Bond basics for non-US investors

=Bond Basics for EU investors=

Background
For a clear understanding of bonds and their function in a Boglehead style portfolio all the necessary introductory material can be found on the main Wiki site here: [| Bond Basics] The information is aimed at the original US boglehead community and therefore isn't entirely suitable for non-US investors.

However after understanding the basic fundamentals of asset allocation, the non-US investor can use this section to understand all the characteristics of fixed income. The principles remain the same notwithstanding applying them to non-US jurisdictions. In addition all of the usual types of US bond "types" are available to non-US investors through the main US fund managers such as Vanguard or iShares in UCITS ETFs and mutual fund (some restrictions may apply) versions. These may also be suitable for non EU investors subject to the investors local regulations and tax regime. These can be global aggregate type funds, straight copies of the US versions in UCITS format or through the use of some specific duration UCITS bond ETF's that can include for example TIPS and short term duration Treasury bonds.

Europe and other markets issue their own debt instruments such as European government bonds, UK Gilts and Eurobonds.

3 fund portfolio
The more recent boglehead version referenced here is the 3 fund portfolio comprising:


 * Total stock market (US)
 * Total international stock market (Developed markets)
 * Total bond market (US)

The case for this arrangement can be read about in the following posting by Taylor Larrimore: The three-fund portfolio

When investing in Vanguard ETFs, US investors can for example create a three-fund portfolio using on this basis:


 * Vanguard Total Stock ETF (VTI)
 * Vanguard Total International Stock ETF (VXUS)
 * Vanguard Total Bond Market ETF (BND)

Total bond market funds
In regards to the total bond market fund used in this portfolio (or the equivalent ETF) the assets are "domestic" or US only bonds. Obviously this will create some potential difficulties for those investing from outside of the US where the relevant local currency will not be the dollar. In addition some jurisdictions may have tax treatment issues that prevent or present difficulties in the use of US domiciled funds.

Since 2013 Vanguard have in fact now included international bonds in their total bond market offering in the US. Specifically, the bond allocation is now 70% Vanguard Total Bond Market Index Fund and 30% Total International Bond Index Fund.

For non-US investors and in particular EU jurisdictions, United Kingdom and elsewhere, the main asset managers have developed bond fund solutions that are more appropriate for their needs.

In addition for EU based investors the EU has introduced legislation that has altered the ability of EU citizens to access US situs investment funds, information is available here: [|EU_investing: EU legislation : UCITS, MiFID II and PRIIPs]

EU version of bogleheads portfolio
The EU investor version of the 3 fund boglehead approach to investing is given in this section of Wiki: [| EU investing suggested portfolios]

Two versions are shown here both accumulating and distributing. The fixed income suggestions are based upon global aggregate UCITS ETF bond funds and / or global government UCITS ETF bond funds.

Non-US global bond funds
The Wiki non-US bond suggestion is an aggregate global bond ETF of investment grade bonds in an accumulating version and alternatively a global government bond ETF in a distributing version.

The UCITS aggregate global bond ETF for example from iShares (AGGH) has a geographical breakdown as follows:

These proportions contrast with the Vanguard US domiciled bond mix as noted above at 70% US and 30% international.

In this case the iShares global aggregate bond UCITS ETF (AGGH or whichever version is chosen) seeks to track the investment results of an index composed of global investment grade bond, the Bloomberg Barclays Global Aggregate Bond Index is used as the benchmark.

The UCITS global government bond ETF from iShares (IGLH) has a geographical breakdown as follows:

In this case the iShares global government bond fund UCITS ETF (IGLH) seeks to track the investment results of the FTSE world government bond index (WGBI) that measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI provides a broad benchmark for the global sovereign fixed income market. Sub-indexes are available in any combination of currency, maturity, or rating.

Hedging to local currency
The fixed income side of the portfolio is designed to provide ballast and stability to the portfolio. In order to avoid unnecessary currency swings adding to portfolio volatility, hedging versions of the bond funds (back to the home currency, limited number available) which are for instance US domiciled assets can be used.

Equivalent bond fund to "total bond market"
As noted above the use of the US version of the total bond market means that non-US investors would be now be relying upon US domiciled assets and some portion of international bonds. While this demonstrates that Vanguard and others now accept an aggregated bond the proportion of domestic to non-US assets doesn't reflect the global market precisely.

Other non-US bond funds
The use of a global bond fund as noted above should be suitable in the role of "ballast" in the non-US investors portfolio.

In addition a non-US investor may wish to include for whatever reason additional bond funds to their portfolio or alternatively may choose to build up their own fixed income approach.

The main asset managers offer a range of UCITS and other bond funds.

Relevant bond indices
The Bloomberg Barclays Global Aggregate Bond Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.