Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Tue Jun 07, 2016 11:27 am

I am curious if this article impacts any Bogleheads' thinking on how to put together a diversified bond portfolio. See below:

http://www.cnbc.com/2015/09/02/a-key-asset-class-most-investors-completely-ignore.html

Excerpts rom the article:

"The international market is changing quickly, and most investors are behind," said Matt Hougan, CEO of ETF.com. "In the bond space, investors are even further behind. Most investors have zero percent exposure to international debt. You wouldn't accept a portfolio with zero percent international equity exposure, so why are you doing it in bonds?"

"Rosenbluth recommends allocating no more than 20 percent of overall bond holdings internationally. Mishra guides investors to 5 percent to 10 percent of fixed holdings in developed market international bonds, and 4 percent to 7 percent in emerging markets, depending on an individual's risk profile."

FYI, they are recommending:
BNDX (Vanguard Total International Bond Index)
and
EMB (iShares JP Morgan USD Emerging Markets Bond)
Last edited by neomutiny06 on Tue Jun 07, 2016 1:28 pm, edited 1 time in total.

Wagnerjb
Posts: 7015
Joined: Mon Feb 19, 2007 8:44 pm
Location: Houston, Texas

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by Wagnerjb » Tue Jun 07, 2016 12:27 pm

neomutiny06 wrote:"In the bond space, investors are even further behind. Most investors have zero percent exposure to international debt. You wouldn't accept a portfolio with zero percent international equity exposure, so why are you doing it in bonds?"


I am doing it in bonds because I don't need diversification in my fixed income. I use equity for the expectation of handsome returns (and I diversify internationally there), and I use fixed income for portfolio stability and risk reduction. For stability and risk reduction, I prefer short-term US government-backed instruments such as CDs or Treasury bills. In that context, I have no need to diversify the fixed income portion of my portfolio.

Best wishes.
Andy

User avatar
BlueEars
Posts: 3531
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by BlueEars » Tue Jun 07, 2016 12:36 pm

According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Tue Jun 07, 2016 1:34 pm

BlueEars wrote:According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.


Yes, but as recommended by the article, and Vanguard, etc, this is simply not enough international bond exposure.

User avatar
BlueEars
Posts: 3531
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by BlueEars » Tue Jun 07, 2016 1:48 pm

neomutiny06 wrote:
BlueEars wrote:According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.


Yes, but as recommended by the article, and Vanguard, etc, this is simply not enough international bond exposure.

Reading the last last paragraph of the linked article it would seem a combo of BND and VFIDX would come close to meeting their suggestions.

azanon
Posts: 1511
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by azanon » Tue Jun 07, 2016 2:28 pm

For me, a diversified portfolio is more about having a mixture of asset classes, where at least a portion of the portfolio will perform well in virtually any climate. I feel my portfolio accomplishes that, despite lacking any international bonds (my portfolio is listed below). Also, for me anyway, I have pretty heavy international exposure on the equity side, so I certainly have the exposure to foreign currencies and markets.

But for me, I use bonds as a pseudo cash proxy, so prefer them to be riskless (my bonds are G fund (never lose) and a triple AAA rated VG government bond fund).

Just about any portfolio usually leaves something out. Heck, mine has gold and commodities futures, so I have some interesting things in there, but I still don't have everything! I still put myself in boglehead category though since I'm buy-and-hold w/rebalance, and low cost.

anil686
Posts: 636
Joined: Thu May 08, 2014 12:33 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by anil686 » Tue Jun 07, 2016 2:30 pm

I use it because it is in my VG TR fund. There seems to be many opinions on holding it or not holding it - I just am trying to limit behavioral mistakes by staying with the TR fund and hope Taylor's advice about if many experts disagree - it probably is not that important (I think I am paraphrasing this...)

CFM300
Posts: 1226
Joined: Sat Oct 27, 2007 5:13 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by CFM300 » Tue Jun 07, 2016 2:57 pm

neomutiny06 wrote:Matt Hougan, CEO of ETF.com: "You wouldn't accept a portfolio with zero percent international equity exposure, so why are you doing it in bonds?"

Here's a summary of the reasons why I don't have an allocation to international bonds in my portfolio.

From Morningstar and William Bernstein:

- Higher ER
- Lower yield
- Longer duration (more interest rate risk)
- Lower credit rating (more credit risk)

More here:
viewtopic.php?t=181529#p2751648

azanon
Posts: 1511
Joined: Mon Nov 07, 2011 10:34 am
Location: Little Rock, AR
Contact:

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by azanon » Tue Jun 07, 2016 3:01 pm

anil686 wrote:I use it because it is in my VG TR fund. There seems to be many opinions on holding it or not holding it - I just am trying to limit behavioral mistakes by staying with the TR fund and hope Taylor's advice about if many experts disagree - it probably is not that important (I think I am paraphrasing this...)


I think this is spot-on. They didn't really hurt anything too much by adding those into the mix, but they didn't help much either. I think its more a perception issue than anything else; it looks fancier and for the most part, no-harm/no-foul.

If I'm going to add alternatives (and I do), I want them to do something completely different/noticeably different, and not behave like other parts of my portfolio.

Call_Me_Op
Posts: 6541
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Call_Me_Op » Tue Jun 07, 2016 4:39 pm

It's very simple. I'm not doing it in bonds because bonds are for safety and US bonds are perfectly safe.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
nedsaid
Posts: 8704
Joined: Fri Nov 23, 2012 12:33 pm

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by nedsaid » Tue Jun 07, 2016 4:55 pm

BlueEars wrote:According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.


I would bet that those non-US Bonds are dollar denominated. Any bond experts out there? Could Larry Swedroe comment on this?
A fool and his money are good for business.

BigJohn
Posts: 1394
Joined: Wed Apr 02, 2014 11:27 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by BigJohn » Tue Jun 07, 2016 5:05 pm

CFM300 wrote:From Morningstar and William Bernstein:

- Higher ER
- Lower yield
- Longer duration (more interest rate risk)
- Lower credit rating (more credit risk)

Call_Me_Op wrote:It's very simple. I'm not doing it in bonds because bonds are for safety and US bonds are perfectly safe.

I've never bought the "international exposure is good for stocks so it must be for bonds as well" argument for just these reasons.

Sconie
Posts: 522
Joined: Sun Feb 07, 2010 10:23 am
Location: Arizona

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Sconie » Tue Jun 07, 2016 5:26 pm

I don't currently have any Int'l bonds, however, I am actively considering them. I'm not all that sure that over the long-run, that either U.S. Gov't bonds---or the U.S. dollar---are all that safe.
I know that you think you understand what you thought I said, but I don't think you realize that what I said is necessarily what I meant......

Whakamole
Posts: 466
Joined: Wed Jan 13, 2016 9:59 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Whakamole » Tue Jun 07, 2016 5:29 pm

I'm poking around the holdings of Vanguard Total Bond Market, and they appear to be dollar-denominated, mostly from foreign governments (Mexico, Canada, etc.) or foreign companies (Credit Suisse, other banks and such) with a few "redevelopment funds."

Interest rates for foreign government debt seems to be nice depending on country (Turkish bonds at ~7%, Peru close to ~9%.) But not sure they fall into the "help me sleep at night" test for bonds.

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Tue Jun 07, 2016 5:50 pm

Sconie wrote:I don't currently have any Int'l bonds, however, I am actively considering them. I'm not all that sure that over the long-run, that either U.S. Gov't bonds---or the U.S. dollar---are all that safe.


Do you mind expanding on this? If US bonds are not safe, what is the alternative? All international bonds? and bonds that are not hedged?

I am curious what would happen if the US defaulted on these "safe" assets.

jalbert
Posts: 2213
Joined: Fri Apr 10, 2015 12:29 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Tue Jun 07, 2016 6:09 pm

Americans don't get barraged with fear mongering about the sovereign debt of other countries like they do about US sovereign debt, but many developed market countries have larger sovereign debt than the US if measured as a percentage of GDP:

https://en.m.wikipedia.org/wiki/Government_debt

In the current state of the world, US bonds are much more likely to protect against a debt crisis in another country than the other way around.

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Tue Jun 07, 2016 6:16 pm

jalbert wrote:Americans don't get barraged with fear mongering about the sovereign debt of other countries like they do about US sovereign debt, but many developed market countries have larger sovereign debt than the US if measured as a percentage of GDP:

https://en.m.wikipedia.org/wiki/Government_debt

In the current state of the world, US bonds are much more likely to protect against a debt crisis in another country than the other way around.


Are you only US bonds at this point?

wije
Posts: 133
Joined: Sun Jun 07, 2015 8:35 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by wije » Tue Jun 07, 2016 6:39 pm

Everyone feel free to disagree, but IMHO there is no better debt than US Treasuries. Given negative rates in the developed world, I really don't understand at all why anyone would buy their debt. I'm not a true Bogle-diehard and I believe in investing in international equity that isn't highly correlated with SPY (that again eliminates most developed world equity), but for debt I get long-term Treasuries to balance my equity allocation. They're a perfect diversifer because of their lack of correlation with equities.

I do invest in EM sovereign debt but I take it out of my equity allocation because of its correlation with equities. Yield is pretty good at a little under 5% and prices are low because their currencies are wrecked.

jalbert
Posts: 2213
Joined: Fri Apr 10, 2015 12:29 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Tue Jun 07, 2016 6:40 pm

Yes. We don't hold int'l bonds.

User avatar
warowits
Posts: 305
Joined: Tue Sep 29, 2015 2:38 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by warowits » Tue Jun 07, 2016 7:20 pm

I don't think International bonds are a "key asset class". Many developed countries other than the US pay almost nothing, or even a negative interest rate. I will never buy a bond that doesn't pay me something to own it. Many developing countries pay more, but there is substantially more risk, and I feel less confident that I understand and can quantify the risks I would be taking by buying their debt.
There are an army of people whose pay checks depend on convincing people to invest in ways that are against their self interest. This forum is the volunteer army that fights back!

User avatar
Rick Ferri
Posts: 8202
Joined: Mon Feb 26, 2007 11:40 am
Location: Vagabond, USA, Twitter: @Rick_Ferri
Contact:

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Rick Ferri » Tue Jun 07, 2016 7:47 pm

I don't see a good reason to allocate money away from US bonds to hedged foreign bonds. The Vanguard International bond fund is yielding less than half that of a similar duration US government bond fund, the currency is hedged, so there is no benefit to investors from a rise in foreign currency against the US dollar, and the total cost is higher than US bonds.

This is one of those asset classes that sounds good, but doesn't work good.

Rick Ferri
The views expressed by Rick Ferri are strictly his own as a private investor and author and do not reflect the views of any entity or other persons.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Tue Jun 07, 2016 8:21 pm

This is a good thread! I too am still learning about this asset class.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
rmelvey
Posts: 739
Joined: Sat Sep 18, 2010 5:17 pm
Contact:

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by rmelvey » Tue Jun 07, 2016 8:44 pm

Rick Ferri wrote:I don't see a good reason to allocate money away from US bonds to hedged foreign bonds. The Vanguard International bond fund is yielding less than half that of a similar duration US government bond fund, the currency is hedged, so there is no benefit to investors from a rise in foreign currency against the US dollar, and the total cost is higher than US bonds.

This is one of those asset classes that sounds good, but doesn't work good.

Rick Ferri


The SEC yield does not include the hedge return. Due to international interest rate parity the hedge return when hedging back to dollars is positive.

Vanguard indirectly addresses this in their literature by showing that SEC yield has lower explanatory power for international bond funds than for domestic bond funds. I wish they published more about the hedge return so people would understand the fund more...

Dandy
Posts: 4757
Joined: Sun Apr 25, 2010 7:42 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Dandy » Tue Jun 07, 2016 8:52 pm

In retirement with a goal of my fixed income being stability and asset preservation I don't see a pressing need to include international fixed income. Much of my fixed income has some US government guarantee to back it up. An essential difference between fixed income and equity investing is often that fixed income investors aren't looking for growth as the primary goal.

US government securities are the "gold" standard for safe reliable fixed income investing for many non US investors and has been so for a very, very long time. The US non government fixed income market offers a range of choices from short term muni's to High Yield securities. So you can get almost any type of fixed income products and risk and tax exposure that you might want.

So the real question for international fixed income is why do most US investors really need that diversity? Is it likely to make a material difference in total portfolio return? or major stabilization of the fixed income portion? My guess is no.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Tue Jun 07, 2016 9:02 pm

Bogleheads appear to be learning about this asset class and have not fully embraced it yet. I could see in time more investors will invest in this fund. Vanguard investment experts however are recommending 30% of your fixed income allocation.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Tue Jun 07, 2016 9:11 pm

abuss368 wrote:Bogleheads appear to be learning about this asset class and have not fully embraced it yet. I could see in time more investors will invest in this fund. Vanguard investment experts however are recommending 30% of your fixed income allocation.


30% is a huge amount of a bond portfolio, which is why I am baffled that Vanguard would recommend this, while many respected authors are very much against international bonds.

letsgobobby
Posts: 10610
Joined: Fri Sep 18, 2009 1:10 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by letsgobobby » Tue Jun 07, 2016 9:22 pm

neomutiny06 wrote:I am curious if this article impacts any Bogleheads' thinking on how to put together a diversified bond portfolio. See below:

http://www.cnbc.com/2015/09/02/a-key-asset-class-most-investors-completely-ignore.html

Excerpts rom the article:

"The international market is changing quickly, and most investors are behind," said Matt Hougan, CEO of ETF.com. "In the bond space, investors are even further behind. Most investors have zero percent exposure to international debt. You wouldn't accept a portfolio with zero percent international equity exposure, so why are you doing it in bonds?"

"Rosenbluth recommends allocating no more than 20 percent of overall bond holdings internationally. Mishra guides investors to 5 percent to 10 percent of fixed holdings in developed market international bonds, and 4 percent to 7 percent in emerging markets, depending on an individual's risk profile."

FYI, they are recommending:
BNDX (Vanguard Total International Bond Index)
and
EMB (iShares JP Morgan USD Emerging Markets Bond)

I plan to continue to ignore international bonds.

Da5id
Posts: 1500
Joined: Fri Feb 26, 2016 8:20 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Da5id » Tue Jun 07, 2016 9:26 pm

I wonder if it is just the usual headline hyperbole. A definition of the word "key" would be relevant here. Diversified stocks (international or US) and high quality fixed income are "key" asset classes, beyond that is mostly tweaks at the margin. IMHO of course.

209south
Posts: 459
Joined: Mon Jan 28, 2013 10:58 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by 209south » Tue Jun 07, 2016 10:24 pm

I hold international bonds, though I am underweight the asset class. My reasons as follows:

1. International bonds are the world's largest asset class...how can one ignore them?
2. US treasuries are viewed by many as the ultimate 'safe asset', yet (a) they are lower-rated than those of some other nations; and (b) it is regrettably a matter of time before US equities/bonds/currency underperform vs. others...the last 100 years have been terrific, but it is folly to ignore the possibility that the next 10, 20, 50, 100 years will be very different.
3. based solely on the evidence since inception of BNDX and VWOB, there is a meaningful rebalancing opportunity offered by international bond funds vs. domestic funds (not to mention the dramatic outperformance of BNDX vs. BND over that time period, which I expect mean reversion will take care of soon enough.)

Note that while I respect Rick Ferri's commentary very much, I believe he was saying the same thing about low international yields 2+ years ago when Vanguard launched their funds...since that time BNDX has outperformed BND by EIGHT HUNDRED BASIS POINTS...who knows how the two will perform going forward by I for on am glad I ignored the consensus on 'low international yields' three years ago when the funds were launched.

User avatar
BlueEars
Posts: 3531
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by BlueEars » Tue Jun 07, 2016 10:48 pm

209south wrote:I hold international bonds, though I am underweight the asset class. My reasons as follows:

1. International bonds are the world's largest asset class...how can one ignore them?
2. US treasuries are viewed by many as the ultimate 'safe asset', yet (a) they are lower-rated than those of some other nations; and (b) it is regrettably a matter of time before US equities/bonds/currency underperform vs. others...the last 100 years have been terrific, but it is folly to ignore the possibility that the next 10, 20, 50, 100 years will be very different.
3. based solely on the evidence since inception of BNDX and VWOB, there is a meaningful rebalancing opportunity offered by international bond funds vs. domestic funds (not to mention the dramatic outperformance of BNDX vs. BND over that time period, which I expect mean reversion will take care of soon enough.)

Note that while I respect Rick Ferri's commentary very much, I believe he was saying the same thing about low international yields 2+ years ago when Vanguard launched their funds...since that time BNDX has outperformed BND by EIGHT HUNDRED BASIS POINTS...who knows how the two will perform going forward by I for on am glad I ignored the consensus on 'low international yields' three years ago when the funds were launched.

I was quite intrigued by the outperformance you mentioned. But firstly these are not comparable funds:
BNDX duration = 7.6 years, credit quality = A
BND duration = 5.8 years, credit quality = AA (credit quality from M*)

Also this is what the performance chart shows from VG:

Image

Kind of a dead heat. Not exactly enticing to me.

Dead Man Walking
Posts: 488
Joined: Wed Nov 07, 2007 6:51 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by Dead Man Walking » Tue Jun 07, 2016 11:38 pm

Rick Ferri wrote:I don't see a good reason to allocate money away from US bonds to hedged foreign bonds. The Vanguard International bond fund is yielding less than half that of a similar duration US government bond fund, the currency is hedged, so there is no benefit to investors from a rise in foreign currency against the US dollar, and the total cost is higher than US bonds.

This is one of those asset classes that sounds good, but doesn't work good.

Rick Ferri


Rick's evaluation along with Berstein's in the ETF.com interview sound the most reasonable to me.

I have not seen any data that shows the performance of an international bond fund over periods of both rising and declining interest rates. Periods of currency fluctuations would also be interesting data. Furthermore, the effect of negative interest rates seems to be an unknown variable.

I wonder how long international bond funds will remain in Vanguard's Life Strategy Funds and Target Retirement Funds if they fail to enhance performance.

DMW
Last edited by Dead Man Walking on Wed Jun 08, 2016 12:00 am, edited 1 time in total.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Tue Jun 07, 2016 11:39 pm

209south wrote:I hold international bonds, though I am underweight the asset class. My reasons as follows:

1. International bonds are the world's largest asset class...how can one ignore them?
2. US treasuries are viewed by many as the ultimate 'safe asset', yet (a) they are lower-rated than those of some other nations; and (b) it is regrettably a matter of time before US equities/bonds/currency underperform vs. others...the last 100 years have been terrific, but it is folly to ignore the possibility that the next 10, 20, 50, 100 years will be very different.
3. based solely on the evidence since inception of BNDX and VWOB, there is a meaningful rebalancing opportunity offered by international bond funds vs. domestic funds (not to mention the dramatic outperformance of BNDX vs. BND over that time period, which I expect mean reversion will take care of soon enough.)

Note that while I respect Rick Ferri's commentary very much, I believe he was saying the same thing about low international yields 2+ years ago when Vanguard launched their funds...since that time BNDX has outperformed BND by EIGHT HUNDRED BASIS POINTS...who knows how the two will perform going forward by I for on am glad I ignored the consensus on 'low international yields' three years ago when the funds were launched.


800 Basis Points? Wow!
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

jalbert
Posts: 2213
Joined: Fri Apr 10, 2015 12:29 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Tue Jun 07, 2016 11:46 pm

1. International bonds are the world's largest asset class...how can one ignore them?


About 27% of the VG total US bond index ETF BND is rated A or below. About 50% of the VG Int'l bond index ETF BNDX is rated A or below. Most bond investors expect to be compensated with a higher yield when taking the risk of lower credit quality, but with int'l bonds, you currently pay for the privilege through lower yields.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Wed Jun 08, 2016 6:00 am

BlueEars wrote:According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.


Hi BlueEars,

My understanding is those bonds are dollar denominated.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

209south
Posts: 459
Joined: Mon Jan 28, 2013 10:58 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by 209south » Wed Jun 08, 2016 7:55 am

Fair points on the duration and credit ratings, BlueEars. I am 55% allocated to bonds and that is broken down 25% BND and NJ munis, 20% TIPs and 10% BNDX and VWOB. At the end of the day, I view the US obligations as somewhat less 'safe' than many US-based investors do, and appreciate the opportunity offered by to be invested - at reasonable cost - in a diversified portfolio of credits worldwide. The substantial outperformance from inception is a pleasant surprise, but I'm sure mean-reversion will kick in at some point and that is just fine.

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Wed Jun 08, 2016 8:06 am

209south wrote:Fair points on the duration and credit ratings, BlueEars. I am 55% allocated to bonds and that is broken down 25% BND and NJ munis, 20% TIPs and 10% BNDX and VWOB. At the end of the day, I view the US obligations as somewhat less 'safe' than many US-based investors do, and appreciate the opportunity offered by to be invested - at reasonable cost - in a diversified portfolio of credits worldwide. The substantial outperformance from inception is a pleasant surprise, but I'm sure mean-reversion will kick in at some point and that is just fine.


I am leaning toward the same viewpoint. It is a small percentage of my bond portfolio, maybe 10% as Bogle mentioned. Or max 15% (I'm saying BNDX, not EM bonds. Those do not belong in a bond portfolio.)

I do worry that US bonds are rated below some other countries. And at a pretty low cost, I can access thousands of different issuers. Seems like a nice piece of mind. Even if it is more expensive and perhaps not necessary. It's a small percentage for me, and I'm sitting in the middle of advice from Ferri, Swedroe, and Vanguard themselves who say 30% of the bond portfolio should be international. All of these opinions are more informed than mine, so I will sit in the middle and not take a strong stance either way.

User avatar
midareff
Posts: 5006
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: "A Key Asset Class Most Investors Completely Ignore"

Post by midareff » Wed Jun 08, 2016 8:16 am

neomutiny06 wrote:
BlueEars wrote:According to M* VG total bond market has about 9% non-US. VFIDX intermediate IG bonds has 19% non-US.


Yes, but as recommended by the article, and Vanguard, etc, this is simply not enough international bond exposure.



According to Vanguard VFIDX has Foreign 2.7% ... with Total Bond Market at Foreign 6.1%. Sometimes you have to go to the source, unless you think M* is a more reliable reporting source of Vanguard holdings than Vanguard is.

User avatar
mickeyd
Posts: 4431
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by mickeyd » Wed Jun 08, 2016 9:23 am

My VG bond fund of choice (Intermediate-Term index bond fund) has 6.6% of foreign bonds according to the most current annual report. That's plenty for me.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Wed Jun 08, 2016 9:24 am

If an investor in Total Bond Index was to add an additional bond fund in terms of increased diversification, the toss up with to common choices is International Bonds and TIPS. Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
mickeyd
Posts: 4431
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by mickeyd » Wed Jun 08, 2016 9:32 am

Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
I'm one of those who jumped on the TIPS fund bandwagon years ago. I have since exchanged all of it and consider it part of the cost of my financial education.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

User avatar
nedsaid
Posts: 8704
Joined: Fri Nov 23, 2012 12:33 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by nedsaid » Wed Jun 08, 2016 9:52 am

Rick Ferri wrote:I don't see a good reason to allocate money away from US bonds to hedged foreign bonds. The Vanguard International bond fund is yielding less than half that of a similar duration US government bond fund, the currency is hedged, so there is no benefit to investors from a rise in foreign currency against the US dollar, and the total cost is higher than US bonds.

This is one of those asset classes that sounds good, but doesn't work good.

Rick Ferri


I own two foreign bond funds and as far as I know, both are unhedged. I want the currency diversification from owning these. That being said, only 8% or so of my bonds are foreign.
A fool and his money are good for business.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Wed Jun 08, 2016 10:30 am

mickeyd wrote:
Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
I'm one of those who jumped on the TIPS fund bandwagon years ago. I have since exchanged all of it and consider it part of the cost of my financial education.


You and me both indeed.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

User avatar
BlueEars
Posts: 3531
Joined: Sat Mar 10, 2007 12:15 am
Location: West Coast

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by BlueEars » Wed Jun 08, 2016 10:52 am

I owned a fair amount of TIPS going into the 2008 debacle. Found out they were not as liquid as I would have thought even though they were US Treasury bonds. They did recover but I did not like the ride.

With foreign bonds and especially EM bonds, I'd be concerned about a severe decline lasting several years (not months). I would want my bonds to act somewhat as a safe harbor in severe declines. So I agree with concerns others have expressed here about foreign bonds. FWIW, I have a plan in place to move all my bonds to US Treasuries should certain market parameters be met (declining equities, flattening yield curve, etc.).

best2u
Posts: 79
Joined: Tue Jul 28, 2015 12:51 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by best2u » Wed Jun 08, 2016 11:17 am

A while back Vanguard did a white paper stating that currency risk for international bonds was a greater determinant of volatility than the bond markets themselves. They concluded the only suitable way to invest in foreign bonds was if one were to hedge the currency risk away. So Vanguard foreign bond funds practice hedging of the underlying currencies. My problem with this strategy is hedging does not perfectly eliminate the currency risks as there will be some loss in transaction costs and spreads. My thinking is there could be enough slippage over a long period, say the rest of my lifetime, that an investment in domestic bonds could well be superior. That is why I do not invest in foreign bond funds.

User avatar
SpringMan
Posts: 5304
Joined: Wed Mar 21, 2007 11:32 am
Location: Michigan

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by SpringMan » Wed Jun 08, 2016 11:19 am

I am not as smart as the so called experts at Vanguard but still don't like international bonds and TIPs funds. I formerly held VG Target Retirement Income fund and sold it because it holds these asset classes. Secondly it costs more because no admiral shares. Our portfolio is complex enough without these asset classes. We have 13 funds which sounds overly complex but these funds are spread over 6 accounts so each account averages 2 funds. Not so complex when you think about it that way.
Best Wishes, SpringMan

neomutiny06
Posts: 384
Joined: Thu Feb 11, 2016 5:14 pm

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by neomutiny06 » Wed Jun 08, 2016 11:37 am

abuss368 wrote:
mickeyd wrote:
Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
I'm one of those who jumped on the TIPS fund bandwagon years ago. I have since exchanged all of it and consider it part of the cost of my financial education.


You and me both indeed.


Can you expand on your decision to eliminate tips? Many authors say TIPS are an essential part of a bond portfolio.

User avatar
siamond
Posts: 3424
Joined: Mon May 28, 2012 5:50 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by siamond » Wed Jun 08, 2016 11:38 am

mickeyd wrote:My VG bond fund of choice (Intermediate-Term index bond fund) has 6.6% of foreign bonds according to the most current annual report. That's plenty for me.

Totally agreed. I am very fond of International investments (I split my equities 50/50 between domestic and international, I am not afraid of tilting towards emerging), but the reasoning is about diversifying to enable a solid engine of growth, and such reasoning does NOT apply to bonds.

As dire as US bonds expected returns seem to be for the coming decade, this is all about anchoring my portfolio to better navigate stormy times, and I do not see how Int'l bonds would do that. If I want more (expected!) returns, I should play on the equities side, not the bonds side.

User avatar
abuss368
Posts: 11641
Joined: Mon Aug 03, 2009 2:33 pm
Location: Where the water is warm, the drinks are cold, and I don't know the names of the players!

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by abuss368 » Wed Jun 08, 2016 11:50 am

neomutiny06 wrote:
abuss368 wrote:
mickeyd wrote:
Many years ago the TIPS was very popular as a second choice both from Bogleheads and Vanguard. That has since changed.
I'm one of those who jumped on the TIPS fund bandwagon years ago. I have since exchanged all of it and consider it part of the cost of my financial education.


You and me both indeed.


Can you expand on your decision to eliminate tips? Many authors say TIPS are an essential part of a bond portfolio.


At the time I probably did not understand them as well as of today. That said, they are a complex investment. In addition, I really questioned the need with an investment portfolio heavily allocated towards equities. I do plan to add an additional bond fund in the future to compliment Total Bond Index. Presently I am unsure if that would be Total International Bond Index or perhaps TIPS. I would like to see Vanguard offer a TIPS fund that was an index and paid dividends monthly.

Best.
John C. Bogle: "You simply do not need to put your money into 8 different mutual funds!" | | Disclosure: Three Fund Portfolio + U.S. & International REITs

jalbert
Posts: 2213
Joined: Fri Apr 10, 2015 12:29 am

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by jalbert » Wed Jun 08, 2016 2:16 pm

I owned a fair amount of TIPS going into the 2008 debacle. Found out they were not as liquid as I would have thought even though they were US Treasury bonds. They did recover but I did not like the ride.


Intermediate investment grade corporate bonds fell harder than TIPs, but the emotional response to TIPs was greater because you see the valuation separately as a separate fund. If the TBM fund instead consisted of treasuries, TIPs, and GNMAs, and you held such a fund, plus a separate intermediate corporate bond fund, corporate bonds would be in a bigger doghouse than TIPs. Short-term TIPs as recommended by Vanguard should be much less volatile as well.

Because int'l bonds are a separate fund, they may get their day in the doghouse at some point . One benefit of LifeStrategy and Target Retirement funds is being able to just see a single number for portfolio return and not second-guess the allocation whenever diversification is busy doing its job.

User avatar
mickeyd
Posts: 4431
Joined: Fri Feb 23, 2007 3:19 pm
Location: Deep in the Heart of South Texas

Re: Int'l Bonds - "A Key Asset Class Most Investors Completely Ignore"

Post by mickeyd » Wed Jun 08, 2016 3:10 pm

Can you expand on your decision to eliminate tips? Many authors say TIPS are an essential part of a bond portfolio.


If I recall correctly, the reason that I abandoned TIPS was that they produced little return, I have a good bit in equities, and the fact that I have two COLA pensions as well as SS & DW's SS. With essentially four COLA'd pensions as part of my income stream, TIPS seemed excessive as well.

I eventually exchanged it all for the I-T bond index fund. All were included in my IRA, so it was not a taxable event.

The many author's that you refer to may be smarter than I am when it comes to TIPS, but I want my portfolio as I want my portfolio.
Part-Owner of Texas | | “The CMH-the Cost Matters Hypothesis -is all that is needed to explain why indexing must and will work… Yes, it is that simple.” John C. Bogle

Post Reply