Vanguard will launch total international and emerging-markets government-bond funds in early 2012.
The wait for cheap foreign-bond index funds from Vanguard will soon be over. The family will launch traditional and ETF share classes of two international fixed-income funds early next year. The announcement comes after years of building demand for such funds from investors and is in the wake of recent research by the fund family that concluded foreign bonds can help portfolios.
It also comes as sales of world-bond funds have heated up this year. Through the end of September 2011, the world-bond category had taken in more than $31 billion in net inflows over the previous 12 months, more than any other Morningstar fund category. Similarly, emerging-markets bond funds took in more than $14 billion in inflows, or more than all but eight fund categories.
Hedging Their Bets
Vanguard plans to roll out Vanguard Total International Bond Index and Vanguard Emerging Markets Government Bond Index in 2012's first quarter, according to a news release and registration statements filed with the Securities & Exchange Commission on Monday. Both funds will track broadly diversified Barclays Capital bond indexes and will take steps to minimize exposure to currency fluctuations. The Total International Bond fund will hedge its currency exposure and the Emerging Markets Government Bond fund will own only U.S. dollar denominated sovereign securities.
Total International Bond will try to track the Barclays Capital Global Aggregate ex-USD Float Adjusted Index (Hedged). That bogy includes more than 7,000 government, agency, and corporate securities in 57 countries in Asia, Europe, Canada, and South America. Emerging Markets Government Bond will attempt to track the Barclays Emerging Markets Sovereign Index (USD), which includes 200 government bonds denominated in U.S. dollars in 39 countries.
Both funds will charge expense ratios significantly lower than the averages for the world-bond and emerging-markets bond categories. Total International Bond will levy 0.40% for Investor shares, which will have a $3,000 minimum; 0.30% for Admiral shares, which will require a $10,000 minimum and for ETFs (no minimum but which will entail brokerage fees); and 0.25% for Institutional shares, which will have a $5 million minimum. Emerging Markets Government Bond will charge 0.50% for Investor shares, 0.35% for Admiral and ETF shares, and 0.30% for Institutional shares. The average world-bond fund charges 1.12%, while the typical emerging-markets bond fund charges 1.31%.
There's a small catch on the fee front for mutual fund investors, though. Vanguard's traditional mutual fund share classes of its new offerings will charge purchase fees--paid directly to the funds--of 0.25% for Total International Bond and 0.75% for Emerging Markets Government Bond.
The funds will have accomplished index-trackers at their helms. The head of Vanguard's bond index group, Gregory Davis, will run the two funds with Yan Pu. Davis has worked in the family's fixed-income indexing group for more than a decade and is a listed manager on nearly 20 funds, including nine that track international-bond indexes but are sold only overseas, such as the Vanguard Global Bond Index and Vanguard European Investment Grade Bond Index. Davis also has helped run Vanguard Total Bond Market Index
The new funds fill significant holes in Vanguard's fund and ETF lineups that many investors have been begging the family to fill for years. The family also has mulled launching such funds several times in the past but never pulled the trigger, due to concerns about costs and demand for funds that hedged away currency exposure. Vanguard had long worried that currency volatility could negate the diversification benefits of owning international bonds.
This year, however, the firm in January published research positing that it made sense to put 20% to 40% of a fixed-income portfolio in hedged international bonds for diversification purposes. That lead to widespread speculation that Vanguard was on the cusp of launching at least one new international-bond fund.
Currency exposure is a big part of international-bond returns and most foreign-bond funds do not hedge all of their currency exposure all of the time. So the new Vanguard funds will be unique but are unlikely to vie for the title of most exciting funds in their respective categories. They are likely to be solid entrants who will offer simple, transparent international-bond exposure and will bring more much-needed price competition to the world-bond and emerging-markets bond categories.