International Bond Index Fund

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thumpie7
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International Bond Index Fund

Post by thumpie7 »

Vanguard recommends International Bond Index as a part of one’s retirement portfolio. Bogkehead’s Three Fund Portfolio does not. Why does the Three Fund Portfolio not include International Bonds? I presently have holdings in the three funds suggested by Bogleheads. My Vanguard Financial Advisor suggested 15% in International bonds.

Suggestions?

Thanks!

Clea
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Re: International Bond Index Fund

Post by tibbitts »

thumpie7 wrote: Sat Jan 09, 2021 9:18 am Vanguard recommends International Bond Index as a part of one’s retirement portfolio. Bogkehead’s Three Fund Portfolio does not. Why does the Three Fund Portfolio not include International Bonds? I presently have holdings in the three funds suggested by Bogleheads. My Vanguard Financial Advisor suggested 15% in International bonds.

Suggestions?

Thanks!

Clea
There was no Vanguard fund, or for the most part other cost-efficient mechanisms, for investing in international bonds at the time the three-fund concept was developed. It's much, much newer in those terms than the other assets included. It takes time for something to be adopted, and right now a lot of Bogleheads are leaning towards making the three-fund into a one-fund (U.S. equity only.) So international bonds came into the discussion at what might not have been the optimal time for them to be welcomed enthusiastically by everybody.

Personally I think if you have a Vanguard adviser you should go with what they suggest. It doesn't make any sense to say you need an advisor, and pay them no less as you're doing, and then decide you know more than they do and not follow their recommendations.
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Re: International Bond Index Fund

Post by vineviz »

tibbitts wrote: Sat Jan 09, 2021 9:22 am Personally I think if you have a Vanguard adviser you should go with what they suggest. It doesn't make any sense to say you need an advisor, and pay them no less as you're doing, and then decide you know more than they do and not follow their recommendations.
I was about to respond with exactly this sentiment.

Whether or not to include international bonds in a portfolio is a relatively minor decision, but including them does improve diversification at low cost. My advice to listen to your professional advisor over random internet strangers.
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Re: International Bond Index Fund

Post by invest4 »

Others may provide a more comprehensive response, but my observation is that many do not see a sufficient benefit in holding Intl bonds vs the additional expense and complexity for the privilege.

Personally, I hold BND and BNDX much the same as I hold VTI and VXUS (80/20) for diversification. For the 3 and 5 year periods (BNDX hasn't been around long enough for the 10), the returns are roughly similar. Thus far in 2021, BNDX is faring a bit better thus far (-0.27 vs -1.04 for BND). Nonetheless, I have no clue what the future may look like.
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Re: International Bond Index Fund

Post by thumpie7 »

Thank you all who responded to my inquiry.

I am heeding your recommendation to follow the advice of my Vanguard Financial Advisor.

Clea
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Re: International Bond Index Fund

Post by nedsaid »

vineviz wrote: Sat Jan 09, 2021 9:34 am
tibbitts wrote: Sat Jan 09, 2021 9:22 am Personally I think if you have a Vanguard adviser you should go with what they suggest. It doesn't make any sense to say you need an advisor, and pay them no less as you're doing, and then decide you know more than they do and not follow their recommendations.
I was about to respond with exactly this sentiment.

Whether or not to include international bonds in a portfolio is a relatively minor decision, but including them does improve diversification at low cost. My advice to listen to your professional advisor over random internet strangers.
My take is that International Bonds are entirely optional but have chosen to include them in my portfolio because they are the largest asset class in the world. In my view the diversification benefits of adding International Bonds to a 3 fund portfolio are minor but Vanguard has decided to include them in their portfolios. To me, the opinion of Vanguard's experts do carry credibility. I echo the advice to follow the recommendation of your Advisor.
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Re: International Bond Index Fund

Post by nisiprius »

I agree with others. If you are going to have a financial advisor, you might as well follow their advice.

I don't believe it makes much difference one way or the other, and I believe in what John C. Bogle called "the majesty of simplicity," so I don't bother with them.

John C. Bogle wrote
Successful investing involves doing just a few things right and avoiding serious mistakes.
I don't think having 0% dollar-hedged international bonds is a serious mistake.
I don't think having 15% dollar-hedged international bonds is a serious mistake.

The Vanguard Total Bond Market Index Fund (VBTLX, orange) and the Total International Bond Market Index Fund (VTABX, blue) have both done what bonds do. They haven't made a lot of money, but they also haven't had a lot of fluctuation (aka risk aka volatility). They have both been very different from the Total Stock Market Index Fund (VTSAX), green. Bonds are bonds. It doesn't make an awful lot of difference which kind you use, especially if it is only 15% of your portfolio.

Milk will lighten and smooth the taste of coffee. So will almond milk. If you want to lighten your coffee, do you think it's worth the effort of using a mixture of 70% milk and 30% almond milk instead of just using 100% milk? You can't say it doesn't make any difference at all. You also can't say for sure which is better and which is worse. It's like that.

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Re: International Bond Index Fund

Post by eshkidd »

Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?

Seems like as personal investors with access to HYSA we have the slight edge to forgo these.

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Re: International Bond Index Fund

Post by abuss368 »

I don’t think this is a big deal at all. Total Bond includes foreign companies bonds and Total International Bond includes US companies bonds.

Vanguard investment experts recommend both in the Target, LifeStrategy, and PAS portfolios.

Tony
Last edited by abuss368 on Sun Jan 10, 2021 10:03 pm, edited 1 time in total.
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Re: International Bond Index Fund

Post by Dr. Dad »

The opinion of Vanguard experts carries considerable credibility for me as well. On the other hand I value the interest and curiosity of those (including OP) who want to better understand and/or verify the recommendations of their professional advisor. I think any good advisor would (should) welcome your questions and even respectful disagreement at times.
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Re: International Bond Index Fund

Post by averagedude »

Probably doesn't matter. According to Vanguard, 88% of your long term investment returns and volatility can be directly attributed to your asset allocation between stocks and bonds. I feel confident that the other 12% isn't attributed to your decision between US bonds and International bonds.
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Re: International Bond Index Fund

Post by Dominic »

eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?

Seems like as personal investors with access to HYSA we have the slight edge to forgo these.

https://investor.vanguard.com/etf/profile/BNDX
Rates might fall even further. Also, if the dollar strengthens, the currency hedging can generate additional returns.
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Re: International Bond Index Fund

Post by vineviz »

eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
You wouldn't, but 0.21% isn't actually the yield of Vanguard Total International Bond ETF (BNDX): the way that Vanguard calculates the SEC yield for that fund excludes the effect of the exchange rate hedges that the fund employs.

On a like-for-like basis, the SEC yield would be more like 0.76%. By comparison iShares reports the SEC yield of the highly similar iShares Core International Aggregate Bond ETF (IAGG) at 0.72%, and it has a slightly shorter average duration.
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Re: International Bond Index Fund

Post by thumpie7 »

Thank you all for your intelligent and thoughtful responses.

You have given me peace of mind.

Sincerely,

Clea
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Re: International Bond Index Fund

Post by eshkidd »

vineviz wrote: Sun Jan 10, 2021 8:01 am
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
You wouldn't, but 0.21% isn't actually the yield of Vanguard Total International Bond ETF (BNDX): the way that Vanguard calculates the SEC yield for that fund excludes the effect of the exchange rate hedges that the fund employs.

On a like-for-like basis, the SEC yield would be more like 0.76%. By comparison iShares reports the SEC yield of the highly similar iShares Core International Aggregate Bond ETF (IAGG) at 0.72%, and it has a slightly shorter average duration.
Ah, very helpful. How did you calculate the 0.76% yield due to exchange rate hedges?
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Re: International Bond Index Fund

Post by vineviz »

eshkidd wrote: Sun Jan 10, 2021 5:24 pm
vineviz wrote: Sun Jan 10, 2021 8:01 am
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
You wouldn't, but 0.21% isn't actually the yield of Vanguard Total International Bond ETF (BNDX): the way that Vanguard calculates the SEC yield for that fund excludes the effect of the exchange rate hedges that the fund employs.

On a like-for-like basis, the SEC yield would be more like 0.76%. By comparison iShares reports the SEC yield of the highly similar iShares Core International Aggregate Bond ETF (IAGG) at 0.72%, and it has a slightly shorter average duration.
Ah, very helpful. How did you calculate the 0.76% yield due to exchange rate hedges?
To truly calculate it you’d look up the rate on all the hedges in their portfolio, but I just estimated the number. The basic procedure is use the average duration of the bonds and geographic distribution, then look up the return implied by the forward rates for the major currencies.

https://www.fxempire.com/currencies/eur ... ward-rates


It doesn’t take long to get a rough idea.
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Vanguard Total International Bond Market Index Fund

Post by thumpie7 »

[Thread merged into here --admin LadyGeek]

Is there a reason the Bogleheads’ Three Fund Portfolio doesn’t include Vanguard's Total International Bond Market Fund? It recommends the Total International Stock Index Fund, but not international bonds.

I greatly respect and trust John Bogle and the Bogleheads and want to follow what they think is best.

Please help make clear.

Thank you,

Clea
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Re: Vanguard Total International Bond Market Index Fund

Post by Silk McCue »

You posted the same question within the past week (edit - plus one year lol) worded slightly differently and received thoughtful responses from a number of members. You twice stated that the answers had met your needs and that you were proceeding with your choice. Either hold International bonds or not. The choice is yours.

viewtopic.php?p=5722764#p5722764

Wishing you the best.

Cheers
Last edited by Silk McCue on Thu Jan 13, 2022 9:38 pm, edited 1 time in total.
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Re: Vanguard Total International Bond Market Index Fund

Post by Triple digit golfer »

Silk McCue wrote: Thu Jan 13, 2022 9:20 pm You posted the same question within the past week worded slightly differently and received thoughtful responses from a number of members. You twice stated that the answers had met your needs and that you were proceeding with your choice. Either hold International bonds or not. The choice is yours.

viewtopic.php?p=5722764#p5722764

Wishing you the best.

Cheers
Good point, but that was a year ago. However, the opinions presented are just as valid today.
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Re: International Bond Index Fund

Post by LadyGeek »

thumpie7 - In order to provide appropriate advice, it's best to keep all the information in one spot. I merged your update back into the original thread. If you have any questions, ask them here.

(Thanks to the member who reported the post.)
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Re: International Bond Index Fund

Post by Taylor Larimore »

thumpie7 wrote: Sat Jan 09, 2021 9:18 am Vanguard recommends International Bond Index as a part of one’s retirement portfolio. Bogkehead’s Three Fund Portfolio does not. Why does the Three Fund Portfolio not include International Bonds? I presently have holdings in the three funds suggested by Bogleheads. My Vanguard Financial Advisor suggested 15% in International bonds.

Suggestions?

Thanks!

Clea
Clea:

Bonds are primarily for safety. U.S. bonds, particularly U.S. Treasury Bonds, are among the safest in the world. International bonds add diversification but they also add risk. In my opinion they are not worth the added complexity.

Best wishes
Taylor
Jack Bogle's Words of Wisdom: “(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."
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Re: International Bond Index Fund

Post by steve r »

Taylor Larimore wrote: Thu Jan 13, 2022 10:07 pm ...
Bonds are primarily for safety. U.S. bonds, particularly U.S. Treasury Bonds, are among the safest in the world. International bonds add diversification but they also add risk. In my opinion they are not worth the added complexity.
...
+1
FWIW I own international stocks at market cap weights and BND (no world bonds).

Currency hedging adds a modest cost that is not part of the expense ratio. Hedging results in you get the yield plus/minus bond appreciation/depreciation -- on the one hand this makes sense as without hedging you pretty much have a currency play -- changes in exchange rate typically dwarf the returns of the bonds themselves -- on the other hand it results in a situation where you are buying government bonds from Germany and Japan and you are paying them interest. Do you like to lend the Greek government debt and get a lower return than the U.S. government?

Yet, BNDX has outperformed BND since inception (modestly), but this is more due to the appreciation of ex US bonds due to their having a greater decline in yields.

I read several Vanguard white papers on this. I didn't get the logic. The best BH thread I read on this was started by author/advisor Rick Ferri.
viewtopic.php?t=247644

FWIW, one poster a year ago stated bonds are the largest market. This is true only if you considered compelled bond ownership around the globe (similar and including the bonds purchased by U.S. Federal Reserve). If you look at free float bonds, the global stock/bond allocation is 60/40 currently, but the numbers were reversed at other times in history (such as 1981, the start of the bond bull market).
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Re: International Bond Index Fund

Post by vineviz »

Dominic wrote: Sun Jan 10, 2021 2:47 am
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?

Seems like as personal investors with access to HYSA we have the slight edge to forgo these.

https://investor.vanguard.com/etf/profile/BNDX
Rates might fall even further. Also, if the dollar strengthens, the currency hedging can generate additional returns.
The currency hedging will generate returns regardless of which direction rates move: the SEC yield of BNDX is an incomplete proxy for the total yield of the fund.
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Re: International Bond Index Fund

Post by ruralavalon »

William Bernstein, etf.com,
Don’t Bother With Int'l Bonds .

Larry Swedroe, Seeking Alpha, Should You Include International Bonds In Your Portfolio? - Part II.

In general they see little or no diversification benefit to holding currency-hedged international bonds.
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Re: International Bond Index Fund

Post by thumpie7 »

Thank you all.

I’m embarrassed to say I had forgotten about my inquiry from a year ago. I reread The Bogleheads Guide to the Three Fund Portfolio yesterday and the same question arose in my mind.

Reading old and new responses got me back on the right track👍

I am sorry for the redundancy😕

Thumpie7
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Re: International Bond Index Fund

Post by abuss368 »

tibbitts wrote: Sat Jan 09, 2021 9:22 am It's much, much newer in those terms than the other assets included. It takes time for something to be adopted, and right now a lot of Bogleheads are leaning towards making the three-fund into a one-fund (U.S. equity only.)
A one fund portfolio with no bonds? That is a lot of risk.

Tony
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Re: International Bond Index Fund

Post by abuss368 »

vineviz wrote: Sat Jan 09, 2021 9:34 am
tibbitts wrote: Sat Jan 09, 2021 9:22 am Personally I think if you have a Vanguard adviser you should go with what they suggest. It doesn't make any sense to say you need an advisor, and pay them no less as you're doing, and then decide you know more than they do and not follow their recommendations.
I was about to respond with exactly this sentiment.

Whether or not to include international bonds in a portfolio is a relatively minor decision, but including them does improve diversification at low cost. My advice to listen to your professional advisor over random internet strangers.
Excellent thoughts Vince. Do you recommend to clients to include international bonds in a portfolio?

Tony
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Re: International Bond Index Fund

Post by abuss368 »

thumpie7 wrote: Sat Jan 09, 2021 3:13 pm Thank you all who responded to my inquiry.

I am heeding your recommendation to follow the advice of my Vanguard Financial Advisor.

Clea
I have family who engaged Vanguard Personal Advisor Services (PAS) a while back. They experienced a comprehensive and rewarding process. The Vanguard advisor recommended and implemented the Vanguard Four Fund Portfolio of US & International Stocks and Bonds.

I would follow the advice of you investment advisor.

Best.
Tony
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Re: International Bond Index Fund

Post by abuss368 »

eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?

Seems like as personal investors with access to HYSA we have the slight edge to forgo these.

https://investor.vanguard.com/etf/profile/BNDX
I think the SEC yield of 0.21% does not include the impact of the additional yield from the currency hedging back to US bonds. The effective yield is much higher.

Best.
Tony
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Re: International Bond Index Fund

Post by willthrill81 »

eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
My thoughts precisely.

Further, there are potentially significant risks from owning bonds denominated in a foreign currency. Let alone currency risk, the interest rates that directly impact bond yields are substantially impacted by the foreign nations' central banks, and those central banks may have little or no concern for inflation in your own home country or its currency. For instance, high inflation in the U.S. is more likely to lead to higher interest rates and bond yields than is high inflation in a foreign nation, and vice versa.
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Re: International Bond Index Fund

Post by abuss368 »

thumpie7 wrote: Sat Jan 09, 2021 9:18 am Vanguard recommends International Bond Index as a part of one’s retirement portfolio. Bogkehead’s Three Fund Portfolio does not. Why does the Three Fund Portfolio not include International Bonds? I presently have holdings in the three funds suggested by Bogleheads. My Vanguard Financial Advisor suggested 15% in International bonds.

Suggestions?

Thanks!

Clea
Hi Clea -

I would honestly go with the Vanguard PAS advisor recommended portfolio and focus on building your career and earnings. Tune out the noise! Over the long term it will not make any difference.

Tony
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Re: International Bond Index Fund

Post by tibbitts »

abuss368 wrote: Fri Jan 14, 2022 8:48 pm
tibbitts wrote: Sat Jan 09, 2021 9:22 am It's much, much newer in those terms than the other assets included. It takes time for something to be adopted, and right now a lot of Bogleheads are leaning towards making the three-fund into a one-fund (U.S. equity only.)
A one fund portfolio with no bonds? That is a lot of risk.

Tony
I agree but consider all the "why not 100% stock?" and "why international?" posts in the past couple of years. It's a considerable shift in sentiment from a decade or so ago. Personally I've let international drift down a little to about 25% but still have only about 50% equity.
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Re: International Bond Index Fund

Post by abuss368 »

tibbitts wrote: Fri Jan 14, 2022 9:21 pm
abuss368 wrote: Fri Jan 14, 2022 8:48 pm
tibbitts wrote: Sat Jan 09, 2021 9:22 am It's much, much newer in those terms than the other assets included. It takes time for something to be adopted, and right now a lot of Bogleheads are leaning towards making the three-fund into a one-fund (U.S. equity only.)
A one fund portfolio with no bonds? That is a lot of risk.

Tony
I agree but consider all the "why not 100% stock?" and "why international?" posts in the past couple of years. It's a considerable shift in sentiment from a decade or so ago. Personally I've let international drift down a little to about 25% but still have only about 50% equity.
Remember all the REITs and TIPS posts over a decade ago?

Tony
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Re: International Bond Index Fund

Post by tibbitts »

abuss368 wrote: Fri Jan 14, 2022 9:31 pm
tibbitts wrote: Fri Jan 14, 2022 9:21 pm
abuss368 wrote: Fri Jan 14, 2022 8:48 pm
tibbitts wrote: Sat Jan 09, 2021 9:22 am It's much, much newer in those terms than the other assets included. It takes time for something to be adopted, and right now a lot of Bogleheads are leaning towards making the three-fund into a one-fund (U.S. equity only.)
A one fund portfolio with no bonds? That is a lot of risk.

Tony
I agree but consider all the "why not 100% stock?" and "why international?" posts in the past couple of years. It's a considerable shift in sentiment from a decade or so ago. Personally I've let international drift down a little to about 25% but still have only about 50% equity.
Remember all the REITs and TIPS posts over a decade ago?

Tony
There has been more drift in Boglehead sentiment over the years than most seem to want to acknowledge.
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Re: International Bond Index Fund

Post by vineviz »

willthrill81 wrote: Fri Jan 14, 2022 9:05 pm
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
My thoughts precisely.

Further, there are potentially significant risks from owning bonds denominated in a foreign currency. Let alone currency risk, the interest rates that directly impact bond yields are substantially impacted by the foreign nations' central banks, and those central banks may have little or no concern for inflation in your own home country or its currency. For instance, high inflation in the U.S. is more likely to lead to higher interest rates and bond yields than is high inflation in a foreign nation, and vice versa.
The construction of Vanguard’s international bond funds renders theses concerns moot. Currency hedging equalizes the expected returns with US bonds, obviates the currency risk, etc
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Re: International Bond Index Fund

Post by willthrill81 »

vineviz wrote: Sat Jan 15, 2022 8:59 am
willthrill81 wrote: Fri Jan 14, 2022 9:05 pm
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
My thoughts precisely.

Further, there are potentially significant risks from owning bonds denominated in a foreign currency. Let alone currency risk, the interest rates that directly impact bond yields are substantially impacted by the foreign nations' central banks, and those central banks may have little or no concern for inflation in your own home country or its currency. For instance, high inflation in the U.S. is more likely to lead to higher interest rates and bond yields than is high inflation in a foreign nation, and vice versa.
The construction of Vanguard’s international bond funds renders theses concerns moot. Currency hedging equalizes the expected returns with US bonds, obviates the currency risk, etc
Currency hedging removes currency risk from the equation, but there is still a clear separation between the inflation and interest rates of one's home country and that of foreign nations and their bonds. For some, that's viewed as a feature, but for others, it's viewed as a bug.

Despite the rampant inflation back then, one sizable plus that U.S. bondholders had in the late 1970s is that their bond yields were at least going up, which helped them to recover their inflation-adjusted losses in the 1980s. Would that have been the case with foreign bonds?
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: International Bond Index Fund

Post by Geographer »

I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
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Re: International Bond Index Fund

Post by willthrill81 »

Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
What's wrong with ETFs?
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: International Bond Index Fund

Post by vineviz »

willthrill81 wrote: Sat Jan 15, 2022 11:18 am Despite the rampant inflation back then, one sizable plus that U.S. bondholders had in the late 1970s is that their bond yields were at least going up, which helped them to recover their inflation-adjusted losses in the 1980s. Would that have been the case with foreign bonds?
If the bonds had been currency hedged, as with BNDX or IAGG, then the answer is “yes”. There will always be small divergences, obviously, which is where the mild diversification effect comes from but the expected return of BND and BNDX should always be almost identical.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: International Bond Index Fund

Post by willthrill81 »

vineviz wrote: Sat Jan 15, 2022 11:58 am
willthrill81 wrote: Sat Jan 15, 2022 11:18 am Despite the rampant inflation back then, one sizable plus that U.S. bondholders had in the late 1970s is that their bond yields were at least going up, which helped them to recover their inflation-adjusted losses in the 1980s. Would that have been the case with foreign bonds?
If the bonds had been currency hedged, as with BNDX or IAGG, then the answer is “yes”. There will always be small divergences, obviously, which is where the mild diversification effect comes from but the expected return of BND and BNDX should always be almost identical.
I haven't seen historic data on currency hedged foreign bond performance over that period. Are there any publicly available datasets with that information?
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: International Bond Index Fund

Post by tibbitts »

willthrill81 wrote: Sat Jan 15, 2022 11:57 am
Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
What's wrong with ETFs?
Hard to hold in a mutual fund account?
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Re: International Bond Index Fund

Post by vineviz »

willthrill81 wrote: Sat Jan 15, 2022 12:03 pm
vineviz wrote: Sat Jan 15, 2022 11:58 am
willthrill81 wrote: Sat Jan 15, 2022 11:18 am Despite the rampant inflation back then, one sizable plus that U.S. bondholders had in the late 1970s is that their bond yields were at least going up, which helped them to recover their inflation-adjusted losses in the 1980s. Would that have been the case with foreign bonds?
If the bonds had been currency hedged, as with BNDX or IAGG, then the answer is “yes”. There will always be small divergences, obviously, which is where the mild diversification effect comes from but the expected return of BND and BNDX should always be almost identical.
I haven't seen historic data on currency hedged foreign bond performance over that period. Are there any publicly available datasets with that information?
Not that I know of. And I honestly don't know how efficient currency markets were in 1970s and 1980s.

However any violations of the principle I outlined (e.g. that "the expected return of BND and BNDX should always be almost identical") would imply a literal arbitrage opportunity. This MSCI white paper mostly discusses "Covered Interest Rate Parity" and "Purchasing Power Parity" in the context of hedging equity portfolios, but the concepts apply equally to bond portfolios.

E.g.
One of the most well known tenets in economics is that over the long term, there is an equilibrium real exchange rate between any two currencies. According to “purchasing power parity” (PPP), exchange rates between currencies are in equilibrium when the purchasing power of each is the same in each of the two countries.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: International Bond Index Fund

Post by willthrill81 »

vineviz wrote: Sat Jan 15, 2022 12:49 pm
willthrill81 wrote: Sat Jan 15, 2022 12:03 pm
vineviz wrote: Sat Jan 15, 2022 11:58 am
willthrill81 wrote: Sat Jan 15, 2022 11:18 am Despite the rampant inflation back then, one sizable plus that U.S. bondholders had in the late 1970s is that their bond yields were at least going up, which helped them to recover their inflation-adjusted losses in the 1980s. Would that have been the case with foreign bonds?
If the bonds had been currency hedged, as with BNDX or IAGG, then the answer is “yes”. There will always be small divergences, obviously, which is where the mild diversification effect comes from but the expected return of BND and BNDX should always be almost identical.
I haven't seen historic data on currency hedged foreign bond performance over that period. Are there any publicly available datasets with that information?
Not that I know of. And I honestly don't know how efficient currency markets were in 1970s and 1980s.

However any violations of the principle I outlined (e.g. that "the expected return of BND and BNDX should always be almost identical") would imply a literal arbitrage opportunity. This MSCI white paper mostly discusses "Covered Interest Rate Parity" and "Purchasing Power Parity" in the context of hedging equity portfolios, but the concepts apply equally to bond portfolios.

E.g.
One of the most well known tenets in economics is that over the long term, there is an equilibrium real exchange rate between any two currencies. According to “purchasing power parity” (PPP), exchange rates between currencies are in equilibrium when the purchasing power of each is the same in each of the two countries.
I've heard that many foreign investors have been buying up U.S. Treasuries in what certainly seems to be positive arbitrage, but I don't how likely they are to succeed after accounting for currency exchanging, foreign taxes, etc.

Of course, temporary arbitrages in either direction could still be possible and not be in conflict with the quote above, which refers to the 'long term'. Whether a retail investor could get a meaningful profit from those temporary arbitrage opportunities is potentially questionable though.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: International Bond Index Fund

Post by lostdog »

Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
VT + BNDW and chill. The REAL diversified two fund portfolio. :beer
Taxable: VTI+VXUS || IRA: VT+BNDW
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Re: International Bond Index Fund

Post by vineviz »

willthrill81 wrote: Sat Jan 15, 2022 2:20 pm I've heard that many foreign investors have been buying up U.S. Treasuries in what certainly seems to be positive arbitrage, but I don't how likely they are to succeed after accounting for currency exchanging, foreign taxes, etc.
High foreign demand for US Treasuries doesn't necessarily imply that foreign investors are participating in an arbitrage.

Some investors can, in theory, profitably engage in covered interest rate parity arbitrage trades but only the fastest and/or most efficient investors will do so rationally. Such trades are, in large part, the mechanism that makes the global bond market as efficient as it is.

But most foreign demand for US Treasuries likely isn't associated with an arbitrage trade. It's just investors trying to optimize their risk/return tradeoff.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: International Bond Index Fund

Post by Geographer »

lostdog wrote: Sat Jan 15, 2022 2:24 pm
Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
VT + BNDW and chill. The REAL diversified two fund portfolio. :beer
Cheers to that, my thoughts exactly!
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Re: International Bond Index Fund

Post by Geographer »

willthrill81 wrote: Sat Jan 15, 2022 11:57 am
Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
What's wrong with ETFs?
Like @tibbitts said, I have a Vanguard taxable brokerage, Roth IRA, and 401k -- and all funds are mutual funds. The 401k holds the majority of my assets, but I'd have to roll it into a Trad IRA and Roth IRA and then convert the funds to ETF equivalents. Plus I'd lose the low ER of the institutional funds.
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Re: International Bond Index Fund

Post by steve r »

vineviz wrote: Sun Jan 10, 2021 8:01 am
eshkidd wrote: Sat Jan 09, 2021 6:15 pm Why would we pay 8 bps (0.08% ER) for 0.21% nominal SEC yield at a duration of 8.5 years, when current HYSA yields are 0.4 - 0.5%?
You wouldn't, but 0.21% isn't actually the yield of Vanguard Total International Bond ETF (BNDX): the way that Vanguard calculates the SEC yield for that fund excludes the effect of the exchange rate hedges that the fund employs.

On a like-for-like basis, the SEC yield would be more like 0.76%. By comparison iShares reports the SEC yield of the highly similar iShares Core International Aggregate Bond ETF (IAGG) at 0.72%, and it has a slightly shorter average duration.
I know you posted this a year ago.

Vanguard and iShares both state that SEC yield is based on a mandated formula by the SEC.

I have a hard time imagining that a mandated formula is different for similar funds. And the difference continues in 2022. Something doesn't "feel" right. :?: But, you can see it clearly by comparing the two funds.

Currency forwards only hedged expected changes in the exchange rate. What about unexpected changes?

Any idea what the 39.33 of BNDX holdings being "other" is? It is not in IAGG.
https://www.morningstar.com/etfs/xnas/bndx/portfolio
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Re: International Bond Index Fund

Post by willthrill81 »

Geographer wrote: Sun Jan 16, 2022 9:02 am
willthrill81 wrote: Sat Jan 15, 2022 11:57 am
Geographer wrote: Sat Jan 15, 2022 11:35 am I'd love to move my 20% bond allocation completely into total world cap, but Vanguard doesn't have a mutual fund equivalent for BNDW. Is there any talk about them adding one? It'd make sense, since they added a mutual fund equivalent for VT.
What's wrong with ETFs?
Like @tibbitts said, I have a Vanguard taxable brokerage, Roth IRA, and 401k -- and all funds are mutual funds. The 401k holds the majority of my assets, but I'd have to roll it into a Trad IRA and Roth IRA and then convert the funds to ETF equivalents. Plus I'd lose the low ER of the institutional funds.
Then it sounds like the very small potential diversification benefit isn't worth the additional costs and hassle.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: International Bond Index Fund

Post by vineviz »

steve r wrote: Sun Jan 16, 2022 9:49 am
Any idea what the 39.33 of BNDX holdings being "other" is? It is not in IAGG.
https://www.morningstar.com/etfs/xnas/bndx/portfolio
There seems to be some glitch in the way Morningstar is analyzing Vanguard's currency contracts. They seem to be counting one side of the hedge as a holding in the "Exposure" table even though they accurately show both sides as creating roughly a net zero allocation in the "Asset Allocation" table right above it. In other words its just dirty data.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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