Which Bond ETF: TBM, TBM-exUS, or TWBM?

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galeno
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Which Bond ETF: TBM, TBM-exUS, or TWBM?

Post by galeno » Wed Dec 05, 2018 7:43 pm

We are USD investors. Theoretically we'd like to use world bonds (BNDW) for diversification. 1.24% less SEC Yield and 0.7 yr more duration seems like "diworsification". The credit quality for non-USA bonds is worse vs USA bonds also.

Can anybody make a case for us to consider world bonds (BNDW) instead of just USA bonds (BND)?

TBM (BND): SEC Yield = 3.43%. Duration = 6.2 yr. Credit = AA.

TBM-exUS (BNDX): SEC Yield = 1.07%. Duration = 7.6 yr. Credit = A.

TWBM (BNDW): SEC Yield = 2.19%. Duration = 6.9 yr.
Last edited by galeno on Wed Dec 05, 2018 8:04 pm, edited 1 time in total.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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whodidntante
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Re: Which Bond ETF: TBM, TBM-exUS, or TWBM?

Post by whodidntante » Wed Dec 05, 2018 7:48 pm

I would buy the ex USA bonds when the yield is higher than the USA bonds.

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jhfenton
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Re: Which Bond ETF: TBM, TBM-exUS, or TWBM?

Post by jhfenton » Wed Dec 05, 2018 9:00 pm

I would definitely keep U.S. and ex-US separate. Whether you bother with the complexity of ex-US bonds at all is a separate question.

You can't look at the SEC Yield alone comparing the return of hedged bond funds, as it doesn't include the hedge return. There are many threads on here discussing the topic.

People ignoring the hedge return have been questioning the wisdom of investing in low-yielding BNDX since its inception (May 31, 2013). And since its inception, $10,000 in BNDX has grown to $12,027.48, while $10,000 in BND has grown to $11,032.68. For 2018, BNDX is up 2.13%, while BND is down 1.30%.

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galeno
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Re: Which Bond ETF: TBM, TBM-exUS, or TWBM?

Post by galeno » Thu Dec 06, 2018 9:44 am

Where can I find any articles regarding the "hedge return"?

Frankly I don't understand how non-USD bonds (lower SEC Yield and weaker currencies) can beat USD bonds regarding total return.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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jhfenton
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Re: Which Bond ETF: TBM, TBM-exUS, or TWBM?

Post by jhfenton » Thu Dec 06, 2018 10:02 am

galeno wrote:
Thu Dec 06, 2018 9:44 am
Where can I find any articles regarding the "hedge return"?

Frankly I don't understand how non-USD bonds (lower SEC Yield and weaker currencies) can beat USD bonds regarding total return.
Here is Vanguard's article from 2014: Understanding the ‘hedge return’: The impact of currency hedging in foreign bonds

I am searching on bogleheads.org, and I have found numerous discussions where it comes up, but I haven't found a definitive discussion yet. I'll add it if I find one.

Update: I found lots of threads like this one: Is BNDX (total international bond) and its utilization in target date funds terrible?. Most of the thread is people questioning the value of BNDX vs BND given the comparative yields, durations, and credit profiles.

For what it's worth, since that thread was started on August 16, 2016, $10,000 in BND has declined to $9,901.62 while $10,000 in BNDX has grown to $10,227.39.

In the long run, I don't think it makes much difference whether you include international bonds or not, but I can see why Vanguard does.

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