Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

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jhfenton
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Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Wed Jul 03, 2019 6:39 pm

I was just responding to another thread and noticed a major change in the percentage of China government bonds owned by VWOB/Vanguard Emerging Markets Government Bond ETF. Through the beginning of this year, VWOB consistently had more than 17% of the portfolio allocated to China sovereign bonds. (By comparison, VEGBX/Vanguard Emerging Markets Government Bond Admiral Shares, the active fund that I own, holds no China sovereign bonds.)

Currently, however, VWOB has only 1.5% in China bonds; and I'm not sure why. The named index that the fund is following (the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index) does not appear to have changed, but the portfolio has. There are other weighting changes besides China, but China is the most dramatic.

The top 10 holdings according to the annual report from October 31, 2018:

China 17.0%
Mexico 7.8%
Brazil 6.0%
Indonesia 5.4%
United Arab Emirates 4.8%
Russia 4.6%
Saudi Arabia 4.2%
Turkey 4.2%
Argentina 4.2%
Qatar 3.9%

According to Vanguard.com., the top 10 holdings as of May 31, 2019:

Mexico 9.2%
Indonesia 6.6%
Saudi Arabia 6.1%
Turkey 5.4%
Qatar 4.7%
Brazil 4.0%
Argentina 3.7%
Russia 3.7%
Colombia 3.7%
Netherlands 3.7% (this is obviously something domiciled in the Netherlands)

China is at #20 with 1.5%.

If you look at the semi-annual report, China was at 5.1% as of April 30, 2019. So the change started prior to April 30 and continued into May.

Does anyone have an idea why the dramatic change? I don't own VWOB--I prefer Vanguard's active fund--but I find it odd that an index fund could change so dramatically without apparent notice.

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Thu Jul 04, 2019 7:18 pm

I haven't been able to find any information on a change that would have almost completely dropped China from the index.

The change did mostly occur in April, though. I found an advisor fact sheet (PDF) with data as of March 31, 2019, and it still showed China at 16.9% of the portfolio. By April 30, it was 5.1%, and by May 31, it was 1.5%. :?:

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by vineviz » Thu Jul 04, 2019 7:33 pm

jhfenton wrote:
Thu Jul 04, 2019 7:18 pm
I haven't been able to find any information on a change that would have almost completely dropped China from the index.

The change did mostly occur in April, though. I found an advisor fact sheet (PDF) with data as of March 31, 2019, and it still showed China at 16.9% of the portfolio. By April 30, it was 5.1%, and by May 31, it was 1.5%. :?:
It looks like China was added to the global aggregate index.

https://www.bloomberg.com/opinion/artic ... ping-point

I haven’t found anything that explicitly says that it drops from the EM index as a result, but my understanding has always been that those indices were mutually exclusive.
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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Thu Jul 04, 2019 7:52 pm

vineviz wrote:
Thu Jul 04, 2019 7:33 pm
jhfenton wrote:
Thu Jul 04, 2019 7:18 pm
I haven't been able to find any information on a change that would have almost completely dropped China from the index.

The change did mostly occur in April, though. I found an advisor fact sheet (PDF) with data as of March 31, 2019, and it still showed China at 16.9% of the portfolio. By April 30, it was 5.1%, and by May 31, it was 1.5%. :?:
It looks like China was added to the global aggregate index.

https://www.bloomberg.com/opinion/artic ... ping-point

I haven’t found anything that explicitly says that it drops from the EM index as a result, but my understanding has always been that those indices were mutually exclusive.
I saw that, but the description of the Global Aggregate Bond Index says that it includes securities from both developed and emerging markets issuers. I'm not sure why it would be exclusive with the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by JAZZISCOOL » Wed Jul 10, 2019 6:07 pm

Given China is the second largest global economy, it seems like this is a reasonable change in the bond indices.

China now shows as a 40 basis point weighting in the Vanguard Total World Bond ETF (BNDW) as of 5/31/19.

Here is another article (Jan. 31, 2019) on the China change in the bond indices:

https://www.bloomberg.com/company/annou ... e-indices/

I thought this section of the article was interesting in terms of additional currency exposure in the Bloomberg Barclays Global Aggregate Index:

"When fully accounted for in the Global Aggregate Index, local currency Chinese bonds will be the fourth largest currency component following the US dollar, euro and Japanese yen."

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by nisiprius » Wed Jul 10, 2019 6:49 pm

I don't know how this figures in to what's been discussed above, but note that
Vanguard Emerging Markets Government Bond ETF (VWOB), Portfolio and Management
Vanguard Emerging Markets Government Bond ETF seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government related issuers in emerging market countries.
And it tracks
Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
So anything about "local currency" bonds would be irrelevant.

VTIBX/VTABX/BNDX, the Total International Bond index Funds, manage currency risk through hedging contracts. VGOVX/VGAVX/VWOB avoid it by only investing in bonds that are denominated in U.S. dollars.
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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by dumbmoney » Wed Jul 10, 2019 10:49 pm

https://institutional.vanguard.com/VGAp ... Info050119

Benchmark modification announced for Vanguard Emerging Markets Government Bond Index Fund and ETF

[...]
On May 1, 2019, Bloomberg modified the methodology of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index. Bloomberg increased the quasi-sovereign bond issuance amount outstanding that is required for inclusion in the index from $500 million or more to $1.5 billion. Quasi-sovereign bond debt is debt issued by corporations that are at least 50% government-backed or government-owned.

This benchmark transition was completed over a month-long period during the second quarter of 2019 with minimal transaction costs to the fund. Vanguard believes this change will improve the portfolio's liquidity while maintaining its broad exposure to emerging-market bonds.
[...]

So nothing directly having to do with China, but the reduction in "quasi-sovereign" bond holdings had the effect of reducing the China allocation.
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Post by hdas » Tue Jul 16, 2019 10:07 am

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Tue Jul 16, 2019 11:21 am

dumbmoney wrote:
Wed Jul 10, 2019 10:49 pm
https://institutional.vanguard.com/VGAp ... Info050119

Benchmark modification announced for Vanguard Emerging Markets Government Bond Index Fund and ETF

[...]
On May 1, 2019, Bloomberg modified the methodology of the Bloomberg Barclays USD Emerging Markets Government RIC Capped Index. Bloomberg increased the quasi-sovereign bond issuance amount outstanding that is required for inclusion in the index from $500 million or more to $1.5 billion. Quasi-sovereign bond debt is debt issued by corporations that are at least 50% government-backed or government-owned.

This benchmark transition was completed over a month-long period during the second quarter of 2019 with minimal transaction costs to the fund. Vanguard believes this change will improve the portfolio's liquidity while maintaining its broad exposure to emerging-market bonds.
[...]

So nothing directly having to do with China, but the reduction in "quasi-sovereign" bond holdings had the effect of reducing the China allocation.
Thanks, dumbmoney! That was it exactly. It's very interesting that most of the China allocation was in smaller-issuance quasi-sovereign debt.
hdas wrote:
Tue Jul 16, 2019 10:07 am
jhfenton wrote:
Wed Jul 03, 2019 6:39 pm
Does anyone have an idea why the dramatic change? I don't own VWOB--I prefer Vanguard's active fund--but I find it odd that an index fund could change so dramatically without apparent notice.
I hypothesize that this change will considerably narrow the performance gap between VEGBX and VWOB. We shall see. Cheers :greedy
It will be interesting to watch. I've obviously been delighted with my investment in VEGBX, up 13.8% since inception 19 months ago (12/6/17) with quite reasonable volatility and max draw downs of 3-4%, even with the EM equity volatility in 2018.

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by columbia » Wed Jul 17, 2019 6:29 am

nisiprius wrote:
Wed Jul 10, 2019 6:49 pm
I don't know how this figures in to what's been discussed above, but note that
Vanguard Emerging Markets Government Bond ETF (VWOB), Portfolio and Management
Vanguard Emerging Markets Government Bond ETF seeks to track the performance of a benchmark index that measures the investment return of U.S. dollar-denominated bonds issued by governments and government related issuers in emerging market countries.
And it tracks
Bloomberg Barclays USD Emerging Markets Government RIC Capped Index.
So anything about "local currency" bonds would be irrelevant.

VTIBX/VTABX/BNDX, the Total International Bond index Funds, manage currency risk through hedging contracts. VGOVX/VGAVX/VWOB avoid it by only investing in bonds that are denominated in U.S. dollars.
The implication being that VWOB *had* held dollar-denominated bonds from China. So those are now in the other index?
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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by columbia » Wed Jul 17, 2019 6:32 am

March 2019:

China’s Huge Bond Market Is Coming to an ETF Near You Soon
https://www.google.com/amp/s/www.wsj.co ... 1553428802
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Post by hdas » Sat Aug 17, 2019 10:55 am

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Sat Aug 17, 2019 12:23 pm

hdas wrote:
Sat Aug 17, 2019 10:55 am
jhfenton wrote:
Tue Jul 16, 2019 11:21 am
It will be interesting to watch. I've obviously been delighted with my investment in VEGBX, up 13.8% since inception 19 months ago (12/6/17) with quite reasonable volatility and max draw downs of 3-4%, even with the EM equity volatility in 2018.
You can already see the peformance decay in the 21day, 3 month figures. Cheers :greedy
I'm not sure what you mean. VEGBX hit an all-time high a week ago (August 9), and VWOB hit a two-year high. VEGBX is up 13.95% for the year. VWOB is up 11.35% (NAV). VEGBX is up 4.45% over 3 months, VWOB is up 4.30%. VWOB is slightly ahead over 1 month, +0.41% vs -0.31%. But that's not long enough to judge anything.

Bottom line, both funds have done well this year: VEGBX is in the top 2% of 312 funds YTD, while VWOB is in the top 22% (about where I might expect an index fund to be). VEGBX was in the top 7% of 295 funds in 2018, so I've obviously been happy as a charter investor in the fund (December 2017). But I don't expect any active fund to be a top quintile performer every year, let alone top decile. :beer

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Post by hdas » Sat Aug 17, 2019 4:32 pm

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Re: Major changes in VWOB (Vanguard Emerging Markets Govt Bond ETF) portfolio (almost no China)?

Post by jhfenton » Mon Aug 19, 2019 7:29 am

hdas wrote:
Sat Aug 17, 2019 4:32 pm
The problem is that you have the wrong figures, I use data from Tiingo, and I calculate 63d and 21d returns (as of Aug 16/2019):

63 day >> VEGBX = +4.45%, VWOB = +5.57%
21 day >> VEGBX = -0.35%, VWOB = +0.74%

For the sake of checking, look at morningstar (they use a different specification)

3 month >> VEGBX = +4.32%, VWOB = +5.49%
1 month >> VEGBX = -0.23%, VWOB = +1.05%

So we can see, that VWOB (the dumb index) has been doing better lately. The working hypothesis is that this has to do with portfolio reconfiguration. I have a rule for active funds, I look at 4 different windows of time and I want to see them outperform their relevant benchmark in at least 3 of them, otherwise is time to start asking questions. Cheers :greedy
The differences in the numbers are trivial. I had correct M* numbers at the time, but they may not have included Friday yet. I don't know what the heck Tiingo is.

You can't tell bupkis from three weeks, one month, nine weeks, or three months of performance data. I don't even look at performance numbers that frequently.

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