A number of ETF issuers have launched new products lately,
bringing the total number of funds closer to the 1,500 mark.
While a few of these funds have been targeting brand new niches,
there has also been a rising trend of 'getting back to basics'
for issuers, as many have looked to round out lineups and plug up
any weak spots.
Vanguard now appears to be getting in on the wave of launches
as well, pushing out two new bond funds of its own. However,
unlike many of the newly launched products from others, these two
look to give investors broad bond exposure, helping to fill a
hole in Vanguard's ETF lineup.
The two funds do come in at a somewhat awkward time for the
bond world though, as investors have seen some losses in their
fixed income portfolios as rates have begun to climb higher.
Still, as equities have begun to struggle lately, either of these
bond funds described below could make for interesting picks for
those seeking lower risk, broadly diversified plays in the fixed
income ETF world:
Vanguard Total International Bond ETF: BNDX
This new ETF looks to give investors broad exposure to the
non-U.S. dollar denominated investment-grade bond market,
charging just 20 basis points in fees for its exposure. This will
largely be accomplished by following the Barclays Global
Aggregate ex-USD Float Adjusted RIC Capped Index (see
Medium Term Treasury Bond ETF Investing 101
Investors should note that this benchmark is capped, so
exposure to any particular issuer is limited to a maximum of
one-fifth of the total, while issuers that constitute 5% or more
of the index may not constitute, in aggregate, more than 48% of
the index. This product will also use a sampling process in order
to establish exposure that is substantially similar to that of
the underlying index, but without holding as many securities.
It is also worth pointing out that, in order to minimize
currency risk, the fund will attempt to hedge its currency
exposure. In terms of weighted average maturity, the product
looks to stay within the five to ten year range, and at the end
of the first quarter, was at 8.2 years, suggesting a modest level
of interest rate risk.
There are already a handful of ex-US bond funds in the ETF
world, several of which have hundreds of millions, if not
billions, in assets under management. In particular, the biggest
competitors look to be
; both of these have been around for years and see a solid level
of volume and AUM (see
The Guide to International Treasury Bond ETF
However, these two funds both charge a bit more in fees than
their new Vanguard competitor, so Vanguard may be able to win
over cost conscious investors in the ex-US bond market.
Vanguard Emerging Markets Government Bond ETF:
This product looks to give investors broad exposure to
emerging market bonds, a segment that is largely absent from many
portfolios, charging just 35 basis points a year in fees for
exposure. This will be accomplished by tracking the Barclays USD
Emerging Markets Government RIC Capped Index, a broad benchmark
of U.S. dollar-denominated government securities.
This index is also capped, so exposure to any single issuer is
limited to a max of 20%, while aggregate exposure to issuers that
individually constitute 5% or more of the index is limited to
48%. The benchmark also uses a sampling strategy to establish its
exposure, so it will not be a full replication of the underlying
Emerging Market Bond ETFs: Time to Buy?
Investors should also note that the product will likely have a
modest level of interest rate risk, as the index generally has an
average maturity of between 10 and 15 years. At the end of the
first quarter, the index had an average maturity of 10.7 years,
suggesting that it is well within the medium part of the
This space is a little less competitive than the broad
international bond market, though we have seen a surge in
interest over the past few years. In terms of dollar-focused
emerging market bonds, there are a few that combine to possess
more than $11 billion in total assets under management (read
Buy These ETFs to Benefit from Japan's Massive
The most popular funds in this segment right now include
. Both of these have a broad emerging market debt focus, and more
than $2 billion in assets each. However, the two charge,
respectively, 59 basis points and 50 basis points in fees, so
some low cost investors may be swayed by Vanguard's low 35 basis
point fee in this category.
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