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ETF Specialist

Diversification for the Sake of Diversification

Vanguard's Total International Bond exchange-traded fund is a poor investment today.

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I don’t know why Vanguard bothered to launch  Vanguard Total International Bond ETF (BNDX), a currency-hedged developed-markets bond fund. When you hedge foreign sovereign bonds, you end up with something that looks a lot like U.S. Treasuries. Vanguard points to some modest historical diversification benefits, but this backward-looking analysis fails to consider how present valuations and economic conditions affect prospective returns and correlations. The fund yields about 1.5% and has a duration of roughly seven years. The Barclays U.S. Aggregate Index, which can be owned through any number of dirt-cheap options, including  Vanguard Total Bond Market ETF (BND), yields a little more than 2% and has a duration of about five years. The fund seems to be a case of diversification for the sake of diversification.

If you're a diehard efficient-market person, the foreign bond index’s lower yield and higher duration must be compensation for some kind of risk-hedging benefit. Of course, this is crazy when you consider the bonds’ modest diversification benefits, low expected returns, and the fact that their sovereign issuers are more indebted and slower-growing than the United States.

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Samuel Lee does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.