This is a solid currency-hedged international-bond fund.

fundcoverage@morningstar.comBNDX
by Neal Kosciulek
9/17/2019
Vanguard Total International Bond ETF

Vanguard Total International Bond ETF BNDX is a solid choice for hedged exposure to foreign investment-grade fixed-income markets. This fund is one of the cheapest in its category and offers one of the broadest and highest quality portfolios. It earns a Morningstar Analyst Rating of Silver.

The fund tracks the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which includes investment-grade bonds issued in currencies other than the U.S. dollar with maturities greater than one year. The index is weighted by market value, tilting the portfolio toward the largest, most liquid issues, which are easy to obtain and cheap to trade. That said, bond-issuing activity influences the composition of this portfolio. As a result, high-quality but low-yielding government debt accounts for most of the fund’s assets.

This portfolio has more interest-rate risk than most of its peers in the US Fund World Bond-USD Hedged Morningstar Category. Its average effective duration is approximately eight years, while the category average is approximately seven years, as of this writing. However, it diversifies this risk and can offer decent diversification benefits to U.S.-centric investors. More than 20 different countries are represented in its portfolio, but the top five areas--Great Britain, eurozone, Japan, Australia, and Canada--represent more than 85% of its total assets. Changes to the interest rates in these markets will likely have the greatest impact on the fund’s performance.

The fund engages in currency hedging, which will help it deliver cleaner exposure to local bond returns. By using one-month forward currency contracts, differences between interest rates are locked in based on short-term expectations. The strategy will be less volatile compared with non-USD hedged international funds, but its performance will not match the local market returns.

The performance of the strategy since its inception in May 2013 has been very sold. Its returns have beat its category average by more than 100 basis points, ranking in the top third of the US Fund World Bond-USD Hedged category.



Portfolio Construction

This portfolio replicates the composition of the international investment-grade bond market, effectively harnessing the market’s collective wisdom about the relative value of each bond. This is a sound approach because it is cost-effective and the market does a decent job pricing these bonds. The strategy engages in currency hedging, which provides a cleaner exposure to the local market returns by isolating its exposure to local bond credit and interest-rate risk. It earns a Positive Process Pillar rating. The strategy employs representative sampling to track the performance of the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index. The index includes original term government, government agency, corporate, and securitized non-U.S. investment-grade fixed-income investments, all issued in currencies other than the U.S. dollar with at least one year until maturity. The index weights its holdings by float-adjusted market cap and is rebalanced monthly. The fund uses one-month forward currency contracts to hedge its currency exposure.

Fees

The fund’s average annual expense ratio of 0.07% is among the lowest in the category, supporting a Positive Price rating. The fund lagged its index by approximately 20 basis points over the trailing three years through August 2019. Vanguard also charges a low 0.13% expense ratio for the Admiral share class of this fund, which has an investment minimum of $3,000.

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