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ETF Specialist

The Missing Piece

This currency-hedged international-bond fund offers core exposure to one of the world's largest asset classes, which U.S. investors often overlook.

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The Barclays US Aggregate Bond Index has become a widely accepted benchmark for investors seeking broad passive exposure to the U.S. investment-grade bond market. But until recently, there were no index funds that offered similar exposure to international bonds. Investors had to assemble this portfolio piecemeal with separate international government- and corporate-bond funds. More problematically, currency fluctuations have a significant impact on most of these funds' returns and volatility, limiting their ability to diversify credit and interest-rate risk. High expense ratios also create a significant drag on their performance. Vanguard International Bond Index ETF (BNDX) fills this void. For a low 0.20% expense ratio, it offers broad exposure to fixed-rate investment-grade government and corporate debt issued in foreign currencies, with more than one year to maturity. Vanguard attempts to hedge the fund's currency risk. This hedge should make interest-rate, inflation, and credit risk more-important drivers of the fund's performance. The fund could serve as a core holding for cost-conscious investors looking to diversify these risks. It is also available in a mutual fund format.

While it was only launched in May 2013, the fund has already amassed assets amounting to more than $18 billion across all of its share classes. But investors aren't flocking to this fund for its yield. As of the end of October, the fund's holdings had an average yield to maturity of 1.8%, slightly lower than the corresponding figure for the Barclays US Aggregate Float Adjusted Index, 2.2%. That may be partially explained by the fact that it has greater exposure to government bonds, which represent more than three fourths of the portfolio.

Alex Bryan does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.