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Vanguard Launches New International Bond ETFs

Eric Dutram

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.

ETF Competition

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 BWX and IGOV; 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 Investing).

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: VWOB

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 index (see 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 curve.

ETF Competition

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 Easing).

The most popular funds in this segment right now include EMB and PCY. 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.