After a recent review of the almost 200 fixed-income ETFs traded in the U.S., a stark reality hit me:Issuers have been slicing and dicing the fixed-income market ever-more granularly, but nobody has yet offered a marketlike investment-grade global bond fund.
Only BlackRock has a fund in registration to track the Barclays Global Aggregate Bond Index, but with no ticker or expenses reported in the filing, the imminence of a launch is unlikely.
Many investors have traditionally stayed U.S. focused, typically investing in a fund seeking to either track or beat the Barclays U.S. Aggregate Bond Index and leaving it at that.
But this is short sighted, as dollar-denominated debt no longer constitutes the majority of the outstanding investment-grade debt. In fact U.S.-dollar debt makes up about 40 percent of the Barclays Global Aggregate Bond Index, compared with 67 percent 20 years ago.
So what does it take to go global with ETFs in the current landscape?
The U.S. exposure seems pretty straightforward. Four funds deliver exposure to the Barclays U.S. Aggregate Bond Index:
- iShares Core Total U.S. Bond Market ETF (AGG)
- Vanguard Total Bond Market ETF (BND)
- SPDR Barclays Aggregate Bond ETF (LAG)
- Schwab U.S. Aggregate Bond ETF (SCHZ)
AGG’s superior liquidity and lowest all-in cost—expenses, tracking and trading costs—edge out the competition. Still, these differences are typically a matter of single-digit basis points. In other words, any of the three funds should get the job done.
From here a combination of the SPDR Barclays International Treasury Bond ETF (BWX) and the SPDR Barclays International Corporate Bond ETF (IBND) will push you over the top to get you something approximating truly global exposure.
These two funds cost 50 basis points and 55 basis points, respectively, which is at least 10 times the cost of SCHZ, which comes in a at 5 basis points. Similarly, both funds have more tracking variability than the funds tracking the U.S. Aggregate. While both have decent volume and reasonable bid/ask spreads to meet investor needs, neither affords investors the same liquidity as AGG or BND.
None of this should be a surprise, since the funds target segments of the bond market that are less liquid and harder to track. However, that relative lack of liquidity does translate to higher trading costs incurred by establishing the correct proportions you need to hold the three funds to get marketlike exposure and then maintaining it with regular rebalances.
Vanguard will partially solve this problem when it finally launches the Vanguard International Bond Index Fund . Despite being late to the game in launching an international bond fund, the name brand and the low cost are likely attract assets. The reason it’s not a complete solution is the fund will be hedging out the currency exposure of its nondollar bond portfolio.
The debate for and against hedged versus un-hedged exposure is a subject for another blog on another day, but the takeaway should be that the Vanguard fund will be a particular flavor of broad international bond exposure, and investors should keep this in mind before diving in head-first.
Regardless of your opinion about taking on currency risk with your international bond exposure, not taking a global approach misses a significant part of the market that can help diversify your exposure. Until an issuer solves this hole in coverage, investors are stuck getting their global bond exposure in a piecemeal way.
At the time this article was written, the author held no positions in the securities mentioned. Cotact Gene Koyfman at email@example.com .
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