FUNDS FOCUS – Foreign & Global Bond Funds | Foreign bonds haven't cost you anything—and haven't gained you much either. My take on Vanguard's five foreign and global bond funds.
If you ask Vanguard, roughly a third of every investor's bond allocation should be in foreign bonds at all times. Or at least that's the message I get from Vanguard's pre-canned portfolios—the LifeStrategy and Target Retirement funds—which are all positioned this way.
I've allocated roughly a third of the bond sleeve in the IVA Portfolios to Total World Bond ETF (BNDW), so you might think I agree with Vanguard. I don't—not fully.
I own the global bond fund today because it increases diversification without sacrificing return (or yield)—that's a good trade in my book. But as I'll show you, very little has separated a U.S.-only bond portfolio from a global one, particularly once you strip out currency risk (which is what Vanguard's foreign bond funds generally do).
So while I like being globally diversified today, I'm not convinced foreign bonds are a must-own all the time.
(And for the record, the other two-thirds of my bond sleeve is in cash—so I'm not exactly following Vanguard's playbook step for step either.)
Let's dig into foreign bonds and sort through Vanguard's options.
U.S. Bond Round-Up
Looking for my take on one of Vanguard’s U.S.-focused taxable bond funds? You can find it in my recent four-part series:
- Sorting Through the Short End: A guide to Vanguard’s cash alternatives and short-maturity bond funds.
- Sorting Through the Long End: My take on Vanguard's core bond funds, from Total Bond Market Index to Core-Plus Bond to Intermediate-Term Investment-Grade.
- Inflation Insurance, Repriced: Everything you need to know about Treasury Inflation-Protected Securities (TIPS).
- The Rest of the Bond Aisle: My take on Vanguard’s riskier bonds, from mortgage-backed securities to junk bonds to one very volatile Treasury ETF.
Staying Home Versus Traveling Abroad
Here’s why I’m not convinced everyone must own a globally diversified bond portfolio.
The chart below plots an investment in Total Bond Market Index (VBTLX or BND) alongside an investment in a “global bond” portfolio since 1989 (when my index data starts). My global bond portfolio follows Vanguard’s lead—70% Total Bond Market Index and 30% Total International Bond Index (VTABX or BNDX). (For returns before the foreign fund’s 2013 inception, I used index returns.)
Simply put, over the past three-and-a-half decades, global and U.S.-only portfolios traveled similar courses to the same destination.
One investor may look at that and decide to keep things simple with U.S. bonds—that you don’t need to complicate things by adding foreign bonds to the mix.
Another investor might say, if I’m not giving up anything, I should hold the more diversified (global) portfolio—you’re getting the same return with less risk.
With the IVA Portfolios, I’m leaning toward the latter view. But I’m sympathetic to both. As I often say, finding the right portfolio for you makes it easier to spend time in the market.
With that, let’s turn to Vanguard’s foreign and global bond funds.