign bond hate" either. I've had them in my portfolio since the inception of VTABX. No complaints.

Regards,
That's interesting. What allocation of Domestic/International Bonds do you have? Also should foreign bond be in taxable account?

Topic Author
van_sun_38
Posts: 41
Joined: Tue Apr 07, 2020 12:56 pm

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by van_sun_38 » Thu May 21, 2020 5:27 pm

bloom2708 wrote:
Thu May 21, 2020 1:23 pm
1. I ignore the advice to buy foreign bonds. Many do the same. You will have to decide if foreign bonds has a place in your portfolio. They don't add much safety and they don't add much return.

2. The interest/dividends are exempt from Federal tax. State tax may still apply.

You do still pay tax on the gain or loss from the shares when sold. Long term rate if >1 year held. Short term/ordinary income rate if held <1 year (dividends reinvested adds new shares).

For higher tax brackets VWIUX (Int-Term Tax-Exempt) makes some sense. When the bond market wobbled, some of these funds were perhaps not as stable as some might have wanted. But, the Fed is backing them up and it holds many bonds. Many are staying the course with the fund.
Thank you! So it looks like the capital gains will be taxed, but not the interest/dividends.

retired@50
Posts: 2558
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by retired@50 » Thu May 21, 2020 6:20 pm

van_sun_38 wrote:
Thu May 21, 2020 5:26 pm
retired@50 wrote:
Thu May 21, 2020 1:59 pm
statefan03 wrote:
Thu May 21, 2020 1:56 pm
I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't understand the "foreign bond hate" either. I've had them in my portfolio since the inception of VTABX. No complaints.

Regards,
That's interesting. What allocation of Domestic/International Bonds do you have? Also should foreign bond be in taxable account?
I have between 20% - 25% of my bonds in international bonds. I hold them in my Rollover IRA.

Regards,
This is one person's opinion. Nothing more.

Topic Author
van_sun_38
Posts: 41
Joined: Tue Apr 07, 2020 12:56 pm

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by van_sun_38 » Fri May 22, 2020 12:50 pm

retired@50 wrote:
Thu May 21, 2020 6:20 pm
van_sun_38 wrote:
Thu May 21, 2020 5:26 pm
retired@50 wrote:
Thu May 21, 2020 1:59 pm
statefan03 wrote:
Thu May 21, 2020 1:56 pm
I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't understand the "foreign bond hate" either. I've had them in my portfolio since the inception of VTABX. No complaints.

Regards,
That's interesting. What allocation of Domestic/International Bonds do you have? Also should foreign bond be in taxable account?
I have between 20% - 25% of my bonds in international bonds. I hold them in my Rollover IRA.

Regards,
Thanks! Do you recommend vtabx in a taxable account?

retired@50
Posts: 2558
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: Bond questions: Adding foreign bonds? Bond Tax implication

Post by retired@50 » Fri May 22, 2020 1:17 pm

van_sun_38 wrote:
Fri May 22, 2020 12:50 pm
retired@50 wrote:
Thu May 21, 2020 6:20 pm
van_sun_38 wrote:
Thu May 21, 2020 5:26 pm
retired@50 wrote:
Thu May 21, 2020 1:59 pm
statefan03 wrote:
Thu May 21, 2020 1:56 pm
I don't understand the foreign bond hate.

Higher return, lower std.dev., higher sharpe ratio.

https://www.portfoliovisualizer.com/bac ... ion2_2=100
I don't understand the "foreign bond hate" either. I've had them in my portfolio since the inception of VTABX. No complaints.

Regards,
That's interesting. What allocation of Domestic/International Bonds do you have? Also should foreign bond be in taxable account?
I have between 20% - 25% of my bonds in international bonds. I hold them in my Rollover IRA.

Regards,
Thanks! Do you recommend vtabx in a taxable account?
I don't really know enough about VTABX to make a recommendation. It might depend on your tax bracket, etc. All I can suggest is you read the wiki page on tax-efficient fund placement. Given the relatively low yield on VTABX, it could make sense in a taxable account. See link.

https://www.bogleheads.org/wiki/Tax-eff ... _placement

Regards,
This is one person's opinion. Nothing more.

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