Bond basics for non-US investors

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Bond basics for non-US investors applies to EU, UK and some other jurisdictions. As each jurisdiction has its own set of laws and regulations the non-US investor should carefully study all aspects of their intended investment and seek advice from local specialists and from the Bogleheads® forum as appropriate.

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

After understanding the basic fundamentals of asset allocation, the non-US investor can use the section on the main Wiki site 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 investor's 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 ETFs 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.

Suitability of the fixed income side of the two-fund or three-fund portfolios to EU and non-US jurisdictions

Three-fund portfolio

The more recent Bogleheads® version referenced here is the three-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 this Bogleheads® forum topic: The three-fund portfolio by Taylor Larimore.

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

Vanguard Total Bond Market ETF (BND)

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.

The total bond market fund BND is based upon:

  • Broad exposure to U.S. investment grade bonds.
  • Aim is to keep pace with U.S. bond market returns.
  • Potential to provide income.
  • Moderate volatility.
  • More appropriate for medium- or long-term goals.
Credit quality

Vanguard classify the risk level for the BND fund at 2 on their scale from 1 to 5, where 1 is the lowest risk.

Credit quality Proportion
U.S. Government 64%
Aaa 4%
Aa 3.5%
A 11%
Baa 17%
Duration

The BND fund is in the intermediate term bond fund category.

Average effective maturity 8.2 years
Average duration 6.0 years
Yield to maturity 2.7%

Vanguard Total World Bond ETF (BNDW)

Since 2013 Vanguard have in fact now included international bonds (non-USD bonds hedged to USD) in some of their total bond market offerings in the US. Vanguard Total World Bond ETF seeks to track the performance of a broad, market-weighted index that measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds hedged to USD. Specifically, the bond allocation for BNDW is now 47% US and remainder non-US (June 2019). BNDW seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index[1].

EU version of Bogleheads portfolio

The EU investor version of the three-fund Bogleheads® approach to investing is given in this section of Wiki: EU investing § Sample portfolios

Two versions are shown there; both accumulating and distributing.

Equivalent non-US bond fund to "total bond market"

As noted above, the use of the US version of the total global bond market (BNDW) means that non-US investors would be now be relying upon US domiciled assets and some portion of international bonds. This demonstrates that Vanguard and others now accept an aggregated global bond as a option for US investors. (It may also be the case that many US boglehead investors prefer to stay with the total US bond (BND) rather than use the global version).

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. More information is available here: EU legislation § UCITS, MiFID II and PRIIPs

The fixed income suggestions are based upon investment grade global funds: the first aggregate version including corporate bonds and the second version only including government bonds:

  • Global aggregate UCITS ETF bond funds
  • Global government UCITS ETF bond funds

See below for more details. The key risk areas of duration and credit quality are briefly touched upon, however the overall risks of investing in bonds are not described here in a comprehensive way and the overall bond risks should be studied carefully before making any investment decisions.

The data provided below is current as of July 2019. The prospective investor in any of these products should satisfy themselves at the current date of the accuracy and suitability of the relevant data and update their analysis accordingly.

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.

Geographical spread

Global aggregate bond fund

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

Location Proportion
1. United States 40%
2. Japan 17%
3. France 5.6%
4. United Kingdom 5%
5. Germany 4.7%
6. Italy 3.4%
7. Canada 3%
8. Spain 2.5%
9. Supranational 2%
10. China 2.6%
11. Netherlands 1.6%

These proportions contrast somewhat with the Vanguard US domiciled bond mix as noted above.

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[2] is used as the benchmark.

Global government bond fund

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

Location Proportion
1. United States 44.6%
2. Japan 22.75%
3. France 9.48%
4. Italy 8.4%
5. Germany 6.3%
6. United Kingdom 6%
7. Canada 1.8%
8. Spain 2.5%
9. Cash and derivatives 0.5%

In this case the iShares global government bond fund UCITS ETF (IGLH) (distributing and hedged back to sterling) seeks to track the investment results of the FTSE world government bond index (WGBI).[3] This index 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-indices are available in any combination of currency, maturity, or rating. This fund is also available as SGLU (issued June 2019) following the same index, accumulating and hedged back to dollars.

Credit quality

Global aggregate bond fund

Investment in AGGH or an equivalent allows access to assets with:

  • Direct investment in government, government-related, corporate and securitized bonds.
  • Diversified exposure to the global fixed income market.
  • Exposure to investment grade bonds

The majority of the investment is in BBB rated or superior including treasuries (56%) and other government bonds. There are 3690 assets in the iShares fund, ranging from US treasuries and local authority bonds to corporate bonds without guarantees.

The top holdings are as follows:

US treasuries 17.6%
Government of Japan 17%
Federal national mortgage association 3.5%
France 3.3%
Italy 3%
Government national mortgage association 2.7%
Uniform MBS 2.7%
United Kingdom 2.7%
Germany 2.2%
Spain 2%

iShares classify the risk level for the global aggregate fund at 3 on their scale from 1 to 7 where 1 is the lowest risk.

Global government bond fund

Investment in ILGH or an equivalent allows access to assets with:

  • Diversified exposure to global government bonds
  • Direct investment in government bonds
  • Global government bond exposure

The assets are invested in BBB rated or superior treasuries (53%) and other government bonds. There are 738 assets in the iShares fund ranging from treasuries to cash.

The top holdings are as follows:

United States 45%
Japan 22%
France 9.6%
Italy 8.6%
Germany 6.3%
United Kingdom 6.1%
Canada 1.8%
Cash 0.32%

iShares classify the risk level for the global government fund at 4 on their scale from 1 to 7 where 1 is the lowest risk. This contrasts with the lower level of risk for the global aggregate fund.

Duration

Global aggregate bond fund

Weighted Average Maturity 8.63 yrs
Weighted Average Coupon 2.44%
Weighted Average Yield To Maturity 1.59%
Effective Duration 6.81 yrs

Global government bond fund

Weighted Average Maturity 9.92 yrs
Weighted Average Coupon 2.17%
Weighted Average Yield To Maturity 1.20%
Effective Duration 8.11 yrs

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.

Bond funds for non-US investors

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 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. Lists of the currently available UCITS fixed income ETFs and bond funds provided by Vanguard to some non-US investors is provided below. Similarly other asset managers including iShares fixed income bond UCITS ETF fundsprovide a range of UCITS fixed income ETFs and bond funds, and these can be reviewed by visiting the relevant websites. In addition, a non-US investor can review alternative bond options for specific purposes by using other web platforms such as justETF's bond schedule.

Vanguard fixed income funds

On their website portal for European private investors, Vanguard list (June 2019) the following fixed income ETFs and funds:

ETFs

  • EUR Corporate Bond UCITS ETF
  • EUR Eurozone Government Bond UCITS ETF
  • Global Aggregate Bond UCITS ETF
  • U.K. Gilt UCITS ETF
  • USD Corporate 1-3 Year Bond UCITS ETF
  • USD Corporate Bond UCITS ETF
  • USD Emerging Markets Government Bond UCITS ETF
  • USD Treasury Bond UCITS ETF

All of these products are UCITS ETFs and are passively managed index funds. See: Vanguard UCITS bond ETFs The products have subcategories in many currencies and often offer accumulating, distributing and hedged versions.

Funds

  • 20+ years Euro treasury index fund
  • Euro government bond index fund
  • Euro Investment Grade Bond Index Fund
  • Eurozone Inflation-Linked Bond Index Fund
  • Global Bond Index Fund
  • Global Corporate Bond Index Fund
  • Global Short-Term Bond Index Fund
  • Global Short-Term Corporate Bond Index Fund
  • Japan Government Bond Index Fund
  • SRI Euro Investment Grade Bond Index Fund
  • U.K. Government Bond Index Fund
  • U.K. Investment Grade Bond Index Fund
  • U.K. Short-Term Investment Grade Bond Index Fund
  • U.S. Government Bond Index Fund
  • U.S. Investment Grade Credit Index Fund

All of these products have KIID information and are passively managed index funds. See: Vanguard non-US bond funds The products have subcategories which offer versions such as accumulating, income, hedged, and inflation linked funds.

These funds may have minimum investment amount of €100,000. Retail investors may choose to invest in these funds if they are in a position to satisfy the minimum investment thresholds and can access the funds. In addition others may gain access through a professional adviser.

Some of these funds are for institutional investors only with very large minimum investment thresholds and are not available to retail investors.

Comparison of bond fund options

If you look at varying your fixed income with additions and alternatives to a simple global government or global aggregate UCITS ETF approach then you should review the help that is available in Bond basics on the Wiki here: Bond basics § Role in a portfolio and Bond basics § Style boxes.

Suggested fixed income simple adjustment options

Should a non-US investor seek to adjust their bond allocation for whatever reason, by adding to the suggested Wiki global aggregate or global government bond fund approach, then the following additional or alternative funds could be considered in the highlighted cases:

Adjustments or alternatives
Objective Reasoning Funds
Savings for a big future purchase. If you are saving money for a future purchase: a car, a wedding, a house. Consider investing those savings in a low-risk bond with a maturity date that matches the date you will need the money. iShares € Govt Bond 7-10yr UCITS ETF
iShares Euro Govt Bond 3-5yr UCITS ETF
Guarding against inflation. To help guard against this risk, you might consider Treasury Inflation Protection Securities (TIPS). iShares € Inflation Linked Govt Bond UCITS ETF
iShares $ TIPS UCITS ETF
iShares $ TIPS 0-5 UCITS ETF
iShares £ Index-Linked Gilts UCITS ETF
Managing interest rate risk. Manage this risk by creating a portfolio of bonds with maturities staggered over one, three, five and ten years. iShares € Govt Bond 0-1yr UCITS ETF
iShares € Govt Bond 1-3yr UCITS ETF
iShares € Govt Bond 5-7yr UCITS ETF

All of the suggested products are already available in some form within the global aggregate funds.

Cash equivalents and short term bonds

Cash investments can be held by investors for a number of reasons, ranging from as little as 5% of a portfolio for a younger investor, for instance for liquid emergency reserves and for funding obligations due in the short to intermediate term, to inclusion in a portfolio during the withdrawal stage as adequate cash to offset any drawdown so as to avoid selling equities during a protracted market downturn.

Please see here for further information on cash equivalents and short term bonds for EU investors: Cash equivalents for EU investors

Relevant bond indices

The Bloomberg Barclays Global Aggregate Bond Index[2] 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.

The FTSE World Government Bond Index (WGBI)[3] 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.

See also

References

  1. Bloomberg Barclays Global Aggregate Float Adjusted TR Index, retrieved 13 Jul 2019.
  2. 2.0 2.1 Wikipedia, Bloomberg Barclays US Aggregate Bond Index, retrieved 6 July 2019.
  3. 3.0 3.1 Wikipedia, FTSE World Government Bond Index (WGBI), retrieved 6 July 2019.

External links