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World-Bond Funds: 2 Risks to Be Aware Of

Investors should be aware of the currency risk and emerging-markets exposure before investing, as those factors can greatly impact the fund's risk/reward profile.

Karin Anderson: There are about 110 funds in Morningstar's world-bond category, including open-end and exchange-traded offerings. There are a variety of different approaches at play. Some key things to think about are global versus non-U.S. focus, the currency policy (whether the fund is unhedged or U.S. dollar hedged), and also sector exposure.

This year, performance-wise, global versus non-U.S. focus didn't matter so much. What really drove returns so far this year was the currency approach used. Unhedged funds take on the most non-U.S. currency risk because they are giving investors exposure to the currencies of the bonds the funds invest in. With the dollar being very strong this year, similar to last year, that gave the U.S. dollar-hedged funds a clear leg up. On average through Nov. 20, U.S. dollar-hedged funds are up about 1%, compared with an average loss of about 5% for unhedged funds.