Vanguard Emerging Markets Bond Fund Investor Shares VEMBX

Vanguard Emerging Markets Bond's risk-conscious approach, with its heavy emphasis on capital preservation, stands out from peers.

This relatively lean emerging-markets debt team comprises five analysts, three traders, and two managers. Lead manager Daniel Shaykevich has run this fund since its 2016 inception, while Mauro Favini joined the management roster in 2019; they average 21 years of industry experience. While this 10-person team's lean size limits its research capabilities, it does have its strengths. It leads to timely decision-making, which is important to this approach that relies on efficiently rotating positions based on relative value; the team’s smaller size facilitates faster execution when opportunities arise. Vanguard's shared resources, such as corporate sector specialists, economists, and additional traders, also contribute as necessary.

The team is generally conservative with the risks it takes. To rotate in and out of positions effectively, managers place an emphasis on maintaining ample liquidity. As such, the team is less involved in distressed debt and restructurings than many emerging-markets bond Morningstar Category peers. The team's approach to scenario analysis and stress testing stands out and has helped the team avert major drawdowns. For example, in 2022's first quarter, while the team did not expect Russia to invade Ukraine, they noticed they were exposed to heavier losses than they were comfortable with. Thus, the team exited its local Russia exposure and tweaked other portfolio positions, resulting in the fund outperforming most peers for the year.

Hard-currency sovereign debt makes up the majority of this portfolio, typically 60%-75% of fund assets, with smaller allocations to local-currency, corporate, quasi-sovereign debt, and US Treasuries rounding out the portfolio. The team will invest in local-currency and corporate debt if it believes a security will outperform its hard-currency sovereign debt on a risk-adjusted basis. Country- and security-selection abilities have led to compelling long-term performance. The team uses other levers such as yield-curve positioning and currency trades when opportunities arise.

Despite modest relative performance since 2024, the result of missed opportunities due to defensive positioning, the strategy's 14.0% annualized gain over the trailing three years through September 2025 landed in the top quartile of peers and outperformed the JPMorgan EMBI Global Diversified Index's 12.3% annualized return. As a result of its reliance on rotating positions, the fund should outperform most peers when markets are volatile, and it has a strong track record during stress periods.

The team's thoughtful approach to emerging-markets debt investing has been effective over the long term, earning an Above Average Process Pillar rating.

This valuation-driven approach is rooted in its thoughtful risk management and leans on an ability to rotate in and out of positions based on the team's assessment of relative value. The team's leaner size helps with quick decision-making, which is important for this approach that results in higher portfolio turnover. To implement this strategy, the team places emphasis on maintaining ample liquidity, allowing the team to rotate in and out of positions efficiently. As such, the team is not investing in distressed debt and restructuring opportunities as often as many peers; however, they still find debt rated CCC and below to invest in. That said, the bulk of high-yield exposure, which typically makes up around half of the portfolio, is higher-quality BB rated debt.

Overall, this is a conservative approach to emerging-markets debt investing, and all valuation decisions are made on a risk-adjusted basis. The team's approach to scenario analysis and stress testing stands out from peers and has been effective in avoiding or exiting vulnerable positions earlier than most peers. In early 2022, it flagged local Russian debt due to the risk of Russia invading Ukraine, and while the team didn’t think an invasion was likely, they exited the position due to the drawdown risk they were not comfortable with. This approach can lead to missed opportunities, but the team is less concerned with short-term opportunity costs and is diligent in not compromising its process when opportunities are limited.

As of July 2025, the team allocated 70% of the portfolio to hard-currency sovereign bonds, 15% to corporate and quasi-sovereign debt, and less than 1% to local-currency debt. Both corporate debt and local-currency exposure have 10% limits. Given the elevated US interest rates in 2025, the team has favored US-dollar-denominated debt to avoid the negative carry associated with holding other currencies. The team also felt that there was too much consensus on a weak dollar. Managers use currency forwards and interest rate swaps to hedge or adjust exposures, but US Treasury futures are the team's primary derivatives usage, employed to manage yield-curve risk. Derivatives are not used to lever the fund.

While the managers actively adjust country exposures, they maintain persistent portfolio biases. For example, the fund has consistently underweighted China debt since inception, reflecting the team’s view that its narrow spread over US Treasuries does not adequately compensate for risk. Macro themes and country selections tend to be viewed with a long-term horizon, but bottom-up security selection can be more tactical in nature if the team identifies mispriced securities. After April 2025’s tariff-induced volatility, while most emerging-markets securities rebounded quickly, the team identified EUR-denominated Hungarian debt that lagged its US-dollar-denominated counterpart. The team maintained a constructive view on Hungary's fundamentals but increased exposure by nearly 3% of assets and hedged the currency risk, all in response to the short-term mispricing. By August, Hungarian debt represented 4% of the portfolio, making it one of its largest country positions and shifting the fund from an underweight to an overweight stance versus its JPMorgan EMBI Global Diversified Index.

Proven managers continue to drive this relatively lean but collaborative emerging-markets team; it maintains an Above Average People Pillar rating.

Lead manager Daniel Shaykevich and comanager Mauro Favini have been a stable presence here since the fund's 2016 inception and 2019, respectively. The dedicated emerging-markets team comprises five analysts and three traders. They rely on consistent communication to ensure everyone stays on the same page as it relates to the fund's risk budget and overall exposures. Like traders, portfolio managers also have discretion to execute trades for the portfolio, while analysts contribute by integrating fundamental and technical analysis into their trade recommendations. Managers also make use of shared resources at Vanguard, such as corporate sector specialists, global economists, and additional traders.

Historically, there has been little team turnover with this group; however, over the past year, the team experienced some reshuffling. In July 2025, former co-head of emerging-markets fixed income Nick Eisinger left Vanguard for a competitor. While he wasn't a manager on the strategy, he played a key role in the research and strategic process of the emerging-markets debt team. Global head of emerging-markets research Micah James has filled this vacancy; he has been working on the team since 2014. An associate analyst also left the team in September 2025, though the team plans on adding an analyst or two to the team over the next year.

Both managers are personally invested in the fund. Shaykevich invests between USD 100,001 and USD 500,000, and Favini invests between USD 50,001 and USD 100,000.

Vanguard maintains its High Parent Pillar rating as it continues to grow under new leadership.

CEO Salim Ramji has had a busy first year captaining Vanguard’s crew, and the ship remains pointed in the right direction. The firm made its largest round of fee cuts in early 2025, which came at an estimated cost of USD 350 million. It established a separate division dedicated to its advice and wealth management efforts, a sign that it wants to seriously compete within those lines of business. Asset growth has continued to be a huge success. Only BlackRock’s inflows rival the money Vanguard is taking in. Likewise, the number of clients it serves has more than doubled since 2015.

Despite that success, an ever-growing number of clients has presented a challenge: Vanguard can’t grow its services fast enough to keep up with demand. In some instances, it has had to curb certain services and capabilities or raise fees on others to cope, causing some loyal clients to criticize what they perceive as deteriorating services.

Vanguard has ambitions to bring its disruptive legacy to the bond market. It created roughly a dozen low-cost bond exchange-traded funds for US investors and several others abroad over the 12 months through June 2025. All have low fees in their respective categories, and the actively managed strategies align with Vanguard’s philosophy. They are relatively easy to understand and are conservatively managed.

Vanguard has another opportunity to prove that clients are still its priority. On the surface, its endeavor into the high-fee deal-making world of private assets alongside Wellington and Blackstone looks like a cultural mismatch. So far, the collaboration hasn’t produced anything that’s concerning.

Long-term performance remains strong despite some more recent missteps.

The Admiral shares’ 7.0% annualized return since its April 2016 inception through September 2025 ranked in the top decile of emerging-markets bond category peers and outperformed the JPMorgan EMBI Global Diversified Index's 3.7% annualized return. Over that same timespan, it ranked as the top-performing fund among category peers that are also mainly focused on hard-currency sovereign debt. Risk-adjusted performance ranks identically, as measured by the Sharpe ratio. Long-term relative performance rankings are significantly affected by the fund's exceptional performance through 2020, though.

Performance since early 2024 has been middling relative to peers, a departure from the team’s historical outperformance. This is partly due to a stable market environment, where the fund’s relative value approach is less likely to generate excess returns relative to peers. The portfolio was more defensive than its managers would have liked; while the team added some risk during April 2025’s volatility, they largely added to names that they felt very strongly about the fundamentals. The team was also underallocated to distressed countries that performed well, such as Lebanon and Venezuela. Much of this is a byproduct of the team's conservative approach. However, given the team's reliance on rotating in and out of positions to extract value, periods of market volatility are when they expect to outperform most. The fund has maneuvered around periods of stress and economic uncertainty well.

Vanguard Emerging Markets Bond Investor's Prospectus Adjusted Expense Ratio is 0.5% per year. It places it in the cheapest quintile of the Morningstar US Fund Emerging Markets Bond Category, where the median fee is 0.86% per year. This cost positioning translates into a Medalist Rating Price Score of 1.99, which reflects its relative price positioning within the category. The Price Score ranges from -2.50 (most expensive) to +2.50 (cheapest), with higher scores indicating better cost competitiveness.