Vanguard Group, after years of deliberating about whether
international bonds were an investment class worthy of its focus,
filed paperwork with the Securities and Exchange Commission
detailing plans to market two bondsâone focused on
investment-grade debt outside the United States and the other on
sovereign credits from the emerging markets.
Vanguard, the third-largest U.S. ETF fund sponsor by assets,
said it will offer conventional mutual fund shares of the two new
bond funds as well as ETF shares. The two funds and the estimated
expense ratios of the ETF versions are:
- Vanguard Total International Bond Index Fund, 0.30%
- Vanguard Emerging Markets Government Bond Index Fund,
The international bond fund will be hedged, meaning that
whatever currency exposure a given bond has will be neutralized by
the fundâs hedging strategy, Vanguard said in a press release on
the two proposed funds. The emerging markets fund will meanwhile
own dollar-denominated credits, according to the filing.
International bonds have become an increasingly popular
investment in recent years. Thatâs particularly true of the
emerging markets. The single-biggest international bond fund is
focused on developing market credits. Itâs the iShares JPMorgan
USD Emerging Markets Bond Index Fund (NYSEArca:EMB), and it has
$3.15 billion in assets, according to data compiled by
IndexUniverse. The iShares fund, like the one Vanguard is planning,
holds dollar-denominated bonds.
State Street Global Advisors has two broad international bond
funds that have also attracted significant assets. SPDR Barclays
Capital International Treasury Bond ETF (NYSEArca:BWX) has $1.65
billion in assets, while its SPDR DB International Government
Inflation-Protected Bond ETF (NYSEArca:WIP) is a $1.3 billion
The Investment Grade Fund And Its Index
Vanguard said its international bond fund will track the
Barclays Global Aggregate ex-USD Float Adjusted Index (hedged).
The benchmark includes a wide spectrum of more than 7,000 global
government, agency and corporate securities in 57 countries in
Asia, Europe, Canada and South America, Vanguard said in its press
By hedging currency exposure, Vanguard said the fundâs returns
should more closely correlate with the underlying performance of
international bonds without currency distortions. Vanguard, citing
Lipper Inc. research, said most international bond funds offered
today donât use hedging strategies.
Vanguard said the investment-graded international bond portfolio
will be available in a mutual fund wrapper in the âInvestor,â
âAdmiralâ and âInstitutionalâ share classes for 0.40
percent, 0.30 percent and 0.25 percent, respectively. That would
make the âInstitutionalâ share class the only category cheaper
than the ETF.
Emerging Market Bond Fund
The Vanguard Emerging Markets Government Bond Index Fund will be
based on the Barclays Emerging Markets Sovereign Index (
The benchmark features about 200 government bonds in 39
By investing solely in U.S.-dollar-denominated international
bonds, the fund will not subject U.S.-based investors to currency
However, Vanguard did not say the emerging markets fund would be
hedged, which means that if the dollar should weaken on
international currency markets, investors, as in any
dollar-denominated asset, wouldn't be protected from that
Indeed, international emerging bond ETFs denominated in local
currencies have been gaining in popularity in the past year. For
example, the WisdomTree Emerging Markets Local Debt Fund
(NYSEArca:ELD) has pulled in $1.15 billion since its launch in the
summer of 2010.
Van Eck also rolled out the Market Vectors Emerging Markets
Local Currency Bond ETF (NYSEArca:EMLC) in the summer of 2010 and
the iShares Emerging Markets Local Currency Bond Fund
(NYSEArca:LEMB) came to market earlier this month.
Funds like ELD, EMLC and LEMB are designed to benefit when the
dollar is declining in currency markets, as it has for much of the
past decade. However, when markets are roiled, investors quickly
scurry back to dollar-denominated assets, hurting returns on such
Vanguard said the emerging markets portfolio will be available
in a mutual fund wrapper in the âInvestor,â âAdmiralâ and
âInstitutionalâ share classes for 0.50 percent, 0.35 percent
and 0.30 percent, respectively. As with the investment-grade fund,
that would make the âInstitutionalâ share class of the emerging
markets debt fund the only one cheaper than the ETF.
Special Purchase Fees For Mutual Funds
Vanguard also said to help offset the transaction costs
associated with international bonds, the Total International Bond
Index Fund and the Emerging Markets Government Bond Index Fund will
assess purchase fees of 0.25 percent and 0.75 percent,
respectively, on the non-ETF conventional shares.
Vanguard offers its own clients commission-free trades when they
are buying and selling Vanguard ETFs.
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