Vanguard to introduce low-cost international aggregate bond ETF

Feb 7th, 2013 | By | Category: Fixed Income

Vanguard has revealed plans to introduce the Vanguard Total International Bond Index ETF, a new fixed income exchange-traded fund (ETF) offering exposure to international bond markets. The ETF is scheduled to make its debut in the US before the end of the second quarter of this year.

Vanguard to introduce low-cost international aggregate bond ETF

Vanguard has revealed plans to introduce a low-cost international aggregate bond ETF.

Vanguard filed an amended registration statement for the fund with the US Securities and Exchange Commission (SEC) that reflects a new target index, as well as lower estimated expense ratio.

Bill McNabb, Vanguard CEO, said: “International bonds can serve as an important diversifier, especially for US investors who currently have modest exposure to the asset class.”

McNabb noted that Vanguard research found that a strategic allocation to hedged international bonds substantially broadens a US bond portfolio, which can further moderate risk in a diversified portfolio.

Vanguard believes that 20% of the bond portion of a US investor’s portfolio can be considered a potential target allocation to hedged international bonds.

The ETF will track the performance the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). This index comprises approximately 7,000 high-quality corporate and government bonds (average credit quality AA2/AA3) from 52 countries.

The index caps its exposure to any single bond issuer, including a government, at 20% to meet diversification requirements. The top country holdings as of 31 December, 2012, were Japan (23%), France (12%), Germany (11%), and the United Kingdom (9%).

Despite the plethora of ETFs available to US-based investors, the international aggregate bond market is largely untapped. None of Vanguard’s rivals, including iShares, SPDR, WisdomTree, Market Vectors or Schwab, offers exposure to international corporate, government and municipal bonds (i.e. the aggregate bond market) in one simple fund.

Given the ETF’s largely unexplored territory and low expense ratio (projected at 0.20% pa), the fund is likely to attract immediate interest from investors and no doubt add to Vanguard’s $245 billion in ETF assets.

The ETF will list on the NYSE Arca.

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