I’m still not a fan of international bond funds

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Rick Ferri
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I’m still not a fan of international bond funds

Post by Rick Ferri » Fri Apr 20, 2018 6:47 pm

I’ve never been a big fan of international bond funds (see my “All About Asset Allocation” book and other posts I’ve made here in the past). They have higher fees than comparable US bond funds and hedging currency adds another hidden layer of cost. On top of that, at the present time, the yields stink! Vanguard’s BNDX (Int’) is at 0.8% SEC today while BND (US) is at 3.0%.

Vanguard talks about the *potential* for diversification. It’s not enough to peak my interest. Whatever benefit there *might* be from future low correlation isn’t going to make up the higher expense or lower yield. Maybe it did in the past, but not now.

A diversified fixed income strategy does not need a hedged developed market international bond fund.

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Re: I’m still not a fan of international bond funds

Post by steve roy » Fri Apr 20, 2018 7:19 pm

Yup and Yup.

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Re: I’m still not a fan of international bond funds

Post by youngpleb » Fri Apr 20, 2018 7:24 pm

Yeah, I haven't looked into them that much but their extremely low yields kind of confuse me. In my mind, international = more risky, so therefore shouldn't an uninformed person expect international bond yields to be higher than our domestic bonds? :confused
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Re: I’m still not a fan of international bond funds

Post by bayview » Fri Apr 20, 2018 7:27 pm

I would consider moving my Vanguard investments to a Target Date or LifeStrategy fund if there were the option to do so without international bonds. Even more so for “advice upon death.”

I think Vanguard has decided to live or die upon this particular sword.
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Re: I’m still not a fan of international bond funds

Post by lack_ey » Fri Apr 20, 2018 7:29 pm

Rick, have you evaluated what the hedge return is doing a weighted average over the currency forwards used in these funds?

We can't exactly evaluate local-currency yields in a vacuum and leave it at that. Citing SEC yield without even a mention of this seems pretty misleading to me.

For example currently I see spot EUR/USD of 1.2288 with a 1-month forward quoted at around 26 (units are 1/10000). So we can convert 1 euro to 1.2288 USD today, or convert 1 euro today to 1.2314 USD in a month. That monthly difference 1.2314 / 1.2288) comes out to an annualized hedge return of 2.57%. Of course the rates will change over time, but if anything USD short rates are rising faster than EUR short rates. Sure, a 10-year German bund is at 0.50% yield in local currency terms, but if we get 2.57% on top of that to hedge the currency back to USD, that looks... more or less reasonable at the moment, in line with a 10-year US Treasury at 2.96%. No huge deal?

edit: if somebody sees a mistake in the above, please let me know.

Other currencies the hedge return may be much smaller or even negative so I wonder if somebody's actually gone through all the currency pairs.
Last edited by lack_ey on Fri Apr 20, 2018 7:36 pm, edited 1 time in total.

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Re: I’m still not a fan of international bond funds

Post by fennewaldaj » Fri Apr 20, 2018 7:32 pm

I don't really see the appeal of the super low yielding developed market bonds (like Japan and Germany). That said I don't feal super strongly about and would use a vanguard target date fund with them if needed. Emerging market bonds seem ok but entirely optional. They slot in a similar spot to high yield bonds.

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Fri Apr 20, 2018 8:13 pm

Lack_ey,

Yes, that's the big unknown. According to purchasing power parity, the net outcome is supposed to be the same for both US bonds and developed market bonds (before considering credit differences). But accepting this assumes the market is correct in its estimate of future inflation and short rate differences between the US and other developed markets. I'm not betting it is - just to get the same return as the US is offering without the extra moving parts. Sure, there might be a diverification benefit, but I can get diversification elsewhere.

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Re: I’m still not a fan of international bond funds

Post by HueyLD » Fri Apr 20, 2018 8:22 pm

bayview wrote:
Fri Apr 20, 2018 7:27 pm
I would consider moving my Vanguard investments to a Target Date or LifeStrategy fund if there were the option to do so without international bonds. Even more so for “advice upon death.”

I think Vanguard has decided to live or die upon this particular sword.
Yes, Vanguard is definitely pushing hard for this product.

I heard and read that VPAS will not manage your money if you want to opt out of international bond fund.

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Re: I’m still not a fan of international bond funds

Post by SlowMovingInvestor » Fri Apr 20, 2018 8:25 pm

I have a very small holding of emerging market government bonds -- EMB. It also holds USD debt. No foreign tax credit either (likely becase it invests in foreign goverment bonds.

It seems to have performed decently, although I haven't compared it to domestic bond ETFs with equal credit quality. The holding is too small (less than 0.2%) for me to expend too much energy on it. I do wonder if it's a useful holding at all given that it doesn't provide any currency diversification.

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Re: I’m still not a fan of international bond funds

Post by randomizer » Fri Apr 20, 2018 8:29 pm

As a US-based investor, I agree.

If investing from overseas, I would go for an international currency-hedged fund, even if the yields stink. Bonds for safety, not returns.
Last edited by randomizer on Fri Apr 20, 2018 8:37 pm, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Fri Apr 20, 2018 8:36 pm

randomizer wrote:
Fri Apr 20, 2018 8:29 pm
As a US-based investor, I agree.

If investing from overseas, I would go for an international currency-hedged fund, even if the yields sthink. Bonds for safety, not returns.
Thanks for clarifying. I agree in general. It depends on the county an investor resides in.

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Re: I’m still not a fan of international bond funds

Post by Alexa9 » Fri Apr 20, 2018 8:42 pm

I still like a small amount in retirement to diversify since 60% or more is in fixed income. I also like the rising CD rates.

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Re: I’m still not a fan of international bond funds

Post by cfs » Fri Apr 20, 2018 9:09 pm

Thank you Mister Ferri for the post. As far as the replies, do NOT concur with the "bonds are for safety" stuff. But anyway, good luck y gracias por leer / cfs
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Re: I’m still not a fan of international bond funds

Post by nisiprius » Fri Apr 20, 2018 9:17 pm

I think an interesting question is: how does it benefit Vanguard to offer these funds?
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Re: I’m still not a fan of international bond funds

Post by ying_yang » Fri Apr 20, 2018 9:23 pm

Rick Ferri wrote:
Fri Apr 20, 2018 8:36 pm
randomizer wrote:
Fri Apr 20, 2018 8:29 pm
As a US-based investor, I agree.

If investing from overseas, I would go for an international currency-hedged fund, even if the yields sthink. Bonds for safety, not returns.
Thanks for clarifying. I agree in general. It depends on the county an investor resides in.

Rick Ferri
Out of curiosity in which types of countries or situations do you think it does makes sense to have international bonds?

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Re: I’m still not a fan of international bond funds

Post by JBTX » Fri Apr 20, 2018 9:31 pm

At such low rates they are almost a pure currency play. I guess the question is whether exchange rate fluctuation is an added risk, or does it serve as a diversifier? From a simplistic view, if the US economy is weak relative to the rest of the world, or if it suffers higher inflation, financial instability, dilution of currency reserve status, would not having international denominated assets, whether bonds or stocks, serve as a diversifier? Think of the decades long Japan stagnation. Seems like Japanese investors would have greatly benefited from holding internationally denominated assets.

Because the US economy has always tended to dominate, it is probably difficult to find this potential diversification benefit in US historical data. Perhaps you would see it in foreign portfolios.

In a way it it may act like gold. Very little long term return but diversifying volatility.
Last edited by JBTX on Fri Apr 20, 2018 9:33 pm, edited 3 times in total.

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Re: I’m still not a fan of international bond funds

Post by alex_686 » Fri Apr 20, 2018 9:32 pm

Rick Ferri wrote:
Fri Apr 20, 2018 8:13 pm
Yes, that's the big unknown. According to purchasing power parity, the net outcome is supposed to be the same for both US bonds and developed market bonds (before considering credit differences). But accepting this assumes the market is correct in its estimate of future inflation and short rate differences between the US and other developed markets. I'm not betting it is - just to get the same return as the US is offering without the extra moving parts. Sure, there might be a diverification benefit, but I can get diversification elsewhere.
A couple of points.

I would strike PPP from my argument. PPP does bound currency movements by +/- 20% fair value. Plus PPP does push currencies back to a fair value - statically significantly over 10 years.

Hedging is basically free. I am not going to walk though lack_ey's numbers but I am going to assume that they are right. You can outsource passive management for 1 bps, active management for 2 to 3 bps. The difference in short term has a high correlation to inflation.

I am getting more comfortable with international bonds. Passive investing assumes efficient undistorted markets and I don't know if that is true in government bonds. I would be o.k. with semi-active management or maybe even full blow active management.

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Re: I’m still not a fan of international bond funds

Post by pascalwager » Fri Apr 20, 2018 11:58 pm

nisiprius wrote:
Fri Apr 20, 2018 9:17 pm
I think an interesting question is: how does it benefit Vanguard to offer these funds?
They actually believe in a market proportion which would presently be about 50/50 (US bonds/non-US bonds). At 70/30 they're just proceeding slowly as they did with US/non-US stocks (now 60/40)--considering investor resistance.

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Re: I’m still not a fan of international bond funds

Post by Nestegg_User » Sat Apr 21, 2018 2:13 am

ying_yang wrote:
Fri Apr 20, 2018 9:23 pm
Rick Ferri wrote:
Fri Apr 20, 2018 8:36 pm
randomizer wrote:
Fri Apr 20, 2018 8:29 pm
As a US-based investor, I agree.

If investing from overseas, I would go for an international currency-hedged fund, even if the yields sthink. Bonds for safety, not returns.
Thanks for clarifying. I agree in general. It depends on the county an investor resides in.

Rick Ferri
Out of curiosity in which types of countries or situations do you think it does makes sense to have international bonds?
Think Argentina, Myanmar, etc ... anyplace where the local currency ISN’T preferable to a reserve currency

(in markets other than developed, the hedging may be less than optimal... so you really don’t get the bang for the euro/buck and still take too much risk. better to get market returns in the local developed market... unless QE returns and other developed markets give positive returns instead of muted returns)

me: don’t use them

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Re: I’m still not a fan of international bond funds

Post by pascalwager » Sat Apr 21, 2018 3:00 am

I believe in bonds for safety, but I do prefer to exceed inflation a bit.

I don't use the VG int'l bond fund (although I'm theoretically tempted). The yield is depressed and the effective duration is way too long (7.9 years*) for my taste. I don't like anything over four years duration. In fact my VG bonds are 1/3 total bond market and 2/3 short-term bond for 3.8 years duration.

But the diversification idea is very appealing to me. In fact, most of my bonds are in a DFA fund which is jam-packed with non-US bonds and I don't mind at all because the duration is a modest 3.8 years.

*Vanguard says that the "effective effective duration" (my terminology) is less than 7.9 years due to the country diversification.

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Re: I’m still not a fan of international bond funds

Post by trasmuss » Sat Apr 21, 2018 3:28 am

The international bond fund has everything to dislike. Lower quality, higher expenses, higher duration, lower yield, etc.

But- it should be pointed out that the international bond fund has done a better job than the domestic Total Bond during this time of equity problems. Take a look at the returns (not only YTD but also what the 5 year returns will end up being in May). The total equity funds are still positive for the year. Total Bond is not. Perhaps Vanguard is smiling...

With that said I still have no current plans to add international bonds.

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Re: I’m still not a fan of international bond funds

Post by xxd091 » Sat Apr 21, 2018 3:45 am

Hi Rick
Great to see you regularly posting again on this forum
This board has an international following so for non US investors the situation is a little different
I am U.K. based and use a Vanguard Global Bond Index Tracker hedged to the pound for the Bond part of my Portfolio-and done so for many years now-2009
It allows me to access the US market and is cheap to run -24 Basis points
Done the job so far
xxd091

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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 6:23 am

It is great to see so many non-US based Bogleheads on the board. My how we’ve grown!

My belief for all investors is to keep portfolio complexity as low as needed to accomplish a financial goal. Doing this reduces cost and increases the probability an investor will stay disciplined.

This view on international bonds applies to US based investors. It might apply to others also depending on the county.

I hope that helps clarify things!

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Re: I’m still not a fan of international bond funds

Post by zonto » Sat Apr 21, 2018 6:40 am

I get the arguments against them, but they simply haven’t played out in reality since the inception of Vanguard’s international bond index fund or over a longer period according to portfolio visualizer. See the discussion here: viewtopic.php?t=232920.

I’ve been very happy I’ve owned them, especially this year.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 7:36 am

International bonds did outperform handily during a recent period when many developed countries like Japan and Germany experienced interest rate drops so dramatic that bond yields fell well below zero. Just remember one of Jack Bogle’s favorite phrases, “Regression to the mean!”
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Re: I’m still not a fan of international bond funds

Post by azanon » Sat Apr 21, 2018 7:59 am

As a non-financial expert (I'm a biologist), I confess to having them in my portfolio mainly because the 5.x trillion dollar Vanguard recommends that I have them. I admit I am trusting that they are recommending them because they believe them to be in my best interest, and not their own. As a powerhouse investment company, I am also trusting that Vanguard feels no need to succumb to pressure to do so for petty reasons, such as because it's becoming more popular to do so in general.

I know there are some highly trained, and well respected individuals that disagree with Vanguard sometimes, including Jack Bogle himself. But still, I wonder if it makes sense to not only index your investments, but also to "index" the collective wisdom of thousands of professionals (Vanguard is 16K+ strong) that also have the largest, widespread reputation for putting the investor first, versus tilting just tilting to an outlier or individual opinion, even if that opinion comes from an expert. Stating the analogy another way, if you use active management, you should at least partially fear the indexer. If you invest differently than Vanguard's collective opinion, I think you should at least be a little nervous about that too, again the only exception being if Vanguard values are now to no longer put the investor's best interests before all other objectives. At worst, surely they wouldn't recommend international bonds if they truly believed that doing so is more likely to cause risk-adjusted investment harm than good.

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Re: I’m still not a fan of international bond funds

Post by longinvest » Sat Apr 21, 2018 8:27 am

Foreign bonds are traded using foreign currencies and their interests are paid using foreign currencies. To buy foreign bonds, my money has to go through currency-exchange markets. Reinvesting interests means subjecting interests to two currency conversions (when using a domestic-based bond fund or ETF). Worse, I have to pay taxes on any profit (interest, capital gain) in my local currency. When investing abroad, I have no choice but to subject my money to the vagaries of currency-exchange markets.

Foreign interest is subject to unfavorable foreign taxes, such as withholding taxes (even in tax-advantaged accounts). The risks of confiscation are higher (foreign withholding taxes are a mild form of this) and legal protection is lower (it is more difficult to seek justice abroad). Foreign investments are structurally riskier for me than for their domestic investors.

Some people hedge currency through the use of derivatives. But, derivatives come with fees. In the aggregate, derivatives don't generate a return. The party and the counterparty, collectively, make no return on the derivative; they collectively pay a fee for it. For one party to make a profit, the other has to experience a loss. It's a zero-sum game before costs; a negative-sum game after costs. Worse, the derivative is most likely to fail exactly when it is most needed, when a foreign currency drops badly.

It must be noted that currency hedging doesn't eliminate the currency conversions necessary to buy and sell foreign investments, the double conversions of reinvested foreign interests, nor the withholding taxes on foreign interests. Hedging derivatives are additional contracts which must be bought, hoping to find a financially-sound counterparty willing to participate. (Of course, this is all done behind the scene in a currency-hedged foreign bond fund or ETF).

Holding a cap-weighted portfolio of domestic and foreign bonds is a nice theoretical idea, but it ignores real practical hurdles that put a foreign investor at a disadvantage relative to domestic investor. In other words, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.

For constructing my portfolio, I consider foreign and domestic investments as distinct asset classes. I also consider nominal bonds as a distinct asset class from inflation-indexed bonds.

I don't invest into foreign bonds; not into currency-hedged ones because of their use of derivatives, nor into currency-unhedged ones because of their exposure to wild currency fluctuations overwhelming their returns in domestic currency.

I'm Canadian. My domestic bond market only represents 3% of world bonds. Inflation-indexed domestic bonds only represent 10% of the domestic bond market (that's only 0.3% of world bonds). Yet, I invest 25% of my portfolio into inflation-indexed domestic bonds and 25% of into nominal domestic bonds. My domestic stock market only represents 3% of world stocks. Yet, I invest 25% of my portfolio into domestic stocks and the remaining 25% into international stocks.

I won't invest 97% of my money abroad, exposed to foreign investment risks and to the vagaries of currency exchange markets. And, I certainly won't start using derivatives in an attempt to partly reverse the impact of wild currency fluctuations on my holdings.

I don't think that cap weighting across substantially distinct asset classes is justified. Money getting out of inflation-indexed bonds, for example, doesn't necessarily go into nominal bonds or stocks. It could go into other things like a house or a private business. It could also be spent to buy a ring for one's future spouse or to pay for expenses during retirement.

I sleep well using an equal allocation to four distinct investment-grade asset classes (domestic and international stocks, nominal and inflation-indexed domestic bonds) resulting into a 50% stocks / 50% bonds portfolio using four low-cost cap-weighted total-market index ETFs. It is a good-enough portfolio for me.

Others can do whatever they want with their money. They can use derivatives, subject their money to adverse currency conversions and fluctuations, or assume an excessive amount of inflation risk in their bond investments. It's their money, after all.
Last edited by longinvest on Sat Apr 21, 2018 9:50 am, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by Valuethinker » Sat Apr 21, 2018 9:09 am

longinvest wrote:
Sat Apr 21, 2018 8:27 am

I don't invest into foreign bonds; not into currency-hedged ones because of their use of derivatives, nor into currency-unhedged ones because of their exposure to wild currency fluctuations overwhelming their returns in domestic currency.
The only reason to do so is to diversify credit risk. I ponder Ontario's creditworthiness without coming to a conclusion. I don't have big worries re Federal Government.

Note the cost of currency hedging is very small. BUT it in effect means your returns will be those of the risk free bond into the currency hedged into (assuming you are hedging risk free bonds e.g. US Treasuries into CAD). Any yield you pick up will essentially be credit spread.
I'm Canadian. My domestic bond market only represents 3% of world bonds. Inflation-indexed domestic bonds only represent 10% of the domestic bond market (that's only 0.3% of world bonds). Yet, I invest 25% of my portfolio into inflation-indexed domestic bonds and 25% of into nominal domestic bonds. My domestic stock market only represents 3% of world stocks. Yet, I invest 25% of my portfolio into domestic stocks and the remaining 25% into international stocks.
I know we have discussed this. Given the nature of Canada's economy (very much dependent on imports & exports, especially w USA) and its stock market (roughly 40% of value in Canadian financials; 40% in natural resource stocks; very little technology or consumer staples) I find that an extraordinary concentration of risk. (EDIT: in the context of your equity portfolio; in the context of your total portfolio, of course it is only half as much).

Why take the risk? There's a correlation between the Canadian economy, one's career in Canada, one's home equity in Canada, and the Canadian stock market-- pain to have them all go down together.

Also, why not seek to own a fully diversified portfolio that includes particular companies (Apple, Amazon, Google, Facebook, Netflix; but also Diageo, Pfizer, GSK, Astra Zeneca, Nestle, Unilever, BAT etc.) that are not at all well represented in the Canadian index?

All of the past data seems to show Home Country bias is bad. My own bias may be because of how the Canadian index performed in the late 80s/ early 90s - substantially worse than other main indices.

I don't think that cap weighting across substantially distinct asset classes is justified. Money getting out of inflation-indexed bonds, for example, doesn't necessarily go into nominal bonds or stocks. It could go into other things like a house or a private business. It could also be spent to buy a ring for one's future spouse or to pay for expenses during retirement.
There's a case for world portfolio market weight - it's what William F Sharpe's Financial Engines company was trying to do.

I have worries about the way that would distort one in debt markets. In particular, most indices cap Japan at 20% because they recognize the problem. Sovereign bond markets have event risk - as we saw with Greece. In some nightmare scenario, Italy. That could show up at a truly unpleasant moment. Thus, I don't feel it's necessary to market value weight one's bond portfolios (between countries).

I sleep well using an equal allocation to four distinct investment-grade assets (domestic and international stocks, nominal and inflation-indexed domestic bonds) resulting into a 50% stocks / 50% bonds portfolio using four low-cost cap-weighted total-market index ETFs. It is a good-enough portfolio for me.

Others can do whatever they want with their money. They can use derivatives, subject their money to adverse currency conversions and fluctuations, or assume an excessive amount of inflation risk in their bond investments. It's their money, after all.
The bond point makes reasonable sense: one does not want FX volatility, the only yield pickup is by taking on more credit risk. Why bother?

Equities it seems to me global diversification is the best strategy. Currency will iron itself out in the long run.
Last edited by Valuethinker on Sat Apr 21, 2018 11:32 am, edited 1 time in total.

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Re: I’m still not a fan of international bond funds

Post by longinvest » Sat Apr 21, 2018 9:16 am

Valuethinker,
Valuethinker wrote:
Sat Apr 21, 2018 9:09 am
I've explained how I invest my money and why I do it that way. I won't put 97% of my money into foreign investments and into derivatives.

Anyone else is free to do otherwise. It's their money, after all.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 9:20 am

azanon wrote:
Sat Apr 21, 2018 7:59 am
As a non-financial expert (I'm a biologist), I confess to having them in my portfolio mainly because the 5.x trillion dollar Vanguard recommends that I have them. I admit I am trusting that they are recommending them because they believe them to be in my best interest, and not their own. As a powerhouse investment company, I am also trusting that Vanguard feels no need to succumb to pressure to do so for petty reasons, such as because it's becoming more popular to do so in general.
I'll disagree with you on this one. Vanguard does succumb to the demands of the marketplace. Jack Bogle has spoken about this openly, and I've had the same conversation with several high level executives at the company who confirmed this in confidence.

The fact is, Vanguard offers many funds that investors want although don't necessarily need. International bonds are one example, their new factor funds are another.That being said, Vanguard's view is if investors are going to put there money in these types of products anyway, the least they can do is offer competing products at lower cost.

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Re: I’m still not a fan of international bond funds

Post by herpfinance » Sat Apr 21, 2018 9:23 am

youngpleb wrote:
Fri Apr 20, 2018 7:24 pm
Yeah, I haven't looked into them that much but their extremely low yields kind of confuse me. In my mind, international = more risky, so therefore shouldn't an uninformed person expect international bond yields to be higher than our domestic bonds? :confused
Central banks in the Eurozone, Japan, and other places have been pushing quantitative easing in order to keep interest rates very low. The idea is stimulate growth and investment but whether that is actually working is a whole other topic of great debate.

https://www.ecb.europa.eu/explainers/sh ... ic.en.html
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Re: I’m still not a fan of international bond funds

Post by longinvest » Sat Apr 21, 2018 9:34 am

Valuethinker wrote:
Sat Apr 21, 2018 9:09 am
I know we have discussed this.
Here are my previous posts about why I don't do cap weighting across distinct asset classes in my portfolio (including an exchange with Valuethinker): Note that I do use a low-cost cap-weighted total-market index ETF for each asset class in my portfolio.
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Re: I’m still not a fan of international bond funds

Post by RetireBy55 » Sat Apr 21, 2018 10:34 am

Rick - great to see you posting again..

What about PFORX and FNMIX? I realize the ER's are pretty high for BH'ers (.5 for PFORX and .82 for FNMIX), but both have solid long-term performance and I'd "think" provide some diversification over US-only FI. I hold a good amount of FNMIX and have been thinking seriously about moving some $ into PFORX..

Thanks..

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Re: I’m still not a fan of international bond funds

Post by Valuethinker » Sat Apr 21, 2018 11:12 am

longinvest wrote:
Sat Apr 21, 2018 9:16 am
Valuethinker,
Valuethinker wrote:
Sat Apr 21, 2018 9:09 am
I've explained how I invest my money and why I do it that way. I won't put 97% of my money into foreign investments and into derivatives.

Anyone else is free to do otherwise. It's their money, after all.
You mean 48.5% (50% - 0.5 x 3% Canadian weighting in world market)? The 50% in bonds, I am assuming, you'd just keep in CAD (for the reasons I explained - your yield pickup of investing in international hedged bonds would basically be from taking on credit risk).

That proportion would not have derivatives if you did not buy a currency hedged fund.

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Re: I’m still not a fan of international bond funds

Post by tibbitts » Sat Apr 21, 2018 11:21 am

Rick, you were once a fan of emerging market bonds, then you weren't, due at least mostly to expenses if I recall. That was before Vanguard's emerging market bond fund (not the government/index variety - the other one.) Expenses are below the Fidelity fund (FNMIX) you once recommended and then didn't - but to get expenses down to half (.45%) you have to invest $50k, so... worth it for 5% of a total portfolio? 5% of the bond portion of a total portfolio? Worth it for some percentage even at .60% expenses? Worth it at some lower expense point? Not worth it regardless of expenses?

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Re: I’m still not a fan of international bond funds

Post by michaeljc70 » Sat Apr 21, 2018 11:25 am

I've been thinking of dumping mine. I am 75/25 with 25% of the 25% being international bonds. It is really only 6% of my portfolio presently, so not really providing much diversification. It's not producing much drag either, but probably not worth bothering with.

The actual 12 mo yields aren't that different. I'm not sure why the SEC yield is so low on the international.

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Re: I’m still not a fan of international bond funds

Post by longinvest » Sat Apr 21, 2018 11:32 am

Valuethinker,
Valuethinker wrote:
Sat Apr 21, 2018 11:12 am
longinvest wrote:
Sat Apr 21, 2018 9:16 am
Valuethinker,
Valuethinker wrote:
Sat Apr 21, 2018 9:09 am
I've explained how I invest my money and why I do it that way. I won't put 97% of my money into foreign investments and into derivatives.

Anyone else is free to do otherwise. It's their money, after all.
You mean 48.5% (50% - 0.5 x 3% Canadian weighting in world market)? The 50% in bonds, I am assuming, you'd just keep in CAD (for the reasons I explained - your yield pickup of investing in international hedged bonds would basically be from taking on credit risk).

That proportion would not have derivatives if you did not buy a currency hedged fund.
Many of the arguments I've written earlier are being ignored in the above text.

For example, I've discussed the additional risks of foreign investments such as the double currency conversion of reinvested interests and dividends, adverse withholding taxes even in tax-advantaged accounts, higher confiscation risks, and lower legal protections. Also, foreign investments are exposed to wild currency fluctuations which have nothing to do with the returns of the investments themselves.

Finally, the exact same investment doesn't carry the same risks, nor the same returns, when held by two investors: a domestic one and a foreign one. I think that this alone justifies discarding the idea of treating foreign investments on an equal footing with domestic investments.

I won't invest 97% of my stock allocation into foreign investments.

Others are free to invest their money as they wish.
Bogleheads investment philosophy | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VLB/ZRR

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Re: I’m still not a fan of international bond funds

Post by Valuethinker » Sat Apr 21, 2018 11:48 am

michaeljc70 wrote:
Sat Apr 21, 2018 11:25 am
I've been thinking of dumping mine. I am 75/25 with 25% of the 25% being international bonds. It is really only 6% of my portfolio presently, so not really providing much diversification. It's not producing much drag either, but probably not worth bothering with.

The actual 12 mo yields aren't that different. I'm not sure why the SEC yield is so low on the international.
Because of currency hedging, the yield should be equivalent to risk-free rate in the US (US Treasury Bonds of the same maturity).

What drives the price of currency futures & forward is the difference in interest rates between the 2 currencies (risk free interest rates) and in the opposite direction. That's called Covered Interest Parity -- you can't make money simply by buying EUR putting your money for 3 months in a European bank in EUR and selling forward 3 months EUR for USD = > the returns from that strategy will be the same as sticking your money in a US bank account in USD for 3 months (on average, with small variations).

So any pickup on yield above that is the result of credit risk (basically - there's a few other factors, but credit risk is most of it).

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Re: I’m still not a fan of international bond funds

Post by michaeljc70 » Sat Apr 21, 2018 12:07 pm

Valuethinker wrote:
Sat Apr 21, 2018 11:48 am
michaeljc70 wrote:
Sat Apr 21, 2018 11:25 am
I've been thinking of dumping mine. I am 75/25 with 25% of the 25% being international bonds. It is really only 6% of my portfolio presently, so not really providing much diversification. It's not producing much drag either, but probably not worth bothering with.

The actual 12 mo yields aren't that different. I'm not sure why the SEC yield is so low on the international.
Because of currency hedging, the yield should be equivalent to risk-free rate in the US (US Treasury Bonds of the same maturity).

What drives the price of currency futures & forward is the difference in interest rates between the 2 currencies (risk free interest rates) and in the opposite direction. That's called Covered Interest Parity -- you can't make money simply by buying EUR putting your money for 3 months in a European bank in EUR and selling forward 3 months EUR for USD = > the returns from that strategy will be the same as sticking your money in a US bank account in USD for 3 months (on average, with small variations).

So any pickup on yield above that is the result of credit risk (basically - there's a few other factors, but credit risk is most of it).
Thanks for the explanation.

I noticed the Intl Bond has outperformed the domestic for 1 and 3 years. Unfortunately BNDX hasn't been around that long to do longer comparisons. Is there a benchmark that could be used to compare International vs. domestic bonds over longer periods?

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Re: I’m still not a fan of international bond funds

Post by Clever_Username » Sat Apr 21, 2018 12:15 pm

I still haven't quite justified them to myself either. I'm actually fairly undiversified in bonds, but that's a function of the conservative allocation in my portfolio being a third CA munis and half treasury savings bonds. Still, even if my 30% bonds were to be all Total Bond, I'm still not sure I'd allocate a fraction of that to international.
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Re: I’m still not a fan of international bond funds

Post by pascalwager » Sat Apr 21, 2018 12:17 pm

Rick Ferri wrote:
Sat Apr 21, 2018 9:20 am
azanon wrote:
Sat Apr 21, 2018 7:59 am
As a non-financial expert (I'm a biologist), I confess to having them in my portfolio mainly because the 5.x trillion dollar Vanguard recommends that I have them. I admit I am trusting that they are recommending them because they believe them to be in my best interest, and not their own. As a powerhouse investment company, I am also trusting that Vanguard feels no need to succumb to pressure to do so for petty reasons, such as because it's becoming more popular to do so in general.
I'll disagree with you on this one. Vanguard does succumb to the demands of the marketplace. Jack Bogle has spoken about this openly, and I've had the same conversation with several high level executives at the company who confirmed this in confidence.

The fact is, Vanguard offers many funds that investors want although don't necessarily need. International bonds are one example, their new factor funds are another.That being said, Vanguard's view is if investors are going to put there money in these types of products anyway, the least they can do is offer competing products at lower cost.

Rick Ferri
I don't see how this applies to their int'l bond fund.

-Hardly anyone here seems to like this fund
-It's on their elite Select Funds list
-The advisor program requires holding the fund at a level of at least 20% of FI
-They've published a research paper which supports the fund
-They promote the fund in their blog

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Re: I’m still not a fan of international bond funds

Post by nedsaid » Sat Apr 21, 2018 12:31 pm

Rick Ferri wrote:
Fri Apr 20, 2018 6:47 pm
I’ve never been a big fan of international bond funds (see my “All About Asset Allocation” book and other posts I’ve made here in the past). They have higher fees than comparable US bond funds and hedging currency adds another hidden layer of cost. On top of that, at the present time, the yields stink! Vanguard’s BNDX (Int’) is at 0.8% SEC today while BND (US) is at 3.0%.

Vanguard talks about the *potential* for diversification. It’s not enough to peak my interest. Whatever benefit there *might* be from future low correlation isn’t going to make up the higher expense or lower yield. Maybe it did in the past, but not now.

A diversified fixed income strategy does not need a hedged developed market international bond fund.

Rick Ferri
Rick, it is good to see that you are an active participant in the forum again. Helping to fill the void left when Larry Swedroe took a step back.

I do agree that International Bonds are an optional asset class for U.S. Investors. Whatever the diversification benefit, it is pretty minor. I have chosen to invest, I own a couple of such funds that are not currency hedged but it is only about 7% or so of my bond holdings. I guess I take the kitchen sink approach to asset allocation, I am sort of a believer in hyper diversification.
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Re: I’m still not a fan of international bond funds

Post by nisiprius » Sat Apr 21, 2018 1:03 pm

What's with this? On this one, the second, did Vanguard lock in an interest rate of 1.5% until 2086? Wow. That's thinking ahead. That's... counting on fingers... 68 years from now. A lot of us will never know how that investment turned out.

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Re: I’m still not a fan of international bond funds

Post by Earl Lemongrab » Sat Apr 21, 2018 1:27 pm

I didn't bother with them. I wasn't really convinced of the purpose, but more importantly I had all of my fixed-income in the 401(k). The only international bond fund there was a relatively expensive active one.
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Re: I’m still not a fan of international bond funds

Post by bobcat2 » Sat Apr 21, 2018 1:54 pm

I’m still not a fan of international bond funds
Rick Ferri wrote:
Fri Apr 20, 2018 6:47 pm
I’ve never been a big fan of international bond funds (see my “All About Asset Allocation” book and other posts I’ve made here in the past).
Rick Ferri
From All About Asset Allocation by Richard Ferri page 149, Chapter 8 Fixed Income Investments
Table 8-5 provides an example of a fixed-income asset allocation that my firm uses frequently.
and here is Table 8-5 on page 149.
Fixed-Income Allocation Using Taxable Bonds

Code: Select all

Fixed-Income Allocation          Fixed-Income Category
                50%              US Aggregate Bond Index 
                20%              TIPS or I-bonds 
                20%              High Yield Corporate Bonds
                10%              Emerging Market Debt
Question: How can the same person not be a fan of international bond funds and at the same time run a firm that frequently recommends that 10% of a portfolio's fixed-income allocation go to emerging market bonds?

BobK
Last edited by bobcat2 on Sat Apr 21, 2018 1:59 pm, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by Rick Ferri » Sat Apr 21, 2018 1:57 pm

Bobcat2,

You might want to modify or delete your post because nowhere does it show I recommend emerging market bonds.

Also, for the record, I no longer own or manage an investment firm.

Rick Ferri
The Education of an Index Investor: born in darkness, finds indexing enlightenment, overcomplicates everything, embraces simplicity.

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Re: I’m still not a fan of international bond funds

Post by bobcat2 » Sat Apr 21, 2018 2:01 pm

I'm quoting from your book. The book you wrote. Are you making a distinction between emerging market debt and emerging market bonds?

Anybody can go to Amazon and search the book at page 149 and see the quote and the table.

BobK
Last edited by bobcat2 on Sat Apr 21, 2018 2:08 pm, edited 1 time in total.
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Re: I’m still not a fan of international bond funds

Post by Earl Lemongrab » Sat Apr 21, 2018 2:05 pm

bobcat2 wrote:
Sat Apr 21, 2018 2:01 pm
I'm quoting from your book. The book you wrote. Are you making a distinction between emerging market debt and emerging market bonds?

BobK
Your quote doesn't show any EE bonds. Looks like you flubbed the copy/paste.
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Re: I’m still not a fan of international bond funds

Post by 2pedals » Sat Apr 21, 2018 2:07 pm

I agree, neither am I

Seems to me stocks are for risk and bonds are for stability. Adding bond funds are used to decrease to volatility in your portfolio. Adding international stocks add diversity and might improve returns.

I am not sold on adding international bonds funds. What is the point, if US bonds including TIPS, I-bonds, EE-bonds, CDs, stable value and high yield money markets are low cost and everything you need to keep your portfolio stable?
Last edited by 2pedals on Sat Apr 21, 2018 2:11 pm, edited 2 times in total.

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Re: I’m still not a fan of international bond funds

Post by lack_ey » Sat Apr 21, 2018 2:07 pm

Earl Lemongrab wrote:
Sat Apr 21, 2018 2:05 pm
bobcat2 wrote:
Sat Apr 21, 2018 2:01 pm
I'm quoting from your book. The book you wrote. Are you making a distinction between emerging market debt and emerging market bonds?

BobK
Your quote doesn't show any EE bonds. Looks like you flubbed the copy/paste.
Looks like it's edited now to include EM but I don't remember Rick ever recommending those and I own AAAA and my copy (second edition, Kindle version) doesn't include them either. It shows 60/20/20 as I remmeber him talking about in interviews, 60% total bond, 20% TIPS, 20% high yield corporate.

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