Why does BNDX yield more than BND

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omedus82
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Why does BNDX yield more than BND

Post by omedus82 » Thu Jan 09, 2020 8:48 pm

Like a lot of forum members I'm considering adding international bonds to my portfolio because of the diversification benefits. I know a lot of respected investing experts who post on this forum don't like hedged international bonds because they're viewed as a more expensive US dollar bond fund with a longer duration and lower yield.

But when I look at the trailing 12 month yield the Vanguard Intl Bond fund (BNDX) has yielded 3.41% while the US TBM fund (BND) has yielded 2.72%. When I dig into the holdings of BNDX I see that out of the top 10 holdings 4 of the holdings are German, Japan, and France government bonds yielding less than 1%, in some cases 0%. How can the yield be 3.41%? Is it because of the hedging and different currency rates in the forward contracts?

If the yield of 3.41% is accurate, and the expense ratio of .09% for BNDX is inclusive of all costs, I'm surprised that BNDX doesn't get more love on this forum since almost all Bogleheads believe in the free lunch of diversification.

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CyberBob
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Re: Why does BNDX yield more than BND

Post by CyberBob » Thu Jan 09, 2020 8:58 pm

According to Morningstar, the hedging has added 3 percentage points a year to the return of BNDX since its inception.

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Re: Why does BNDX yield more than BND

Post by abuss368 » Thu Jan 09, 2020 11:16 pm

Is it really yielding more than total bond? How is that possible when many of the top holdings are zero or negative yields (Germany, Japan, etc)?
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Northern Flicker
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Re: Why does BNDX yield more than BND

Post by Northern Flicker » Fri Jan 10, 2020 4:20 am

Forward hedge contracts have a positive return when US rates over the period of the hedge are higher than the same term rates for the other country/currency.

If you hedge a Swiss bond denominated in Swiss francs back to USD with rolling 30-day contracts, and for an entire year the 30-day US rate is 1.5% and the 30-day Swiss rate is .01%, then the effective yield of the bibs plus hedge contracts will be about 1.49 percentage points higher than just the yield of the fund.

If the rates were reversed, it would give rise to additional carrying cost for the hedge, which instead would lead to an effective yield lower than bond yields.

Because the fund uses 30-day and 90-day forward contracts, the hedge returns are short-duration cash flows. As a result, the effective duration of the fund is also lower than the duration of the aggregate bond portfolio.
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Re: Why does BNDX yield more than BND

Post by spdoublebass » Sat Jan 11, 2020 12:04 am

I hold international bonds. Others do as well. I think the argument is more if one NEEDS them or not.

I also have wondered what the big deal is. If you chart BND against BNDX, I think it would surprise a lot of people. If BNDX underperformed or something I could better understand the negative comments. Who knows, maybe in the future it will be a bad idea, but my only point is that it hasn't been since Vanguard started that ETF in 2013. (which of course is an irrelevant duration of time)
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Re: Why does BNDX yield more than BND

Post by columbia » Sat Jan 11, 2020 12:23 am

Is there an ETF which tracks the same index, but without hedging?

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Re: Why does BNDX yield more than BND

Post by Northern Flicker » Sat Jan 11, 2020 12:41 am

spdoublebass wrote:
Sat Jan 11, 2020 12:04 am
I hold international bonds. Others do as well. I think the argument is more if one NEEDS them or not.

I also have wondered what the big deal is. If you chart BND against BNDX, I think it would surprise a lot of people. If BNDX underperformed or something I could better understand the negative comments. Who knows, maybe in the future it will be a bad idea, but my only point is that it hasn't been since Vanguard started that ETF in 2013. (which of course is an irrelevant duration of time)
If and when US and non-US developed market short rates invert, so that yield received from the fund falls well short of the published SEC yield of the fund, it will be interesting to see how many investors stay the course.

Currently the fund has positive hedge carry on top of the tailwind of falling/low non-US rates. Negative hedge carry and rising non-US rates would mean that the hedging cost is absorbing yield, preventing it from offsetting losses from rising non-US sovereign rates.
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andromeda2k12
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Re: Why does BNDX yield more than BND

Post by andromeda2k12 » Sat Jan 11, 2020 10:45 am

From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.

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Re: Why does BNDX yield more than BND

Post by alluringreality » Sat Jan 11, 2020 12:40 pm

Northern Flicker wrote:
Sat Jan 11, 2020 12:41 am
If and when US and non-US developed market short rates invert, so that yield received from the fund falls well short of the published SEC yield of the fund, it will be interesting to see how many investors stay the course.
Personally I choose fixed income with a purpose. Aside from the current hedge, I fail to find many compelling reasons to consider buying foreign bonds at this time. I agree that it would be interesting to see how many people are committed enough to the theory to even accept current BNDX SEC yield for a considerable period.

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Re: Why does BNDX yield more than BND

Post by abuss368 » Sat Jan 11, 2020 1:01 pm

andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
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Re: Why does BNDX yield more than BND

Post by abuss368 » Sat Jan 11, 2020 1:06 pm

Vanguard investment experts however are recommending a two fund bond strategy of Total Bond and Total International Bond in the Target and LifeStrategy funds.
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Re: Why does BNDX yield more than BND

Post by bgf » Sat Jan 11, 2020 1:50 pm

abuss368 wrote:
Sat Jan 11, 2020 1:01 pm
andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
why is that?
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Re: Why does BNDX yield more than BND

Post by abuss368 » Sat Jan 11, 2020 2:39 pm

bgf wrote:
Sat Jan 11, 2020 1:50 pm
abuss368 wrote:
Sat Jan 11, 2020 1:01 pm
andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
why is that?
Historically if we sneeze the rest of the world catches cold. That happened in 2008.
John C. Bogle - Two Fund Portfolio: Total Stock & Total Bond. "Simplicity is the master key to financial success."

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Re: Why does BNDX yield more than BND

Post by bgf » Sat Jan 11, 2020 3:35 pm

abuss368 wrote:
Sat Jan 11, 2020 2:39 pm
bgf wrote:
Sat Jan 11, 2020 1:50 pm
abuss368 wrote:
Sat Jan 11, 2020 1:01 pm
andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
why is that?
Historically if we sneeze the rest of the world catches cold. That happened in 2008.
i was under the impression international bonds did well then. i could definitely be wrong though.

all i could find real quick was the chart on p. 3. it shows international bonds did better than US bonds, US stocks, and International stocks in the immediate aftermath of 2008.

https://www.google.com/url?sa=t&source= ... 7xoEVGDmmc

edit* well, i probably just misinterpreted the chart... id be interested in knowing the answer though.
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Re: Why does BNDX yield more than BND

Post by Northern Flicker » Sat Jan 11, 2020 3:47 pm

I agree that it would be interesting to see how many people are committed enough to the theory to even accept current BNDX SEC yield for a considerable period.
Yeah, if short rates in the US plunge to near zero there will not be a hedge return on top of BNDX yield.

I do think BNDX offers a reasonable diversification opportunity, both for the reasons Vanguard gives and for the additional term risk diversification from hedge returns. But I think at least some investors are looking at the superior returns of BNDX since its inception as a justification.
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andromeda2k12
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Re: Why does BNDX yield more than BND

Post by andromeda2k12 » Mon Jan 13, 2020 12:45 pm

abuss368 wrote:
Sat Jan 11, 2020 2:39 pm
bgf wrote:
Sat Jan 11, 2020 1:50 pm
abuss368 wrote:
Sat Jan 11, 2020 1:01 pm
andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
why is that?
Historically if we sneeze the rest of the world catches cold. That happened in 2008.
In the short term you are certainly correct, the world economy is tightly linked to the US. However, when I mean US catastrophe, I am talking about something on the order of 20+ years of economic problems which would thrust us from being the world's leading economy. In this scenario, the US would not recover while the rest of the world would.

I don't think this is likely to happen. However, seeing something like Japan happen to (at the time) the worlds leading market cap stock market scares me enough to protect against the unlikelihood. I don't think Japan and the US are similar in almost any way fyi, just the best example of 30+ years of stock market decline/stagnation.

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Re: Why does BNDX yield more than BND

Post by bgf » Mon Jan 13, 2020 3:54 pm

abuss368 wrote:
Sat Jan 11, 2020 1:01 pm
andromeda2k12 wrote:
Sat Jan 11, 2020 10:45 am
From 1985-2018:

International Aggregate Bond: 6.25%...........sharpe ratio: 0.73
US Aggregate Bond: 6.47%........................sharpe ratio: 0.68

Interestingly if you move just five years ahead (1990-2018), international aggregate beats US 5.81% vs 5.61%. So in my mind I will gladly buy international bonds for the insurance against US catastrophe given that the returns are equal. Now, I don't care too much about the yields going forward but maybe that could be an argument against intl. depending on the outlook of the currency hedge.
I would suspect if there is a "US catastrophe" it will not matter if an investors bonds are US or International.
i found out how to answer this.

https://www.portfoliovisualizer.com/bac ... ion2_2=100

global bonds (USD hedged) has substantially outperformed Total US Bond market from 2009 to 2019. CAGR of 6.04% to 3.78%.

additionally, the outperformance of global bonds (USD hedged) in 2009 was 15.3% to 5.93%, or like 2.5x that of US Total Bond.
“TE OCCIDERE POSSUNT SED TE EDERE NON POSSUNT NEFAS EST"

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Re: Why does BNDX yield more than BND

Post by occambogle » Mon Jan 13, 2020 5:58 pm

bgf wrote:
Mon Jan 13, 2020 3:54 pm
global bonds (USD hedged) has substantially outperformed Total US Bond market from 2009 to 2019. CAGR of 6.04% to 3.78%.

additionally, the outperformance of global bonds (USD hedged) in 2009 was 15.3% to 5.93%, or like 2.5x that of US Total Bond.
Apologies for the newbie question, but how do you know if an international bond fund is USD-hedged or not? Is BNDX hedged this way?

bgf
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Re: Why does BNDX yield more than BND

Post by bgf » Mon Jan 13, 2020 6:33 pm

occambogle wrote:
Mon Jan 13, 2020 5:58 pm
bgf wrote:
Mon Jan 13, 2020 3:54 pm
global bonds (USD hedged) has substantially outperformed Total US Bond market from 2009 to 2019. CAGR of 6.04% to 3.78%.

additionally, the outperformance of global bonds (USD hedged) in 2009 was 15.3% to 5.93%, or like 2.5x that of US Total Bond.
Apologies for the newbie question, but how do you know if an international bond fund is USD-hedged or not? Is BNDX hedged this way?
yes, BNDX is hedged to the US dollar.

if you find it on the vanguard site, the following is under strategy and policy tab:


Choose your Vanguard ETFs4/5selected
Vanguard Total International Bond ETF (BNDX)
Also available as an Admiral™ Shares mutual fund.
Portfolio
Vanguard Total International Bond ETF seeks to track the performance of a benchmark index that measures the investment return of investment-grade bonds issued outside of the United States.

Learn more about this portfolio's investment strategy and policy.
Layer opened.Strategy and policy
Investment strategy
Vanguard Total International Bond ETF is an exchange-traded share class of Vanguard Total International Bond Index Fund, which employs indexing investment approach designed to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), a broad-based measure of the global, investment-grade, fixed-rate debt markets. The index includes government, government agency, corporate, and securitized non-U.S. investment-grade fixed income investments, all issued in currencies other than the U.S. dollar and with maturities of more than one year. The index is capped, which means that its exposure to any particular bond issuer is limited to a maximum of 20%. Additionally, issuers that individually constitute 5% or more of the index may not constitute, in the aggregate, more than 48% of the index. If the index, as constituted based on market weights would exceed the 20% or 48% limit, the excess is reallocated to bonds of other issuers represented in the index. To minimize the currency risk associated with investment in bonds denominated in currencies other than the U.S. dollar, the fund will attempt to hedge its currency exposures. The fund invests by sampling the index, meaning that it holds a range of securities that, in the aggregate, approximates the full index in terms of key risk factors and other characteristics. All of the fund’s investments will be selected through the sampling process, and at least 80% of the fund’s assets will be invested in bonds included in the index.
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