Should I get out of Vgd Total Int'l Bond Fund?

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Kelly
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Should I get out of Vgd Total Int'l Bond Fund?

Post by Kelly » Sun Aug 21, 2016 7:31 am

I invested 25% of my bond allocation in the Total Int'l Bond fund when it was first introduced. The rest of that allocation is 50% Intermediate Bond Index and 25% Short Term Tips.

Vanguard allocates 10% of its Target Retirement Income fund to Total Int'l Bond.

The Total Int'l Bond fund currently yields only 0.4% and has a duration of 7.8 years (Morningstar). My question is whether there's any value to having an allocation to this fund now? I could get 1% in an FDIC insured account without any interest rate risk. What am I missing??

Many thanks for any thoughts!

Kelly

Angrypuppy
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by Angrypuppy » Sun Aug 21, 2016 7:39 am

1 year return

VINIX 5.59%
VBTLX 6.0%

Seems to me as long as your AA has not changed don't touch it.

livesoft
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by livesoft » Sun Aug 21, 2016 9:19 am

No one can predict the future. The fund has done quite well in the past year, but does that predict the future?

You might ask just as well, "Should I get out of Vg Short-term TIPS fund?"
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Kelly
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by Kelly » Sun Aug 21, 2016 10:00 am

livesoft wrote:No one can predict the future. The fund has done quite well in the past year, but does that predict the future?

You might ask just as well, "Should I get out of Vg Short-term TIPS fund?"
This is a bit different. Isn't it? Math drives bond returns. Probably a good portion of the past returns have been from interest rate reductions. At the current 04.% yield, we are at or close to the bottom of rate reductions.

At 0.4% yield and an 8 yr duration, I'll get 0.4% over that period. I can't see any reason for holding this.

What am I missing?

Many thanks

Kelly

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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by livesoft » Sun Aug 21, 2016 10:07 am

Kelly wrote:At 0.4% yield and an 8 yr duration, I'll get 0.4% over that period. I can't see any reason for holding this.

What am I missing?
I think you are missing that no one can predict the future. This thread has now turned into one of those bond market timing threads. I like market timing myself, but I can't rely on anyone else's opinions for that.
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mpsz
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by mpsz » Sun Aug 21, 2016 11:14 am

Even with low rates, there are a few ways you can make a return greater than the 0.4% yield. Two examples are fluctuations between exchange rates, and further cuts to the interest rate.

Kelly
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by Kelly » Sun Aug 21, 2016 11:26 am

mpsz wrote:Even with low rates, there are a few ways you can make a return greater than the 0.4% yield. Two examples are fluctuations between exchange rates, and further cuts to the interest rate.

They use currency hedging. If rates are cut, I'd still get a 0.4% annualized return by the 7.8 year duration unless I'm missing something.

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cfs
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by cfs » Sun Aug 21, 2016 11:47 am

Tale of the tape.

This fund was launched on 31 May 2013 and three years later [as of 31 July 2016] total assets reached $62.3 billion. This must be one of the fastest growing mutual funds in Vanguard's history [awesome job by Vanguard pushing this bond fund]. IF the fund is no longer meeting your expectations then dump it and move on. As far as what this fund is going to do in the future - "it is tough to make predictions, especially about the future." Good luck with your investments.

Thanks for reading.
~ Member of the Active Retired Force since 2014 ~

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Taylor Larimore
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by Taylor Larimore » Sun Aug 21, 2016 12:18 pm

The Total Int'l Bond fund currently yields only 0.4% and has a duration of 7.8 years (Morningstar). My question is whether there's any value to having an allocation to this fund now? I could get 1% in an FDIC insured account without any interest rate risk. What am I missing??
Kelly:

You may be missing two things:

1. Bonds are primarily for safety--not return. Higher yields nearly always reflects higher risk. Increase your stock allocation for higher expected return.

2. I did not add international bonds to The Three-Fund Portfolio for these reasons:
It is always tempting to add additional funds to The Three Fund Portfolio and overlook their additional costs, risk and complexity. International bonds represent a large asset class which Vanguard added to their Target and Life-Strategy funds so their new Total International Bond Fund deserves a look.

It is notable that a Target portfolio with a 20% bond allocation will have only 6% international bonds. This is almost meaningless. Adding a Total International Bond fund inside a single Target or Life-Strategy fund adds no complexity to the investor.

Vanguard's diversified Total Bond Market Index Fund has a proven record of providing safety in a portfolio. For example, during the 2008 bear market when Total Stock Market fell -37%, Total Bond market gained +5%.

Adding Total International Bond fund to The Three Fund Portfolio has several disadvantages: Political risk, higher expense ratios, longer duration, relatively week credit quality and more complexity.

Mr. Bogle said this in a Morningstar interview:
The other thing that's typical of an industry that's going kind of marketing-wild is think about [how much] are people saying you should put in these exotic, if you will, (international) bond funds. And they say, well, maybe 5% of your bond position or 10% of your bond position. Well, that's not going to change your returns. They're expensive. They have hedging costs--I guess about half are hedged and half are not. I don't even an opinion about which is which because I wouldn't buy either.
Boglehead author and adviser, Bill Bernstein wrote this article: Don't Bother With International Bonds

During the 2015 Boglehead Conference, my expert co-author, Rick Ferri, told an interviewer: "Forget foreign bonds."

Morningstar article: Vanguard's Total International Bond exchange-traded fund is a poor investment today (8-01-14)

For the above reasons, I will not add Total International Bond Index to the very successful Three Fund Portfolio.
Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

Kelly
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by Kelly » Sun Aug 21, 2016 12:47 pm

Thanks Taylor! Reading Bernstein always helps. This is particularly useful info from the good Dr: when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by arcticpineapplecorp. » Sun Aug 21, 2016 6:45 pm

Kelly wrote:I invested 25% of my bond allocation in the Total Int'l Bond fund when it was first introduced. The rest of that allocation is 50% Intermediate Bond Index and 25% Short Term Tips.

Vanguard allocates 10% of its Target Retirement Income fund to Total Int'l Bond.

The Total Int'l Bond fund currently yields only 0.4% and has a duration of 7.8 years (Morningstar). My question is whether there's any value to having an allocation to this fund now? I could get 1% in an FDIC insured account without any interest rate risk. What am I missing??

Many thanks for any thoughts!

Kelly
Just FYI...how did you come up with 10% in Total Int'l Bond in the Target Date Retirement Income fund? Looking at the link and screen shot below, it shows that the Total Int'l Bond Fund is 15.9% of the fund's assets. Are you looking at a different Target Date fund?

https://personal.vanguard.com/us/funds/ ... IntExt=INT

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SeeMoe
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Re: Should I get out of Vgd Total Int'l Bond Fund?

Post by SeeMoe » Sun Aug 21, 2016 8:31 pm

My advisor suggested total international bond for diversification in our IRA accounts, which are 100% bond. Our folio is 45/55 . The IRA holdings are: 25% total international, 25% intermediate corporate, 25% total bond index , 15% short term corporate and 10% high yield corporate funds. It is Working out okay for us and our annual RMD's end of each year.

SeeMoe.. :dollar
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