Vanguard plans to introduce two international bond index funds, which represent the company’s first international fixed income offerings for US investors. Registration statements have been filed with the US Securities and Exchange Commission for the following funds: Vanguard Total International Bond Index Fund and Vanguard Emerging Markets Government Bond Index Fund. Vanguard expects to offer both conventional shares (Investor, Admiral, and Institutional) and ETF Shares of the new funds, with estimated expense ratios ranging from 0.30% to 0.50%.
Vanguard Total International Bond Index Fund will seek to track the investment performance of the Barclays Global Aggregate ex-USD Float Adjusted Index (Hedged). The target benchmark comprises a wide spectrum of more than 7,000 global government, agency, and corporate securities in 57 countries in Asia, Europe, Canada and South America.
"The new Vanguard Total International Bond Index Fund will provide a low-cost way to obtain diversified exposure to one of the world’s largest asset classes," says Vanguard CEO Bill McNabb (pictured). McNabb notes that the new broad market offering will complement Vanguard’s other "Total Market" index funds, which cover US stocks, international stocks, and US bonds. Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market Index Fund have aggregate net assets of nearly USD300 billion.
"These ‘building block’ funds have an enduring appeal to individual investors, retirement plan participants, and financial advisors seeking to assemble balanced, well-diversified portfolios," says McNabb.
The Total International Bond Index Fund will employ currency hedging strategies, entering into various currency transactions to protect against uncertainty in future exchange rates. By hedging currency exposure, the fund’s investment returns are expected to more closely correlate with the underlying performance of international bonds without currency distortions. The majority of international bond funds offered today do not use hedging strategies, according to Lipper, Inc. data.
Vanguard Emerging Markets Government Bond Index Fund will seek to track the investment performance of the Barclays Emerging Markets Sovereign Index (USD). The target benchmark features approximately 200 government bonds in 39 countries. By investing solely in US dollar denominated international bonds, the fund will not subject US-based investors to currency risk.
The Emerging Markets Government Bond Index Fund will offer exposure to a sizeable and growing portion of the international fixed income universe. Emerging markets government bonds feature different risk-return characteristics than the aggregate international fixed income market, affording another diversification opportunity.
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% and 0.75%, respectively, on the conventional shares.
The new funds will be managed by the Vanguard Fixed Income Group, which is one of the world’s largest fixed income managers and oversees USD600 billion in domestic and international fixed income assets. The group has managed global bond funds for the European markets since 2000, including Vanguard Global Bond Index Fund and more than ten others. Gregory Davis, CFA, and Yan Pu, CFA(R), will jointly manage the new funds. Davis, a principal in Vanguard’s Fixed Income Group and head of the Bond Index Group, has managed investments for Vanguard since 2000. Pu joined Vanguard in 2004 and has more than ten years of investment management experience.