Foreign Bond Funds?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Foreign Bond Funds?

Post by LH »

What are some good passive low cost foriegn bond index funds?

Do you reccomend adding foriegn bonds to ones portfolio?

With current events, its unclear to me whether I should go 50/50 US/foriegn bonds in my portfolio. I have considered foriegn bonds before, much like foriegn REITS, but did not think it worth the hassle previously, but diversification may be worth it now?
ntsantak
Posts: 68
Joined: Fri Apr 24, 2009 1:00 pm

I am also looking at foreign bond funds for diversification

Post by ntsantak »

The only ones that appear to be unmanaged and low cost are BWX and for emerging PCY. However, they are sovereign debt funds with no exposure to corporate foreign bonds.

I would rather have a foreign fund that is similar to AGG which is diversified in both government, agency and corporate bonds
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Post by stratton »

International Bond ETFs Compared
This year, iShares issued two international Treasury bond ETFs, tracking indexes covering Treasury bond issues from developed countries around the world excluding the U.S. Those are the S&P/Citigroup International Treasury Bond Fund (Nasdaq: IGOV) and the S&P/Citigroup 1-3 Year International Treasury Bond Fund (Nasdaq: ISHG).

State Street Global Advisors has a similar ETF lineup in the international developed sovereign debt space with the SPDR Barclays Capital International Treasury Bond ETF (NYSEArca: BWX) and the SPDR Barclays Capital Short Term International Treasury Bond ETF (NYSEArca: BWZ).
The article has a severe flaw. Both BWX and BWZ have any where from 15 to 30% emerging markets bonds in them even though they are higher credit than a lot of EM bonds. The percentage varies because Singapore, Hong Kong, Taiwan, South Korea etc. are developed markets in some indexes and EM in others. Or they are moving to developed markets indexes.

Poland, South Africa and a couple others are emerging markets bonds in all indexes.

Paul
User avatar
cato
Posts: 230
Joined: Thu Dec 20, 2007 7:39 pm
Location: Portola Valley, CA

Post by cato »

I'm always amused at articles recommending obscure ETFs without bothering to mention the complete and utter lack of liquidity in them.

Take BWZ for example. It traded 450 shares today. With $15K to invest, you would have been the entire day's volume!
Citigroup delenda est.
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Post by stratton »

cato wrote:I'm always amused at articles recommending obscure ETFs without bothering to mention the complete and utter lack of liquidity in them.

Take BWZ for example. It traded 450 shares today. With $15K to invest, you would have been the entire day's volume!
BWX has been out for awhile and has ~$1 billion in it. The other three are new so they need time to build up assets.

Paul
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

cato wrote:I'm always amused at articles recommending obscure ETFs without bothering to mention the complete and utter lack of liquidity in them.

Take BWZ for example. It traded 450 shares today. With $15K to invest, you would have been the entire day's volume!
So, If I attempted to buy 15k, would I move the market price singlehandledy without a limit order?

So, with it being "only" one billion, should I not invest in it? I am not well versed in this type of issue.
User avatar
Karl
Posts: 1074
Joined: Sun May 13, 2007 5:52 pm
Location: Milwaukee, WI

Post by Karl »

This brings up an issue I was thinking about the other day. Foreign bond funds are one of the various funds that many members of this forum have thought Vanguard should start. [And they do run a foreign bond fund (overseas) so I'm guessing they could figure out how to do so from the US as well.]

What I was thinking was how many people actually write to the supreme leader and tell him what they want instead of simply talking about how much Vanguard should do it? Fire off an e-mail. Send a snail mail. Do both would be even better. Make a NOISE that can't be ignored by F. William McNabb III -- be sure to address your letters to him personally, so he can enjoy an office overflowing with mail. Perhaps he might take the less-than-subtle hint.
User avatar
MossySF
Posts: 2361
Joined: Thu Apr 19, 2007 9:51 pm
Contact:

Post by MossySF »

LH wrote:So, with it being "only" one billion, should I not invest in it? I am not well versed in this type of issue.
BWX's volume yesterday was 82K which is plenty for liquidity.

WIP (inflation protected international bonds) had a volume of 32K yesterday.

BWZ just launched in at the end of January and it really takes about a year for less popular asset class ETFs to build up enough critical mass. The volume yesterday was 450 but the average has been in the 4000's so an average day, 15K would be 10% of transaction volume. Solution is to spread out the buys over a few days assuming you have free trades.
biasion
Posts: 1417
Joined: Mon Aug 13, 2007 8:23 pm

Post by biasion »

Bonds are for safety and income. Foregin bonds would be subject to currency fluctuations which in some cases might be extreme. If the dollar loses value, you gain. If the dollar gains value, you lose. In the end, it is a zero sum game, but all it does is introduce more, a lot more volatility in the part of your portfolio that is looking to offset volatility.

A better choice would be to have international allocation in stocks up to 20% of your total portfolio.

Just as a reminder, what happens if the dollar gains 40% vs other world currencies? For decades this is what happened, keep in mind how many European countries (and EM for that matter) used to devalue their currency and fix prices on local goods with protectionist tariffs. It could happen again. What happens to that chunk of your safety principal and income stream when it loses 40% of your value overnight when your stocks just lost 56%? Ouch.

Stay away from foreign bonds. VG has excellent foreign funds, they even have a small cap foreign. Either their total int'l or FTSE all world ex-US are more than 99% of investors will want.

The only caveat is if you travel to or plan to retire in a country not the US. In that case, you might want to hedge that risk with a cash or government bond, as well as possible stock ETF in that currency unhedged. So if you plan to spend a lot of time in a Euro spending area, perhaps overweighting VG European stock index or purchasing a Eurozone/eurobond ETF or Money market ETF may be a good idea for a certain %.

Remember, currency fluctuations are a zero sum game over the long haul, but they do fluctuate. Hedge against them only if you're going to spend that currency as well as dollars, otherwise stay away.
User avatar
tc101
Posts: 3429
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Post by tc101 »

cato wrote:
I'm always amused at articles recommending obscure ETFs without bothering to mention the complete and utter lack of liquidity in them.

Take BWZ for example. It traded 450 shares today. With $15K to invest, you would have been the entire day's volume!
BWX has been out for awhile and has ~$1 billion in it. The other three are new so they need time to build up assets.

Paul
How long will that take?
. | The most important thing you should know about me is that I am not an expert.
User avatar
tc101
Posts: 3429
Joined: Tue Feb 20, 2007 3:18 pm
Location: Atlanta - Retired in 2004 at age 54

Post by tc101 »

Take BWZ for example. It traded 450 shares today. With $15K to invest, you would have been the entire day's volume!
I understand how this is a problem if you are selling, but if you are buying how does it work? Does State Street, the company who created the ETF, sell shares directly to the public if there is a large order and not enough sellers? If not, how do the total number of shares increase? I don't understand how this works.
. | The most important thing you should know about me is that I am not an expert.
User avatar
DartThrower
Posts: 953
Joined: Wed Mar 11, 2009 4:10 pm
Location: Philadelphia

Post by DartThrower »

biasion,

I think you make many excellent points in your post. I was wondering if you or anyone else had any thoughts on the correlation of international bonds with other domestic and international asset classes. Isn't correlation a key determinant of whether to consider an asset class for inclusion in one's portfolio?

Currency fluctuations may be a zero sum phenomenon but do the international returns zig when others zag? Or do they have low correlation with US bond returns? Maybe you (and Vanguard) feel that this correlation component is already accounted for in the international stock portion of one's portfolio. Of course whatever benefits there may be would have to overcome the higher costs of overseas investing.

There is probably a very good reason why Vanguard does not make an offering in this area. It would be great if they at least explain why somewhere on their site.

Thanks.
Our patience will achieve more than our force. -Edmund Burke
User avatar
Topic Author
LH
Posts: 5490
Joined: Wed Mar 14, 2007 2:54 am

Post by LH »

biasion wrote:Bonds are for safety and income. Foregin bonds would be subject to currency fluctuations which in some cases might be extreme. If the dollar loses value, you gain. If the dollar gains value, you lose. In the end, it is a zero sum game, but all it does is introduce more, a lot more volatility in the part of your portfolio that is looking to offset volatility.

A better choice would be to have international allocation in stocks up to 20% of your total portfolio.

Just as a reminder, what happens if the dollar gains 40% vs other world currencies? For decades this is what happened, keep in mind how many European countries (and EM for that matter) used to devalue their currency and fix prices on local goods with protectionist tariffs. It could happen again. What happens to that chunk of your safety principal and income stream when it loses 40% of your value overnight when your stocks just lost 56%? Ouch.

Stay away from foreign bonds. VG has excellent foreign funds, they even have a small cap foreign. Either their total int'l or FTSE all world ex-US are more than 99% of investors will want.

The only caveat is if you travel to or plan to retire in a country not the US. In that case, you might want to hedge that risk with a cash or government bond, as well as possible stock ETF in that currency unhedged. So if you plan to spend a lot of time in a Euro spending area, perhaps overweighting VG European stock index or purchasing a Eurozone/eurobond ETF or Money market ETF may be a good idea for a certain %.

Remember, currency fluctuations are a zero sum game over the long haul, but they do fluctuate. Hedge against them only if you're going to spend that currency as well as dollars, otherwise stay away.
Lets say that the US currency, drops 40 percent steadily oveer my investing horizon of 20-30 years. I spend dollars yes, but a lot of what I buy comes from china. If US has high inflation, dollar depreciation, and I am in effect spending dollars to buy WORLD goods, should I not hedge the dollar some with bonds too for saftety and diversity?

Isnt low correlation what I am looking for in asset classes for diversification?

Again, I am not well versed here, this issue has never sat well with me.

Thanks,

LH
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Post by preserve »

Biasion is shooting blanks into the air. Foriegn equity is no substitute for bonds, just like domestic equity is no substitute for domestic bonds.

The downfall with international bond investing is expense ratio. If ER was in line with domestic, I would be 50/50 international and domestic bonds.
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Post by preserve »

thanks for the article paul. i had not realized that competing international etf's have come out. can't wait for the lower ER's.
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Post by stratton »

preserve wrote:Biasion is shooting blanks into the air. Foriegn equity is no substitute for bonds, just like domestic equity is no substitute for domestic bonds.

The downfall with international bond investing is expense ratio. If ER was in line with domestic, I would be 50/50 international and domestic bonds.
You're confusing currency effects vs. bonds as ballast. Unhedged bonds introduce more volatility. You *can* get currency diversification through equity. The chart below was from another thread discussing world allocation weights. Before our recent market drop a huge amount of returns were from the falling USD.

Paul
stratton wrote:
Valuethinker wrote:This is why unhedged bonds are probably a pretty bad idea: you are really taking a bet on currencies, because the +/- of the currency in any given year will almost certainly drown out the returns from the bonds.
Which is why Swensen etc. prefer taking unhedged risk in equities. About 25% to 50% of the foreign returns US investors have had over the last several years is from the depreciating USD.

What You Should Know About Currency Risk
For example, the table shows that the return experienced by US investors who invested in the developed and emerging markets of the world excluding the United States should attribute ¼ to ½ of their return to currency effect – the decline of the US Dollar against those other currencies in this case.
Image

Paul
bigH
Posts: 957
Joined: Wed Mar 19, 2008 10:18 pm

Re: Foreign Bond Funds?

Post by bigH »

LH wrote:What are some good passive low cost foriegn bond index funds?

Do you reccomend adding foriegn bonds to ones portfolio?

With current events, its unclear to me whether I should go 50/50 US/foriegn bonds in my portfolio. I have considered foriegn bonds before, much like foriegn REITS, but did not think it worth the hassle previously, but diversification may be worth it now?
A small amount foreign bonds can't hurt. I use RPIBX, but it might be considererd actively managed. Once the dollar turns lower I might sell it and go with some of the options mentioned in this thread.
User avatar
Boglenaut
Posts: 3090
Joined: Mon Mar 23, 2009 7:41 pm

Post by Boglenaut »

biasion wrote:Bonds are for safety and income.
Is that true?

If the bond is not correlated, or even negatively correlated, with the main portfolio holdings, then that is a better reason to hold it. You can actually decrease risk by adding negatively correlated assets.

I am not saying the bonds discussed will do that -- I don't know. But I would disagree with your starting premise.

I don't need income, but would take interest in diversifiers.
bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp »

Boglenaut wrote:
biasion wrote:Bonds are for safety and income.
Is that true?

If the bond is not correlated, or even negatively correlated, with the main portfolio holdings, then that is a better reason to hold it. You can actually decrease risk by adding negatively correlated assets.

I am not saying the bonds discussed will do that -- I don't know. But I would disagree with your starting premise.
Me too. I think the idea that just because an asset class has the word "bonds" in it, then it is required to have low volatility to be considered useful, doesn't fit in well with MPT. Foreign bonds should be looked at in the context of the whole portfolio, not in isolation.

That said, if the OP's concern is primarily domestic spending power:
LH wrote:Lets say that the US currency, drops 40 percent steadily oveer my investing horizon of 20-30 years. I spend dollars yes, but a lot of what I buy comes from china. If US has high inflation, dollar depreciation, and I am in effect spending dollars to buy WORLD goods, should I not hedge the dollar some with bonds too for saftety and diversity?
then I should imagine TIPS would perform much the same function.
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Post by preserve »

bpp wrote: That said, if the OP's concern is primarily domestic spending power:

then I should imagine TIPS would perform much the same function.
The problem with the statement is that there is no longer a difference between domestic and international spending power. They have converged drastically. If an individual does not have global purchasing power, he/she has no purchasing power.

Its like a PC user being concerned about having a telephone jack is his room for his modem. It is not longer relevant.
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Post by preserve »

stratton wrote: You're confusing currency effects vs. bonds as ballast. Unhedged bonds introduce more volatility. You *can* get currency diversification through equity.
Yes, I'm well aware that you can get currency diversification through domestic equity. Why beat around the bush though?

One thing is for sure. You can't get bond diversification domestically.
User avatar
iceport
Posts: 4674
Joined: Sat Apr 07, 2007 4:29 pm

Int'l Bonds

Post by iceport »

preserve wrote:
stratton wrote: You're confusing currency effects vs. bonds as ballast. Unhedged bonds introduce more volatility. You *can* get currency diversification through equity.
Yes, I'm well aware that you can get currency diversification through domestic equity. Why beat around the bush though?

One thing is for sure. You can't get bond diversification domestically.
You sure seem to make sense to me, preserve.

Besides, if bonds-as-ballast is what everybody is so concerned about, why do so many people recommend TIPS?

Compare Total Bond Market, an unhedged international treasuries ETF, and TIPS: VIPSX/BWX/VBTIX

--Pete
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Re: Int'l Bonds

Post by stratton »

petrico wrote:Compare Total Bond Market, an unhedged international treasuries ETF, and TIPS: VIPSX/BWX/VBTIX
Thanks for showing TIPS behave a lot like unhedged foreign with less volatility. That's a another reason to not bother with foreign bonds!

Paul
User avatar
iceport
Posts: 4674
Joined: Sat Apr 07, 2007 4:29 pm

Re: Int'l Bonds

Post by iceport »

stratton wrote:
petrico wrote:Compare Total Bond Market, an unhedged international treasuries ETF, and TIPS: VIPSX/BWX/VBTIX
Thanks for showing TIPS behave a lot like unhedged foreign with less volatility. That's a another reason to not bother with foreign bonds!

Paul
Yes, but the volatility is all relative: VIPSX/BWX/VBTIX/VTSMX

FWIW, I now hold BWX (and BEGBX, Amer. Cent. int'l. bond before that) at 17% of my 30% fixed income allocation, and I've never once been bothered by the volatility. Bothered by the cost, yes, but not the volatility.

There certainly seem to be good arguments against foreign bonds, but (aside from the costs) do they really justify less diversification?

--Pete
User avatar
kramer
Posts: 1825
Joined: Wed Feb 21, 2007 2:28 am
Location: World Traveler

Post by kramer »

I am intrigued by the ishares foreign treasury offerings which have ERs of 0.35%.

But one problem is that you would usually hold these in tax deferred accounts. And there may be some foreign taxes paid on the distributions which you would not be able to recover. So it makes the effective expense ratio that much higher.

Anyone have any idea how much foreign taxes are paid in practice by these sorts of funds? The ishares funds, created in January 2009, have no track record so we can't be sure.

For instance, foreign tax drag amounts to about 0.23% of VWO (Vanguard Emerging markets stock ETF) and VGK (Vanguard European Index stock ETF), which effectively doubles the expense ratios for those that hold in a tax deferred account. This is documented at:

http://www.bogleheads.org/wiki/Vanguard ... tributions

and

http://www.bogleheads.org/wiki/Vanguard ... tributions


So I am wondering what kind of hit these foreign bond funds are going to take in the foreign tax area. The Ishares prospectus seems to indicate that some foreign taxes are going to be withheld by foreign governments.

Kramer
bpp
Posts: 2017
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Post by bpp »

kramer wrote:Anyone have any idea how much foreign taxes are paid in practice by these sorts of funds?
BWX paid $0.007321 per share in foreign taxes in 2008. At an average share price of about $52 for the year, that comes out to about 1.4 basis points.

https://www.spdrs.com/library-content/p ... 08REV3.pdf
User avatar
kramer
Posts: 1825
Joined: Wed Feb 21, 2007 2:28 am
Location: World Traveler

Post by kramer »

bpp wrote:
kramer wrote:Anyone have any idea how much foreign taxes are paid in practice by these sorts of funds?
BWX paid $0.007321 per share in foreign taxes in 2008. At an average share price of about $52 for the year, that comes out to about 1.4 basis points.

https://www.spdrs.com/library-content/p ... 08REV3.pdf
Thanks, bpp. So maybe this is not really a major factor if 2008 BWX payouts were typical.

In a tax deferred account this would make the ishares expense ratios effectively about 0.37% plus transaction costs.

Kramer
User avatar
stratton
Posts: 11083
Joined: Sun Mar 04, 2007 5:05 pm
Location: Puget Sound

Post by stratton »

preserve wrote:
stratton wrote: You're confusing currency effects vs. bonds as ballast. Unhedged bonds introduce more volatility. You *can* get currency diversification through equity.
Yes, I'm well aware that you can get currency diversification through domestic equity.
You don't get currency diversification with domestic equity. You get it with FOREIGN equity. Which is what the chart I posted previously mentions.

Paul
User avatar
preserve
Posts: 560
Joined: Thu Mar 15, 2007 10:13 pm

Post by preserve »

stratton wrote: You don't get currency diversification with domestic equity. You get it with FOREIGN equity. Which is what the chart I posted previously mentions.
Paul
There was good literature out in 2001 about how foreign equity did not provide any more currency diversification than domestic equity. Now looking at the charts, it appears the academics were correct. Compare VEU to SPY and you will see that VEU hardly offers any diversification compared to domestic equity.

While I am not a fan of modern portfolio theory, it is point blank obvious international equity is no substitute for international bonds.
Post Reply