should I add emerging market gov bonds to portfolio?

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james7777
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should I add emerging market gov bonds to portfolio?

Post by james7777 » Mon Apr 01, 2019 12:45 pm

here is my past portfolio which represents my acceptable risk :

VOO ( S&P500) 39.5%
VPU (utilities) 8.5%
BND (total american bond index) 45%
VGLT ( 10-30 year american gov bonds) 7%

this is 52% bonds and 48% stocks.

what I have done recently was added a small part of imerging country government bonds. here is my current portfolio:

VOO 39.5%
VPU 8.5%
BND 43.5%
VGLT 7%
VWOB (emerging market bonds gov) 1.5%

QUESTION, should I stick with the current portfolio OR should I sell some BND and use the money to buy more VWOB......perhaps getting VWOB up to 4%-15% of total portfolio which will get BND below 40% of total portfolio?? I bought VWOB to give me more dividend AND to further diversify the portfolio. any thoughts welcome, THANKS!

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Phineas J. Whoopee
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Re: should I add emerging market gov bonds to portfolio?

Post by Phineas J. Whoopee » Mon Apr 01, 2019 1:00 pm

What purpose do bonds have in your portfolio? If that purpose would be better served by emerging sovereign debt, and you can add it at low cost, then sure.

If your portfolio structure does not require that asset to meet your objectives, then there's reason to hesitate, or not do it at all.

1.5% of your portfolio in any asset class is unlikely to make a material difference to your outcome.

PJW

chisey
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Re: should I add emerging market gov bonds to portfolio?

Post by chisey » Mon Apr 01, 2019 1:08 pm

james7777 wrote:
Mon Apr 01, 2019 12:45 pm

QUESTION, should I stick with the current portfolio OR should I sell some BND and use the money to buy more VWOB......perhaps getting VWOB up to 4%-15% of total portfolio which will get BND below 40% of total portfolio?? I bought VWOB to give me more dividend AND to further diversify the portfolio. any thoughts welcome, THANKS!
I like (and use) EM bonds as a diversifier in a portfolio, but its volatility is much more like that of stocks than bonds. I count it among my "risky" assets, a group which includes global stocks, long term US treasury bonds, and EM bonds. My "safe" assets include only intermediate term US treasuries and a stable value fund.

So my suggestion . . . if you want to add more EM bonds, that's fine; but I would pull from your stock allocation for it rather than your bond allocation.

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vineviz
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Re: should I add emerging market gov bonds to portfolio?

Post by vineviz » Mon Apr 01, 2019 1:38 pm

chisey wrote:
Mon Apr 01, 2019 1:08 pm
james7777 wrote:
Mon Apr 01, 2019 12:45 pm

QUESTION, should I stick with the current portfolio OR should I sell some BND and use the money to buy more VWOB.
So my suggestion . . . if you want to add more EM bonds, that's fine; but I would pull from your stock allocation for it rather than your bond allocation.
This is pretty much my line of thinking as well.

Adding equal portions to VWOB and VGLT by taking that money equally from BND and VOO would increase yield (and increase diversification) without changing the overall risk of the portfolio.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

azanon
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Re: should I add emerging market gov bonds to portfolio?

Post by azanon » Mon Apr 01, 2019 1:42 pm

Adding 1.5% of anything (except maybe something as risky as Venture Capital) isn't going to be worth the trouble, TBH.

If you like dividends/yield, what I'd do instead is maybe add ~ 14.4% (30% of 48) of VYMI (international High dividend yield) and drop your US stock positions proportionally. That'd give you some international diversification and boost your yield too. 30% international is about midpoint boglehead recommendation for foreign stock I believe (reference boglehead wiki on this).
Last edited by azanon on Mon Apr 01, 2019 1:47 pm, edited 1 time in total.

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vineviz
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Re: should I add emerging market gov bonds to portfolio?

Post by vineviz » Mon Apr 01, 2019 1:47 pm

vineviz wrote:
Mon Apr 01, 2019 1:38 pm
chisey wrote:
Mon Apr 01, 2019 1:08 pm
james7777 wrote:
Mon Apr 01, 2019 12:45 pm

QUESTION, should I stick with the current portfolio OR should I sell some BND and use the money to buy more VWOB.
So my suggestion . . . if you want to add more EM bonds, that's fine; but I would pull from your stock allocation for it rather than your bond allocation.
This is pretty much my line of thinking as well.

Adding equal portions to VWOB and VGLT by taking that money equally from BND and VOO would increase yield (and increase diversification) without changing the overall risk of the portfolio.
By way of example, something like this:

31.0% Vanguard S&P 500 ETF (VOO)
8.5%. Vanguard Utilities ETF (VPU)
35.0%. Vanguard Total Bond Market ETF (BND)
15.5%. Vanguard Long-Term Treasury ETF (VGLT)
10.0%. Vanguard Emerging Mkts Govt Bd ETF (VWOB)
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

DonIce
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Re: should I add emerging market gov bonds to portfolio?

Post by DonIce » Mon Apr 01, 2019 2:08 pm

As far as I can see, there are three reasons people hold bonds:

1) To provide a relatively safe component of a portfolio, effectively reducing the maximum fluctuation that one might expect from one's portfolio value. This is the typical reason that people make portfolio allocations like say 60/40 stocks/bonds. They assume that the bond portion shouldn't be able to drop very much in value and therefore limit their downside, while the equity part of their portfolio is responsible for the vast majority of the upside. In this case, there is no use in holding emerging markets bonds, since they increase the volatility of your bond portion due to increased credit risk and foreign currency risk.

2) To provide a reliable source of income from one's portfolio, such as during the withdrawal period in retirement. In this case, the yield of the bonds matters as well as their safety. If one is in retirement and is struggling to achieve the needed withdrawal rates, improving yields by investing in emerging market bonds may be worth considering. If one's portfolio is already mostly bonds, then diversification across emerging market bonds as well as domestic bonds may also reduce risk somewhat.

3) To provide an uncorrelated risk asset in their portfolio which can be balanced against other assets (equities) to reduce the portfolio's overall variance, such as in risk parity strategies. In this case, one is looking for bonds with a minimum of correlation to their equity holdings and a maximum level of variance, which indicates long term treasuries or even leveraged derivatives of treasuries.

pdavi21
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Re: should I add emerging market gov bonds to portfolio?

Post by pdavi21 » Mon Apr 01, 2019 2:26 pm

I think it makes sense to add VWOB, but you have to question why you only want US and EM bonds.

Vanguard's Total World Bond Fund ETF holds:
2.40% Emerging Markets
37.60% Europe
15.70% Pacific
0.20% Middle East
41.20% North America
2.90% Other

Clearly, you have a specific plan in place which involves holding zero INTL equity and very little INTL bonds. Why do you want to add (EDIT: one of) the riskiest subsets of INTL bonds that comprise only (EDIT: the government portion of) 2.4% of what Vanguard puts in BNDW, while holding zero INTL equity? Doesn't really make sense to me.

Perhaps you are looking at the yield, but you should be warned, the yield on INTL bonds is not a good predictor of future returns.
"We spend a great deal of time studying history, which, let's face it, is mostly the history of stupidity." -Stephen Hawking

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james7777
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Re: should I add emerging market gov bonds to portfolio?

Post by james7777 » Mon Apr 01, 2019 4:23 pm

chisey wrote:
Mon Apr 01, 2019 1:08 pm
james7777 wrote:
Mon Apr 01, 2019 12:45 pm

QUESTION, should I stick with the current portfolio OR should I sell some BND and use the money to buy more VWOB......perhaps getting VWOB up to 4%-15% of total portfolio which will get BND below 40% of total portfolio?? I bought VWOB to give me more dividend AND to further diversify the portfolio. any thoughts welcome, THANKS!
I like (and use) EM bonds as a diversifier in a portfolio, but its volatility is much more like that of stocks than bonds. I count it among my "risky" assets, a group which includes global stocks, long term US treasury bonds, and EM bonds. My "safe" assets include only intermediate term US treasuries and a stable value fund.

So my suggestion . . . if you want to add more EM bonds, that's fine; but I would pull from your stock allocation for it rather than your bond allocation.
Thanks guys and chisey for the suggestions. Ill probably take most from VOO and maybe a little from BND to increase the foreign bonds, but it wont be anything drastic but some small "tweaking", the most foreign EM bonds I want are 5% to 9% of total portfolio. Im very pleased with the activity of the whole portfolio whether its my past listed portfolio or the current on . I used to be 100% VOO!, Im glad Im diversified now with a common sense sane portfolio. Im 59 BTW.

ericcohen
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Re: should I add emerging market gov bonds to portfolio?

Post by ericcohen » Mon Apr 01, 2019 8:13 pm

Correct me if I'm wrong, but isn't VWOB is among the safest type of EM bond? It consists almost entirely of sovereign, dollar denominated bonds.

Dominic
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Re: should I add emerging market gov bonds to portfolio?

Post by Dominic » Mon Apr 01, 2019 8:58 pm

I personally am not a fan of emerging market bonds. Yes, the yield is good for a bond fund, but these are still debts owed by governments of developing countries. It's not incredibly rare for them to hit economic trouble and default. It's not super common, either, but it's a real risk.

I still subscribe to the school of thought that says bonds are for safety. Stick with high-quality sovereign bonds or very high-quality corporate bonds, and dollar-hedge on foreign issues. If you want better returns, either tilt towards emerging market stocks, add factor tilts, or both.

klaus14
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Re: should I add emerging market gov bonds to portfolio?

Post by klaus14 » Mon Apr 01, 2019 8:59 pm

i use VEGBX, it's 15 bps more ER but it's cheap for active management. it also buys some local currency bonds but hedges for USD.
So far it performed better than VWOB and LEMB.

EM Bonds are great for better country diversification. EM Equities are dominated by Asian countries. I hold equal amounts of EM bonds and EM equities (See full portfolio here)

Here is Vanguard paper on emerging bonds.
5% ACWV | 10% VFMF, 15% NTSX | 10% ISCF, 5% EFAV | 5% FNDE, 5% EMGF, 5% VEGBX, 5% LEMB | 15% EDV, 5% CD (5y), 5% I/EE Bonds | 10% GLDM

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vineviz
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Re: should I add emerging market gov bonds to portfolio?

Post by vineviz » Tue Apr 02, 2019 6:40 am

Dominic wrote:
Mon Apr 01, 2019 8:58 pm
I personally am not a fan of emerging market bonds. Yes, the yield is good for a bond fund, but these are still debts owed by governments of developing countries. It's not incredibly rare for them to hit economic trouble and default. It's not super common, either, but it's a real risk.
There was an interesting article last month in the WSJ about emerging markets debt, referencing a new study by Meyer, Reinhart, and Trebesch.

The paper itself has a concise summary:
Our main insight is that, as in equity markets, the returns on external sovereign bonds have been sufficiently high to compensate for risk. Real ex-post returns averaged 7% annually across two centuries, including default episodes, major wars, and global crises. This represents an excess return of around 4% above US or UK government bonds, which is comparable to stocks and outperforms corporate bonds.
From the WSJ:
Lending to serial defaulters was even more lucrative, because the high rates Western investors demanded more than offset the terrible repayment record of emerging-market debtors . . .
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

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jhfenton
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Re: should I add emerging market gov bonds to portfolio?

Post by jhfenton » Tue Apr 02, 2019 9:06 am

klaus14 wrote:
Mon Apr 01, 2019 8:59 pm
i use VEGBX, it's 15 bps more ER but it's cheap for active management. it also buys some local currency bonds but hedges for USD.
So far it performed better than VWOB and LEMB.

EM Bonds are great for better country diversification. EM Equities are dominated by Asian countries. I hold equal amounts of EM bonds and EM equities (See full portfolio here)

Here is Vanguard paper on emerging bonds.
+1 I also own VEGBX (Vanguard EM Bond Admiral Shares). I bought in when it first became available in early December 2017, and it has dramatically out-performed VWOB. Since 12/7/17 (the day after inception) through yesterday, VEGBX is up 8.55%, while VWOB is up 2.85%. (The Investor share class out-performed even more from its inception in March 2016, but it also wasn't available to the public until 12/6/17, so I discount the prior out-performance.)

EM bonds are an area where low-cost active management seems warranted. Market cap weighting appears to me to be far from an ideal strategy for the asset class. In this case, I'm willing to pay 15 bp (45 bp for VEGBX vs 30 for VWOB).

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watchnerd
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Re: should I add emerging market gov bonds to portfolio?

Post by watchnerd » Fri Dec 27, 2019 10:51 pm

jhfenton wrote:
Tue Apr 02, 2019 9:06 am
klaus14 wrote:
Mon Apr 01, 2019 8:59 pm
i use VEGBX, it's 15 bps more ER but it's cheap for active management. it also buys some local currency bonds but hedges for USD.
So far it performed better than VWOB and LEMB.

EM Bonds are great for better country diversification. EM Equities are dominated by Asian countries. I hold equal amounts of EM bonds and EM equities (See full portfolio here)

Here is Vanguard paper on emerging bonds.
+1 I also own VEGBX (Vanguard EM Bond Admiral Shares). I bought in when it first became available in early December 2017, and it has dramatically out-performed VWOB. Since 12/7/17 (the day after inception) through yesterday, VEGBX is up 8.55%, while VWOB is up 2.85%. (The Investor share class out-performed even more from its inception in March 2016, but it also wasn't available to the public until 12/6/17, so I discount the prior out-performance.)

EM bonds are an area where low-cost active management seems warranted. Market cap weighting appears to me to be far from an ideal strategy for the asset class. In this case, I'm willing to pay 15 bp (45 bp for VEGBX vs 30 for VWOB).
Do we know if any of that is due to currency exchange gains, given VEGX can hold non-USD bonds and VWOB can't?
70% Global Market Weight Equities | 15% Long Treasuries 15% short TIPS & cash || RSU + ESPP

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jhfenton
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Re: should I add emerging market gov bonds to portfolio?

Post by jhfenton » Sat Dec 28, 2019 11:31 am

watchnerd wrote:
Fri Dec 27, 2019 10:51 pm
jhfenton wrote:
Tue Apr 02, 2019 9:06 am
klaus14 wrote:
Mon Apr 01, 2019 8:59 pm
i use VEGBX, it's 15 bps more ER but it's cheap for active management. it also buys some local currency bonds but hedges for USD.
So far it performed better than VWOB and LEMB.

EM Bonds are great for better country diversification. EM Equities are dominated by Asian countries. I hold equal amounts of EM bonds and EM equities (See full portfolio here)

Here is Vanguard paper on emerging bonds.
+1 I also own VEGBX (Vanguard EM Bond Admiral Shares). I bought in when it first became available in early December 2017, and it has dramatically out-performed VWOB. Since 12/7/17 (the day after inception) through yesterday, VEGBX is up 8.55%, while VWOB is up 2.85%. (The Investor share class out-performed even more from its inception in March 2016, but it also wasn't available to the public until 12/6/17, so I discount the prior out-performance.)

EM bonds are an area where low-cost active management seems warranted. Market cap weighting appears to me to be far from an ideal strategy for the asset class. In this case, I'm willing to pay 15 bp (45 bp for VEGBX vs 30 for VWOB).
Do we know if any of that is due to currency exchange gains, given VEGX can hold non-USD bonds and VWOB can't?
VEGBX has had very little non-dollar currency exposure. Most of the differences have been in country exposure. There are still major differences in weighting, but it used to be even greater. VWOB's largest allocation used to be to Chinese quasi-sovereign bonds, but a change to the underlying index early last year saw it drop most of those. (Now China is only 1.3% in VWOB.) Without the large Chinese weighting, it's possible that the performance of the two could be more similar going forward.

It was also just announced this week that the ER on VWOB has dropped to 25 bp. So the fee difference is creeping up there, at now 20 bp. The fee difference was originally something like 9 bp, then 12, then 15, and now 20. I would like to see a small drop in the fee for VEGBX as it closes in on half a billion in assets ($431.8 as of 11/30/19). Otherwise, at some point, the fee difference is too great to have confidence in the active management paying for itself.

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