Is BNDX (total international bond) and its utilization in target date funds terrible?

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danieljquirk
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Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by danieljquirk »

At the current time, BNDX (total international bond) is far inferior to BND (total US bond) for a couple of obvious reasons:

1- The yield is lower, 1.06% vs. 2.44%
2-The duration (risk) is longer at 7.4 years vs. 5.8 years
3- The credit risk is worse. The debt profile and risk of countries like Japan, Germany, France, Germany, and Italy is hard to gauge, but many of these countries, particularly Japan, have very serious and chronic issues. (Japan is 22% of BNDX weight.) The US is in much better shape.
4- The currency hedge is imperfect and fails to arbitrage the rate differential because Vanguard primarily uses 1-year hedges, where the yield differentials have been marginal (which means you don't actually recapture the difference between the 2.44% and the 1.06%).
5- It is now one of the largest international bond funds in the world, and will likely become one of the largest in the world. From its inception in May 2013 to today, it has gone from $0 to $51+ billion in assets.
6- There is very little "natural" direct demand for this fund--for obvious reasons.
7-The "demand" is coming primarily from Vanguard's very popular target date funds. In 2015, Vanguard's brain trust decided to increase the allocation to international bonds as a % of total bonds within the target-date-funds from 20% to 30%. I think they got caught up far too much in this chase for "diversification" rather than applying some simple common sense.
8- I think it is a mistake to focus too much on past returns rather than focusing on current yield and profile. For what it is worth, BNDX returned 1.08% in 2015 vs. 0.39% for BND.

I don't have any real problem with BNDX by itself, but I think it is a very serious mistake for Vanguard to be pushing it so aggressively through its TDFs, when there are such obvious disadvantages of it versus BND.

Thoughts?
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

Over the long run I think it is a fine choice but currently it isn't very attractive for reasons you give. When making asset allocation changes Vanguard tends to give justifications that are long-term strategic and not tactical, so if you believe them they are not doing this as a market timing move. Regardless this probably will have a lower impact than the international equity allocation they choose for the funds-of-funds.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by dcarste »

Dad's high level advisor highly recommended your bond portion split 70% US bond, 30% intl bond.

Accept the returns.

Feel good about the diversification

Move away from home bias.

Said yes, it is a possibility of lower returns, but also a possibility of higher returns in your portfolio. Accept these results. Yield doesn't reflect all the performance, but a demand internationally that focuses a lot on bond investing. Hence the lower yield due to demand.

More importantly than this, is to set your comfortable asset allocation and don't waiver. Re-balance or invest in a balanced fund the closely reflects your risk tolerance based on the investor questionnaire. Take the test multiple times, be as honest as possible.

Use the 70% US and 30% Intl both on stock and bond side.

This is what the Vanguard Advisor gave me and my dad - he is an institutional advisor and we got the meeting for free based on my dad's high level of assets and Vanguard.

Thoughts? What are your results from the questionnaire? What is your age. I am curious to see the results.

For me he recommended 60 stock/ 40 bond, then move to 50 stock 50 bond around 5 years before retirement. Don't waiver and accept the results.

https://personal.vanguard.com/us/funds/ ... mmendation
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by rmelvey »

I don't think the SEC yield includes the forward points that you get for hedging back to the dollar. So I don't think that SEC yield is as predictive for this fund as it would be for the domestic TBM.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

rmelvey wrote:I don't think the SEC yield includes the forward points that you get for hedging back to the dollar. So I don't think that SEC yield is as predictive for this fund as it would be for the domestic TBM.
It doesn't, but the argument here is that the forward points don't cover the difference, the way they're doing the hedging.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Tyr0ne »

Paul Krugman wrote an interesting post last year that has stuck with me a little. It seems to imply that international yields are lower from an inherent expectation of a declining dollar over the next decade. Taken one step further, if Krugman is right, it seems to me that in a hedged international bond fund, you are sticking yourself with the low yields without the upside of the appreciating foreign currencies.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by vitaflo »

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Taylor Larimore »

danieljquirk wrote:At the current time, BNDX (total international bond) is far inferior to BND (total US bond) for a couple of obvious reasons:

1- The yield is lower, 1.06% vs. 2.44%
2-The duration (risk) is longer at 7.4 years vs. 5.8 years
3- The credit risk is worse. The debt profile and risk of countries like Japan, Germany, France, Germany, and Italy is hard to gauge, but many of these countries, particularly Japan, have very serious and chronic issues. (Japan is 22% of BNDX weight.) The US is in much better shape.
4- The currency hedge is imperfect and fails to arbitrage the rate differential because Vanguard primarily uses 1-year hedges, where the yield differentials have been marginal (which means you don't actually recapture the difference between the 2.44% and the 1.06%).
5- It is now one of the largest international bond funds in the world, and will likely become one of the largest in the world. From its inception in May 2013 to today, it has gone from $0 to $51+ billion in assets.
6- There is very little "natural" direct demand for this fund--for obvious reasons.
7-The "demand" is coming primarily from Vanguard's very popular target date funds. In 2015, Vanguard's brain trust decided to increase the allocation to international bonds as a % of total bonds within the target-date-funds from 20% to 30%. I think they got caught up far too much in this chase for "diversification" rather than applying some simple common sense.
8- I think it is a mistake to focus too much on past returns rather than focusing on current yield and profile. For what it is worth, BNDX returned 1.08% in 2015 vs. 0.39% for BND.

I don't have any real problem with BNDX by itself, but I think it is a very serious mistake for Vanguard to be pushing it so aggressively through its TDFs, when there are such obvious disadvantages of it versus BND.

Thoughts?
Daniel:

When Vanguard first introduced BNDX (total international bond fund) I seriously considered adding it to The Three-Fund Portfolio. I decided not to as I explained in this Reply:

viewtopic.php?f=10&t=88005&start=500#p1837043

Best wishes.
Taylor
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Christine_NM »

BNDX and 40% Total Intl may be right or not in some theoretical sense.

Back here in the real world, it seems a huge marketing mistake to offer their funds-of-funds (LifeStrategy and Target Date) all pegged at the same max international allocation.

TD and LS are like an ice cream shop with 100 flavors, all strawberry. People who want true "plain vanilla" or perhaps chocolate (20% international stocks, no intl bonds) are left to allocate for themselves or pay for advice.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by cfs »

Good conversation.

When the Total International Bond Fund was launch I "predicted" that in the not-so-distant future it would become the largest international bond fund.

The fund was launched on 05/31/2013, and as of 11/30/2015 the fund had $51.3 billion in total net assets. Not a big deal? Well, we can compare the total net assets with another Vanguard bond fund which was introduced FORTY years earlier (Long-Term Investment-Grade Fund) launched on 07/09/1973 with "only" $14.1 billion in total net assets as of 11/30/2015.

Vanguard has done an excellent job marketing Total International Bond Fund, and "pushing" the fund to individual investors, plus, adding the fund to their balanced funds portfolio including target retirement funds has helped the portfolio move up the "total net assets ranking."

Thank you.

Edit: Adding the taxable bond funds ranking as of 05/29/2015: Quarterly Fund Analysis: Largest Taxable-Bond Funds
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danieljquirk
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by danieljquirk »

Good comments. I actually don't think Vanguard has done a great job of marketing BNDX. If that was the case, a lot more people would be buying it as an individual fund. As I understand it, 90%+ of the flows are to the TDFs.

I have a tremendous amount of respect for the folks on this board, but is there anyone outside of Vanguard who actually likes this fund relative to BND? It seems as if Vanguard made this decision in a silo rather than thoroughly vetting it.

Given their prevalence in retirement plans, the target date funds are going to become much larger in terms of overall assets. It seems to be the height of foolishness to push 30% international bond exposure when most Main street investors currently have 0% in international bonds.

If and when international bonds move to a scenario where the yields and duration move to something close to the US, I would probably be more accepting of the allocation. But to actively seek them out given today's environment seems foolish, particularly when no one is clamoring for them or utilizing them, including Vanguard's competitors. Bonds are not stocks--we have the stated yields and duration, which make them more predictable than equities. Timing when they should be added to the TDFs actually does make sense.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by abuss368 »

cfs wrote:Good conversation.

When the Total International Bond Fund was launch I "predicted" that in the not-so-distant future it would become the largest international bond fund.

The fund was launched on 05/31/2013, and as of 11/30/2015 the fund had $51.3 billion in total net assets. Not a big deal? Well, we can compare the total net assets with another Vanguard bond fund which was introduced FORTY years earlier (Long-Term Investment-Grade Fund) launched on 07/09/1973 with "only" $14.1 billion in total net assets as of 11/30/2015.

Vanguard has done an excellent job marketing Total International Bond Fund, and "pushing" the fund to individual investors, plus, adding the fund to their balanced funds portfolio including target retirement funds has helped the portfolio move up the "total net assets ranking."

Thank you.

Edit: Adding the taxable bond funds ranking as of 05/29/2015: Quarterly Fund Analysis: Largest Taxable-Bond Funds
Or the Intermediate TIPS fund which has declined substantially with the redemptions.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by abuss368 »

I am learning about this fund and asset class. Vanguard is very high on diversification and moving away from home bias.

I suspect that over the years ahead, this asset class (and the fund specifically) will only increase and grow in popularity (Target and Life Strategy funds or not).

Best.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

When the fund was introduced the yields were closer together, for what it's worth.

Vanguard is not going to send mixed signals by publicly market timing this stuff in fund-of-fund allocations so they make arguments based on the very long term. They're already committed and this is what they're going to do.

By the way, this paper from Vanguard is relevant:
http://www.vanguard.com/pdf/icrifi.pdf
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by abuss368 »

Too bad this can't be a poll question!
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by vitaflo »

danieljquirk wrote: I have a tremendous amount of respect for the folks on this board, but is there anyone outside of Vanguard who actually likes this fund relative to BND?
I do. But I like diversification. There's an argument to be made that bonds are the "safe" part of the portfolio, but I personally think "safe" is a grey area. I want to own everything. I don't want home bias (I actually find it risky). Will it outperform (or not)? Don't know, don't really care. The idea is to own everything so I don't have to worry that I missed out on the "thing that did well that one time".

International bonds make up 60% of the bond market. It's the largest asset class in the world. I find it a bit silly to ignore it honestly.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

vitaflo wrote:
danieljquirk wrote: I have a tremendous amount of respect for the folks on this board, but is there anyone outside of Vanguard who actually likes this fund relative to BND?
I do. But I like diversification. There's an argument to be made that bonds are the "safe" part of the portfolio, but I personally think "safe" is a grey area. I want to own everything. I don't want home bias (I actually find it risky). Will it outperform (or not)? Don't know, don't really care. The idea is to own everything so I don't have to worry that I missed out on the "thing that did well that one time".

International bonds make up 60% of the bond market. It's the largest asset class in the world. I find it a bit silly to ignore it honestly.
Do you really think a 10-year German bund at 0.51% or better yet, an equivalent Swiss 10-year government bond at -0.14% (or go to Japan where 22% of the fund is, where the 10-year government issue is at 0.21%), is ever going to be the "thing that did well that one time"? Best-case scenario, you get all the payments, plus or minus whatever you get from the currency hedging process. Okay, rates could drop further, but then that makes rates even lower.

You also get diversification by holding cash and other assets. You can park money in a bank with FDIC insurance and get over 1%. People aren't saying to ignore international bonds forever, just that now doesn't look like a very attractive time overall. The risk/return proposition is muted at best and you can always jump in at some other time when it might be better. No guarantees but the odds aren't great now.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by miles monroe »

my tax deferred stuff is in target retirement.

i don;t like this fund to the extent that i'm "this close" to exchanging target retirement into the individual pieces sans bndx.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Ketawa »

danieljquirk wrote:At the current time, BNDX (total international bond) is far inferior to BND (total US bond) for a couple of obvious reasons:

1- The yield is lower, 1.06% vs. 2.44%
2-The duration (risk) is longer at 7.4 years vs. 5.8 years
3- The credit risk is worse. The debt profile and risk of countries like Japan, Germany, France, Germany, and Italy is hard to gauge, but many of these countries, particularly Japan, have very serious and chronic issues. (Japan is 22% of BNDX weight.) The US is in much better shape.
4- The currency hedge is imperfect and fails to arbitrage the rate differential because Vanguard primarily uses 1-year hedges, where the yield differentials have been marginal (which means you don't actually recapture the difference between the 2.44% and the 1.06%).
5- It is now one of the largest international bond funds in the world, and will likely become one of the largest in the world. From its inception in May 2013 to today, it has gone from $0 to $51+ billion in assets.
6- There is very little "natural" direct demand for this fund--for obvious reasons.
7-The "demand" is coming primarily from Vanguard's very popular target date funds. In 2015, Vanguard's brain trust decided to increase the allocation to international bonds as a % of total bonds within the target-date-funds from 20% to 30%. I think they got caught up far too much in this chase for "diversification" rather than applying some simple common sense.
8- I think it is a mistake to focus too much on past returns rather than focusing on current yield and profile. For what it is worth, BNDX returned 1.08% in 2015 vs. 0.39% for BND.

I don't have any real problem with BNDX by itself, but I think it is a very serious mistake for Vanguard to be pushing it so aggressively through its TDFs, when there are such obvious disadvantages of it versus BND.

Thoughts?
In my opinion, you have a long list, but little in the way of an actual argument. You didn't exactly make a list of 8 arguments that BNDX is clearly inferior to BND, since many of the individual elements in your list have to be combined to make an argument.

We had a lot of discussion in this thread in July. Why invest in BNDX's when 30 day SEC yield = 0.76%.

1, 2, 4: Why don't you look back at previous SEC Yields reported for BND (VBTLX) and BNDX (VTABX), then see what the funds have done since? For example, take the performance since the end of 2014.

SEC Yield on 12/31/2014
VBTLX: 2.12%
VTABX: 0.98%

SEC Yield on 01/07/2016
VBTLX: 2.44%
VTABX: 1.05%

Actual return since 12/31/2014 per Morningstar
VBTLX: 1.09%
VTABX: 1.64%

Based on what has happened so far, I don't think you can make the case that Vanguard can't make up the difference in SEC Yield with the currency hedge. We also saw this in the July thread.

Longer duration isn't necessarily a bad thing in itself. It's only useful in this case to the extent that you can compare similar funds to see if you are compensated for the duration risk. SEC yield is practically meaningless for these funds, and in the above example, the longer duration didn't hurt TIBM relative to TBM. SEC yield rose, but it still returned more than TBM. If anything, it might have done even better than TBM if they had similar durations. Either TIBM would have not suffered as much from higher rates with a lower duration, or TBM would have done worse with a longer duration. Again, this bolsters the case that the hedge return is a substantial part of the return for TIBM.

3: I don't think it's so obvious that the US is a better credit risk than other developed countries. Besides, this is helped by the fact that 80% of TIBM is govt bonds and about 20% corporate investment-grade, while TBM is ~65% Treasuries + govt-backed and 35% corporate investment-grade (I think, based on Vanguard's portfolio tab). The difference in credit risk is not actually that large, in my opinion.

5, 6, 7: These aren't criticisms of TIBM itself. I don't see how the size of the fund is relevant. You also didn't even provide any evidence to show that the vast majority of holdings are from the Target Date or LifeStrategy funds. Well, here are the actual numbers from the Vanguard Institutional page. As of 11/30/2015, at most $20.4 billion of the $51.3 billion in the fund is from Target Date and LifeStrategy funds, since that is the amount in Investor shares, VTIBX. At least 60% of the assets in the fund are from other sources.

8: From my above exercise, I think it is also a mistake to look at yield.

Personally, if my primary fixed income holding was Total Bond Market, I would strongly consider an allocation to Total International Bond Market, simply to improve the overall diversification of my fixed income holdings. Vanguard did not jump into this asset class haphazardly, and they published research supporting their decision. However, I have access to the G Fund. It is my only fixed income holding (along with some prepaid cards earning 5%).
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

That shows that if the SEC yield on total (US) bond didn't go up or only went up around 0.07% then it would have had a higher return. The point was that the currency forwards don't cover the difference in yield entirely.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Ketawa »

lack_ey wrote:That shows that if the SEC yield on total (US) bond didn't go up or only went up around 0.07% then it would have had a higher return. The point was that the currency forwards don't cover the difference in yield entirely.
That could be the case, but there are a lot of other factors making it difficult to analyze. The funds aren't directly comparable in terms of risk. If Japan was really that risky, would its 10 year bonds be yielding 0.21% compared to 2.12% for Treasuries? TBM has more corporates, as well. All I'm saying is that the hedge return is probably larger than the OP thinks.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by digit8 »

It is terrible.
Not the fund itself, which has a strong if not completely convincing argument backing it.
But IMHO, a fund class that's been offered for a handful of years simply doesn't belong in a target fund. They are a safety zone, not a testing ground.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by nisiprius »

My personal opinion is that it's meh. I don't like the trendiness of it. I have not lifted a finger to add Total International Bond to my own portfolio. On the other hand, if I were invested in the target date funds, I wouldn't lift a finger to try to get out of it.

If you want the convenience of a cake mix, you just need to accept that they won't use exactly the same recipe you'd mix yourself.

(In contrast, I actually did jump ship from the Fidelity Freedom Funds when I got a notice in the mail saying they were changing the fund's fundamental investment polities to allow them to put more into so-called "high yield" bonds).

(I found Vanguard's Global Fixed Income: Considerations for U.S. Investors to be very interesting, well-written, informative... and amazingly unconvincing. I highly recommend it. The case for "if international bonds, then currency hedged" is very strong. The case for international bonds in the first place is lighter than a dandelion puff. And, of course, the point that people forget is that "diversification" means "sometimes it won't do as well." Someday it will be the U.S. that has higher interest rates and some other country whose central bank is pressing them down. I'm completely baffled by Vanguard's "push" for international bonds. I'll accept their judgement that the cost of hedging is negligible. I have to feel that they are doing this because they think they need to internationalize, not because they think U.S. investors need to).
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by garlandwhizzer »

I see no reason for US based investors to hold international bonds at this time. Just my opinion, but it seems to me that the major reason to hold bonds is safety and reliability and I consider the US to be the nicest house in a bad economic neighborhood (the rest of the world) at present. Not to mention that the dollar is the world's reserve currency and that currency fluctuations are out the window if you invest in high quality US bonds. Although Vanguard hedges currency exposure that costs money and lowers yield. High quality bonds from developed markets already yield less than comparable US bonds even without these additional costs. Why Vanguard seems to have fallen in love with INTL bonds is frankly beyond me.

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Christine_NM »

nisi wrote:
I have to feel that they are doing this because they think they need to internationalize, not because they think U.S. investors need to
+1. I could not think of a polite way to say this so I didn't, but the infamous Vanguard paper does seem an obvious overreaction to Mr. Bogle's US-centric approach. I tremble for the fate of Wellington, Wellesley, and Balanced Index. I hope they wait till I'm dead before tinkering with those.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by rmelvey »

garlandwhizzer wrote:Although Vanguard hedges currency exposure that costs money and lowers yield. High quality bonds from developed markets already yield less than comparable US bonds even without these additional costs.
When foreign bond yields are lower than domestic, that is precisely the time to hedge because you can pick up the forward points.

Right now we are in an environment where US yields are higher than international, so the benefits of hedging are larger. We are in a good environment for this kind of fund, which is why BNDX has outperformed BND.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by sawhorse »

garlandwhizzer wrote:High quality bonds from developed markets already yield less than comparable US bonds even without these additional costs. Why Vanguard seems to have fallen in love with INTL bonds is frankly beyond me.

Garland Whizzer
Not only do they yield less, the duration is longer (7.4 years vs. for 5.8 years for US bond), making them more vulnerable to interest rate risk.

Add me to the list that is unhappy at their increasing role in their all-inclusive funds. I don't have enough to put together a portfolio due to the fund minimums, so I'm stuck with whatever flavor of the year they implement. Their claim of a glidepath has been historically empty because they've tinkered with the path so often. Someone said that the allocation for a given target year is of similar risk to the fund 10 years ago; the fund hasn't glided down as planned.

I'm considering switching to the Fidelity Freedom Index series because it doesn't have international bonds.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

rmelvey wrote:
garlandwhizzer wrote:Although Vanguard hedges currency exposure that costs money and lowers yield. High quality bonds from developed markets already yield less than comparable US bonds even without these additional costs.
When foreign bond yields are lower than domestic, that is precisely the time to hedge because you can pick up the forward points.

Right now we are in an environment where US yields are higher than international, so the benefits of hedging are larger. We are in a good environment for this kind of fund, which is why BNDX has outperformed BND.
Do you know if anyone's calculated exactly what the forward points are right now? Seems like a bit of a pain tracking down all the individual interest rates so I didn't try it myself, but maybe someone has.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Christine_NM »

When I am reduced to looking up forward points in Investopedia, the question answers itself. BNDX may not be terrible but it is unsuitable for a mass investment by folks with limited funds and even more limited investing experience.

For the old folks like me, how is this different from Jeffrey Vinik's Magellan bond bet. Perhaps only in the size of the bet.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by vitaflo »

nisiprius wrote:And, of course, the point that people forget is that "diversification" means "sometimes it won't do as well."
Yes this, which is why I have it. I'm not about to guess which rates are going to be up or down, just give me the average. This is why I don't like the whole "it's not doing as well as BND right now, so why bother". You get a slice of all sorts of different rate environments with it. Some are worse, some are better. Everyone is comparing it to BND now as proof it's garbage, yet BNDX has outperformed BND recently with a lower yield.

Whether they should be in TD funds is certainly debatable, but the amount of poo-pooing of them on this forum in general is a head scratcher at times. It's not just about yield.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by lack_ey »

vitaflo wrote:
nisiprius wrote:And, of course, the point that people forget is that "diversification" means "sometimes it won't do as well."
Yes this, which is why I have it. I'm not about to guess which rates are going to be up or down, just give me the average. This is why I don't like the whole "it's not doing as well as BND right now, so why bother". You get a slice of all sorts of different rate environments with it. Some are worse, some are better. Everyone is comparing it to BND now as proof it's garbage, yet BNDX has outperformed BND recently with a lower yield.

Whether they should be in TD funds is certainly debatable, but the amount of poo-pooing of them on this forum in general is a head scratcher at times. It's not just about yield.
But the currency hedge imperfectly normalizes some of the difference in rate environments. You get a rate that is translated back to USD, sure, but not directly.

Also, diversification for the sake of diversification isn't necessarily a good thing. The asset needs to have some level of respectable risk/return and/or low enough correlation for it to be worth it. Now, this isn't going to actually move a portfolio much either way but why bother adding something if it's not expected to help on average?



Okay, I did a tiny bit of digging into the forward contracts. Looks like they're using short-dated agreements. The semiannual report shows contract settlement dates of early May (some early June) as of April 30. The annual report shows contract settlement dates of early November (some early December) as of October 31.

Currently JPY 1-month LIBOR is 0.05%, while USD 1-month LIBOR is 0.42%. So the hedge return now, unless I screwed it up, is (1+0.0042)/(1+0.0005) - 1 = 0.37%. Maybe they get a slightly different rate, don't quite use the 1-month, or whatever. And this figure will change over time.

The 10-year Japanese government bond yields 0.21% in local currency, while the equivalent US issue yields 2.12%. The hedge return at the moment is not making up that differential, not by a long shot. The hedge return was lower recently but as we know short-term interest rates have increased in the US. Maybe in the next ten years the hedge return from these short-dated forwards will make up the difference. Maybe they won't. I don't think they will on average. Did I get this wrong? If so, where?

Add on extra fund fees to that.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by SpringMan »

Another reason not to use BNDX in my opinion is you already have exposure to international bonds in Vanguard's domestic bond funds and hybrid funds as below:
Vanguard Bond Fund % US
VBILX Intermediate index 87.41
VBTLX Total Bond index 90.40
VFSUX Short Term Invest grade 75.89
VSCSX Short Term Corp index 80.16
VWEAX High Yield 79.51
VBIRX Short Term index 87.65
VFIDX Intermed Invest grade 80.35
VICSX Intermediate Corp index 85.51

Vanguard Hybrid active funds
VWIAX Wellesley Income bond sleeve 82.17
VWENX Wellington bond sleeve 82.54
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by artthomp »

Some time ago I decided to follow the allocation scheme used by the Vanguard Retirement Income Fund (30% equities/70% fixed income) so when they added the Total International Index Bond Fund I modified my allocation plan to include it. Regardless of the factors mentioned over the last year the BND ETF has increased 0.49% while the BNDX ETF has increased 1.13%.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by garlandwhizzer »

rmelvey wrote:
Right now we are in an environment where US yields are higher than international, so the benefits of hedging are larger. We are in a good environment for this kind of fund, which is why BNDX has outperformed BND.
This is a valid point and currency hedging has improved the returns of BNDX relative to BND in recent years. Sometimes hedging improves returns but this is not consistent and depends on fluctuations in the volatile currency markets. It has improved BNDX's returns in recent years but will it do so in over the next 3 or 5 or 10 years during which time currency markets may change dramatically. Certainly I don't know but removing the uncertainty of currency fluctuations is in my opinion a plus in bond investing in the long run. My expectation is that over long periods of time currency fluctuations will cancel out, a net gain of about zero after all the ups and downs. The costs of hedging contracts will however not be zero, will persist and accumulate over time reducing expected long term bond returns. I may be wrong but that's how I see it.

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by abuss368 »

Stuck in the middle! Bogleheads may be dancing on the head of a needle on one side and Vanguard recommendation from their investment experts on the other!
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by KyleAAA »

Meh, global ex-US bonds are by far the largest asset class in the world.

Since June 4th, 2013 compared to Total Bond Market Index:

Correlation: 0.66
Annualized return: 5.23% vs 3.28%
Annualized Std Dev: 2.62% vs 2.95%

It has been better in every way since inception. Does that mean it will continue performing better over the next 10 years? Nobody knows. But it's the largest asset class in the world and is only moderately correlated with the US bond market at 0.6 to 0.7. Yeah it costs a bit more and there are hidden costs due to hedging, but that's an issue with this particular fund, not the asset class generally, and I expect that to improve over time as Vanguard pushes costs down and gets better at executing.

Even if you expect no actual benefit from holding this fund, that's an argument for holding it because hey, if it doesn't hurt, you're generally better off erring on the side of more diversification. I can't think of a compelling reason NOT to add international bonds although you could probably make an argument that it shouldn't be this particular fund (yet).
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Dead Man Walking »

Does anyone have total return figures for total international bond funds during a sustained period of rising interest rates? I suspect that many posters have not experienced bond fund returns during such a period.

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by nedsaid »

My take is that International Bonds as an asset class offer a mild diversification benefit. I own a couple of these funds as a way of being in the international currency markets. A strengthening dollar is bad for such funds and a weakening dollar is good for these funds. In other words, currency diversification. You also get the benefit of geographical diversification as interest rates are not the same the world over.

Vanguard, however, hedges for currency so it makes a mild diversification benefit even milder. Pretty much you are down to geographical diversification.

Pretty much I think this fund can't hurt and might help a portfolio a little.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by cfs »

I wrote this back on 08 Jan 2016:
. . . The fund was launched on 05/31/2013, and as of 11/30/2015 the fund had $51.3 billion in total net assets . . .
Eight months later [as of 07/31/2016] Fund total net assets: $62.3 billion

Not bad at all. Over $62 billion in only three years and two months.

Good luck with your investments, with or without Vanguard Total International Bond Index.

Thanks for reading.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by TropikThunder »

cfs wrote: Not bad at all. Over $62 billion in only three years and two months.
Any way to tell how much of that $62 billion was put into BNDX "willingly"? The Target Retirement funds (~$260 billion total assets) hold BNDX anywhere from a low of 2.8% for the 2060 fund to a high of 15.7% after retirement. I can't say if $62 billion in BNDX is "not bad at all" unless I could tell how much of that is held outside of the Target Retirement funds (meaning people consciously selected it rather then having it come along for the ride in the Target Retirement fund).
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by cfs »

TropikThunder wrote:
cfs wrote: Not bad at all. Over $62 billion in only three years and two months.
Any way to tell how much of that $62 billion was put into BNDX "willingly"? The Target Retirement funds (~$260 billion total assets) hold BNDX anywhere from a low of 2.8% for the 2060 fund to a high of 15.7% after retirement. I can't say if $62 billion in BNDX is "not bad at all" unless I could tell how much of that is held outside of the Target Retirement funds (meaning people consciously selected it rather then having it come along for the ride in the Target Retirement fund).
Well, see what I wrote on my previous note [08 Jan 2016]:
Vanguard has done an excellent job marketing Total International Bond Fund, and "pushing" the fund to individual investors, plus, adding the fund to their balanced funds portfolio including target retirement funds has helped the portfolio move up the "total net assets ranking."
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by TropikThunder »

KyleAAA wrote: Since June 4th, 2013 compared to Total Bond Market Index:

Correlation: 0.66
Annualized return: 5.23% vs 3.28%
Annualized Std Dev: 2.62% vs 2.95%

It has been better in every way since inception.
I thought I read that wrong. At first glance I thought when you said "better in every way since inception" you were basing your argument on more then just a three year window. Oh, wait .......
KyleAAA wrote: I can't think of a compelling reason NOT to add international bonds although you could probably make an argument that it shouldn't be this particular fund (yet).
I accept diversification arguments in general but I just don't see the point at such a small allocation like the Vanguard Target Retirement funds use. Let's take the Target Retirement funds at face value re: expected retirement age. They start out with BNDX at 2.8%, stay below 5% for the first 20 years, and only reach 10% when one is 10 years out from retirement (i.e., the 2025 fund is the first to get BNDX above 10%). A ~3% allocation will have little or no effect on portfolio performance, and by the time the allocation becomes meaningful there is only 10 years left of accumulation. It's an unnecessary complication that even in a best-case scenario won't matter.

You could use the same arguments (diversification, lack of correlation, etc) for holding 4% in Gold but I doubt any BH would do so.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by MossySF »

For an individual investor, it doesn't matter much either way. "Terrible" would be -20% drop and diversified quality government bonds won't do that. Maybe one year it'll be -2% while something else is +2% or vice versa -- over the long run, you won't notice the difference.

In terms of Vanguard's overall picture though, more global market capitalization in stocks & bonds is very important because we have a huge slush of global money (a lot of it targetted towards the U.S.) and we're running out of places to put money. If all funds follow Vanguard's lead by moving some Target/Lifestyle money global bonds, that'll ease the upward pressure on the U.S. bond market.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by in_reality »

lack_ey wrote:
vitaflo wrote:
nisiprius wrote:And, of course, the point that people forget is that "diversification" means "sometimes it won't do as well."
Yes this, which is why I have it. I'm not about to guess which rates are going to be up or down, just give me the average. This is why I don't like the whole "it's not doing as well as BND right now, so why bother". You get a slice of all sorts of different rate environments with it. Some are worse, some are better. Everyone is comparing it to BND now as proof it's garbage, yet BNDX has outperformed BND recently with a lower yield.

Whether they should be in TD funds is certainly debatable, but the amount of poo-pooing of them on this forum in general is a head scratcher at times. It's not just about yield.
But the currency hedge imperfectly normalizes some of the difference in rate environments. You get a rate that is translated back to USD, sure, but not directly.

Also, diversification for the sake of diversification isn't necessarily a good thing. The asset needs to have some level of respectable risk/return and/or low enough correlation for it to be worth it. Now, this isn't going to actually move a portfolio much either way but why bother adding something if it's not expected to help on average?



Okay, I did a tiny bit of digging into the forward contracts. Looks like they're using short-dated agreements. The semiannual report shows contract settlement dates of early May (some early June) as of April 30. The annual report shows contract settlement dates of early November (some early December) as of October 31.

Currently JPY 1-month LIBOR is 0.05%, while USD 1-month LIBOR is 0.42%. So the hedge return now, unless I screwed it up, is (1+0.0042)/(1+0.0005) - 1 = 0.37%. Maybe they get a slightly different rate, don't quite use the 1-month, or whatever. And this figure will change over time.

The 10-year Japanese government bond yields 0.21% in local currency, while the equivalent US issue yields 2.12%. The hedge return at the moment is not making up that differential, not by a long shot. The hedge return was lower recently but as we know short-term interest rates have increased in the US. Maybe in the next ten years the hedge return from these short-dated forwards will make up the difference. Maybe they won't. I don't think they will on average. Did I get this wrong? If so, where?

Add on extra fund fees to that.
Vanguard's "financial math" says the expected returns (ex ante) are expected to be equal given hedge return.

Also, from an interest risk standpoint, it's unlikely that everyplace will be raising rates at the same time so diversification is your friend.

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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by KyleAAA »

TropikThunder wrote: A ~3% allocation will have little or no effect on portfolio performance, and by the time the allocation becomes meaningful there is only 10 years left of accumulation. It's an unnecessary complication that even in a best-case scenario won't matter.
I hear this argument all the time and I don't buy it. It's 2016. Having 4% of your portfolio in a fund in absolutely no way constitutes a complication. I can literally manage that portfolio with the click of a button. Whether or not it will make a material impact is open to debate. It might not, but I don't think it's wise to state in advance that it definitely won't. The point of diversification is to guard against the unknown, even if it's extremely unlikely. Can I think of a scenario where international bonds might spike 25% relative to US bonds? Sure. It almost certainly won't happen, but the possibility exists.
TropikThunder wrote:
You could use the same arguments (diversification, lack of correlation, etc) for holding 4% in Gold but I doubt any BH would do so.
True, but there's also the possibility that BHs are wrong. Everybody has to draw a line somewhere. If you draw it at international bonds, that's fine, but it's an objectively fairly arbitrary distinction.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by dodecahedron »

The degree to which inclusion of BNDX even matters varies a lot among different Target Funds. There is so little in bonds (of any kind) in 2045/2050/2055/2060 that I didn't give it a second thought when suggesting the Vanguard funds to my daughters. Hopefully by the time their bond allocation increases, the current historically bizarre ZIRP (NIRP) bond situation will have renormalized. On the other hand, VTINX (the Vanguard Target Retirement Income Fund) has 16% of its holdings in BNDX. That gives me pause. As a result, I prefer the TIAA-CREF Life Cycle Index Funds, which do not have any international bonds (and are cheaper for me anyway, at 12 basis points for the institutional class shares in my 403b.)
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by nisiprius »

I think Total International Bond is a silly bunch of trendy nonsense, I don't hold any, I don't plan to... but I don't think it's "terrible." It's just Vanguard's little quirk or schtick and it can't possibly matter much one way or the other.

The "three fund portfolio" is, basically Taylor Larimore's judgement of what constitutes "as simple as possible but no simpler," and I believe that a commitment to simplicity over optimization is wise because someone committed to simplicity is what enables you to stay the course. Being committed to trying to find the optimum inevitably leads to constant churn, and the possibility of actually doing significant harm if the course changes are big and badly timed.

The flip side of all danieljquirk's complaints about Total International Bond is this:
Source
Image
I calculate that to be 5.14% since inception, versus 3.18% for Total Bond, and looking at the ups and downs it seems obvious that the extra return has not been at the cost of extra volatility, so obvious I'll accept my eyeball judgement and not go looking for numbers. The difference is enough to arouse envy in me.

Anyway, the thing about "simplicity" is that simplicity is in the eye of the beholder and I think people should go with what seems "simple" to them. For some people that might be no international. For some people that might be S&P 500 instead of Total Stock. For some people it might be total world allocation in both stocks and bonds.

Almost all of us add our little personal complexities to our portfolios--John C. Bogle's is probably Wellington--and currency-hedged international bonds are Vanguard's pet idea.

For a lot of people simplicity might be "a single Vanguard all-in-one fund, trust Vanguard not to do anything too stupid, and being glad that having the different assets hidden inside a single fund make it easy to see the total and discourages peeking at the relative performance of what's inside."

In my opinion there are sins worse than Total International Bond Index. I mentioned that constantly changing one's portfolio hoping to find the optimum can do some harm. I would point out that Vanguard goosed up stock allocation in the Target Retirement funds in 2006, just in time for the crash... and that they've been goosing up the percentage of stocks that's international just as the dollar has been strengthening and international stock has been lagging. If I've got my history right, Vanguard Target Retirement 2025 had a stock allocation of about 60% in 2006 before they upped it.

The net result of their upping stock allocation and other changes was that in the chart below we see that VTTVX, blue, Target Retirement 2025, took a bigger knock in 2008-2009 than VBINX, orange, Vanguard Balanced Index (60% Total Stock, 40% Total Bond). The knock was so big that it has still not caught up with Balanced Index--even though its stock allocation, currently 65%, has been higher than Balanced Index during the spectacular bull market of 2010-present.

In the case of Total International Bond Index, either a) Vanguard is right, or b) their addition to of it to their fund was, at least, well-timed.

Source
Image
Last edited by nisiprius on Tue Aug 16, 2016 7:26 am, edited 1 time in total.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Dandy »

I am not comfortable with how VG introduced this fund by basically shoving it into Life Strategy and Target Date funds where customers had no say and some may not even noticed. It is a pretty effective way of making a new fund a success - no expensive marketing is needed.

I was poised to consolidate my TIRA in TD or Life Strategy Funds during the time VG upped their international equity exposure and added International bonds. I chose the Balanced Index and Wellesley funds instead. (I'll cover international equities in taxable). If Bogle feels international equities are of questionable value I doubt he feels international bonds are any better.

Oh and please don't tell me about Vanguard "experts" knowing what investments/allocations make sense. They have no corner on investment expertise no matter their good intentions. Remember their Asset Allocation Fund? The fact that they have made many changes to these all in one funds and have a green light to continue to do it makes it impossible to know what you are buying. Not acceptable to me for an all in one retirement solution for me or my non investment savvy wife.
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Re: Is BNDX (total international bond) and its utilization in target date funds terrible?

Post by Da5id »

Dandy wrote:I am not comfortable with how VG introduced this fund by basically shoving it into Life Strategy and Target Date funds where customers had no say and some may not even noticed. It is a pretty effective way of making a new fund a success - no expensive marketing is needed.
They were taking money from one fund (total bond) and moving it to another (international bond). Not increasing their AUM. Higher fees in international, but higher costs too. I don't see this as a conspiracy, but rather as really what they think is in best.

Mind you, I also am not fond of LifeStrategy changing. I bailed from it earlier this year, splitting into components. Total International Bond was only one reason for that though, and not the biggest...
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