Re-evaluating Total World Bond (BNDW)?

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Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

[Thread merged into here, fund name corrected --admin LadyGeek]

I'll admit, when it first came out a few years ago, I was pretty dismissive of Total International Bond / BNDW for US investors, finding it to have several attributes not to my liking:

-- Deviates from 'take risk on the equity side' / stick to Treasuries preference
-- Portion of returns that comes from USD-hedging adds a complexity that is harder to model
-- Given it spans countries / currency regimes, harder to think about how it responds to inflation / deflation in US vs elsewhere
-- Ditto for interest rate changes across countries / currency regimes
-- Unclear that it provides real-world diversification with improved efficient frontier, vs "diversification for diversification's sake", compared to other bond funds of similar duration

However, the world has evolved since then, with a huge amount of stimulus / debt being issued around the world in attempts to deal with the pandemic.

This increase in global money supply across the board is enough to cause me to re-examine my previous framings.

Are there now more compelling reasons than before for US investors to consider a total world bond approach?
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Re: Re-evaluating Total International Bond (BNDW)?

Post by zuma »

Are you looking at Total International Bond (BNDX) or Total World Bond (BNDW)?
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Re: Re-evaluating Total International Bond (BNDW)?

Post by watchnerd »

zuma wrote: Fri Feb 19, 2021 12:44 pm Are you looking at Total International Bond (BNDX) or Total World Bond (BNDW)?
BNDW, fixed the title.
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Re: Re-evaluating Total International Bond (BNDW)?

Post by Ocean77 »

The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by PolarInvest »

I would argue that it doesn't matter too much, as highly-rated developed country treasury bonds should return about the same once you hedge back to your currency of choice. For what it's worth, BNDX has outperformed BND since 2013, though it's unclear if that will continue given US rates have more room to fall.

Another consideration is that BNDW and BNDX both have corporates. The only pure ex-US treasury bond ETF that I know of is IGOV, which has an expense ratio of 0.35%, which is a non-starter for me.
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Re: Re-evaluating Total International Bond (BNDW)?

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Ocean77 wrote: Fri Feb 19, 2021 1:02 pm The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
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Re: Re-evaluating Total World Bond (BNDW)?

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PolarInvest wrote: Fri Feb 19, 2021 1:03 pm Another consideration is that BNDW and BNDX both have corporates. The only pure ex-US treasury bond ETF that I know of is IGOV, which has an expense ratio of 0.35%, which is a non-starter for me.
Yes, the presence of corporates means I would have to change my point of view on taking business risk on the equity side.
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Re: Re-evaluating Total International Bond (BNDW)?

Post by secondopinion »

watchnerd wrote: Fri Feb 19, 2021 1:06 pm
Ocean77 wrote: Fri Feb 19, 2021 1:02 pm The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
Not being investment-grade is not the worst thing in the world. Just note that market risk is more likely to affect the price.
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Re: Re-evaluating Total International Bond (BNDW)?

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watchnerd wrote: Fri Feb 19, 2021 1:06 pm
Ocean77 wrote: Fri Feb 19, 2021 1:02 pm The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
The main one I use is EBND, it is a bit better with about half of the holding rated A or better.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by UpperNwGuy »

I don't see how BNDX or BNDW would do much for a portfolio. What started your investigation, OP? Was it frustration with low US bond yields?
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Re: Re-evaluating Total World Bond (BNDW)?

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UpperNwGuy wrote: Fri Feb 19, 2021 2:06 pm I don't see how BNDX or BNDW would do much for a portfolio. What started your investigation, OP? Was it frustration with low US bond yields?
Re-reading threads on the Sharpe portfolio.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by DB2 »

Vanguard has about one third international bonds in their LifeStrategy and Target Date funds. I believe they also have a paper or two about them out there you might want to take a look at.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by AlwaysLearningMore »

Dr. Wm. Bernstein addressed international bonds in this interview: https://tinyurl.com/y6qp4fr9

ETF.com: One thing that puzzled me is that among your recommendations, I don’t see an international bond fund as part of the allocation—even one that’s currency-hedged. Why?

Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets. They are what you are defeasing your retirement with; they are what enables you to sleep at night; they are your liquidity for when you lose your job or for when you want to buy cheap equities or the corner lot from your neighbor who got caught in a liquidity squeeze.

And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.

Now, when you have hedged currency risk as opposed to unhedged currency risk in a bond fund, you’ve got a smaller problem, but it’s still a problem. And that’s when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.

ETF.com: So, to take this back to your basic recommendation in “If You Can,” it’s that you don’t need BNDX—which is a currency-hedged international aggregate bond fund, because of negligible diversification and transaction costs? And you’re basically fine with a U.S. aggregate bond fund like BND?

Bernstein: Yes, owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
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Re: Re-evaluating Total World Bond (BNDW)?

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This:
DB2 wrote: Fri Feb 19, 2021 2:36 pm Vanguard has about one third international bonds in their LifeStrategy and Target Date funds. I believe they also have a paper or two about them out there you might want to take a look at.

Is an interesting contrast to this:
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
ETF.com: So, to take this back to your basic recommendation in “If You Can,” it’s that you don’t need BNDX—which is a currency-hedged international aggregate bond fund, because of negligible diversification and transaction costs? And you’re basically fine with a U.S. aggregate bond fund like BND?

Bernstein: Yes, owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
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Re: Re-evaluating Total World Bond (BNDW)?

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AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm Dr. Wm. Bernstein addressed international bonds in this interview: https://tinyurl.com/y6qp4fr9

ETF.com: One thing that puzzled me is that among your recommendations, I don’t see an international bond fund as part of the allocation—even one that’s currency-hedged. Why?

Bernstein: Well, first, there is absolutely no way any rational investor would want an unhedged international bond fund in their portfolio for a very simple reason: Your bonds are your “safe” assets. They are what you are defeasing your retirement with; they are what enables you to sleep at night; they are your liquidity for when you lose your job or for when you want to buy cheap equities or the corner lot from your neighbor who got caught in a liquidity squeeze.

And the unhedged currency exposure with unhedged international bonds is very risky. All you have to do is look to what happened to the euro and the yen in the last crisis—they cratered. That’s a risk you simply don’t want to take.

Now, when you have hedged currency risk as opposed to unhedged currency risk in a bond fund, you’ve got a smaller problem, but it’s still a problem. And that’s when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.

ETF.com: So, to take this back to your basic recommendation in “If You Can,” it’s that you don’t need BNDX—which is a currency-hedged international aggregate bond fund, because of negligible diversification and transaction costs? And you’re basically fine with a U.S. aggregate bond fund like BND?

Bernstein: Yes, owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.

Since Sharpe specifically mentions BNDW...

https://retirementincomeanalysis.blogsp ... hange.html

...I wonder what benefit he's seeing that Bernstein doesn't?

Although perhaps Sharpe's view is more driven by philosophical goals, the desire to own the total market, than practical ones.
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Re: Re-evaluating Total World Bond (BNDW)?

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watchnerd wrote: Fri Feb 19, 2021 3:38 pm Although perhaps Sharpe's view is more driven by philosophical goals, the desire to own the total market, than practical ones.
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Re: Re-evaluating Total World Bond (BNDW)?

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Sadly the white paper that was linked to from the first post is a busted link now
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Re: Re-evaluating Total International Bond (BNDW)?

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secondopinion wrote: Fri Feb 19, 2021 1:33 pm
watchnerd wrote: Fri Feb 19, 2021 1:06 pm
Ocean77 wrote: Fri Feb 19, 2021 1:02 pm The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
Not being investment-grade is not the worst thing in the world. Just note that market risk is more likely to affect the price.
If considering EM bonds, take a look at VEGBX. It has outperformed its benchmark as well as VWOB over the last 3 years. The majority of the fund is Baa or lower. It is actively managed, which I am not allergic to and may counteract some of your concerns in investing in lower quality credit. I personally own VEGBX, but I consider it as part of my EM exposure and not “safe” fixed income
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Re: Re-evaluating Total International Bond (BNDW)?

Post by DB2 »

Huygens wrote: Fri Feb 19, 2021 5:16 pm
secondopinion wrote: Fri Feb 19, 2021 1:33 pm
watchnerd wrote: Fri Feb 19, 2021 1:06 pm
Ocean77 wrote: Fri Feb 19, 2021 1:02 pm The bond portion of my portfolio is already split between US treasuries and emerging market government bonds. My impression is that emerging markets such as China are actually more responsible and conservative with their spending and fiscal policies and the US and many other developed countries (which operate like the US, if not worse). Not to mention that interest rates in China and other EM are still positive. I think if we want to diversify, then the the asset being added should really be different than the one we already have.
That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
Not being investment-grade is not the worst thing in the world. Just note that market risk is more likely to affect the price.
If considering EM bonds, take a look at VEGBX. It has outperformed its benchmark as well as VWOB over the last 3 years. The majority of the fund is Baa or lower. It is actively managed, which I am not allergic to and may counteract some of your concerns in investing in lower quality credit. I personally own VEGBX, but I consider it as part of my EM exposure and not “safe” fixed income
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Re: Re-evaluating Total World Bond (BNDW)?

Post by GAAP »

I think it partly depends upon how you define risk. My definition includes economic failure in the US (a black swan to most in this forum), but my reading of history tells me that all empires fail, and that the time to failure has become shorter as the pace of change has increased. I also spent 30 years in Telecom, and am a true-believer in the optimism of Mr. Murphy -- it just could happen in my lifetime...

Another influence is that I'm married to someone with triple citizenship -- a post-pandemic retirement is still quite possible.

My portfolio is composed exclusively of VT (World Stock) and BNDW (World Bonds) plus sufficient cash to ensure liquidity.
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Re: Re-evaluating Total World Bond (BNDW)?

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GAAP wrote: Fri Feb 19, 2021 6:42 pm I think it partly depends upon how you define risk. My definition includes economic failure in the US (a black swan to most in this forum), but my reading of history tells me that all empires fail, and that the time to failure has become shorter as the pace of change has increased. I also spent 30 years in Telecom, and am a true-believer in the optimism of Mr. Murphy -- it just could happen in my lifetime...

Another influence is that I'm married to someone with triple citizenship -- a post-pandemic retirement is still quite possible.

My portfolio is composed exclusively of VT (World Stock) and BNDW (World Bonds) plus sufficient cash to ensure liquidity.
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Re: Re-evaluating Total World Bond (BNDW)?

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I'm essentially VT & BNDW. I use VTSAX/VTIAX & VBTLX/VTABX at the US/ex-US weights in VT and BNDW.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by goonie »

AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
Slightly more diversification for slightly more expense. That's actually not all that different from what Vanguard says in their research paper.

Regardless, Bernstein and Vanguard are both basing diversification benefit on past history. There's always the possibility that the future is quite a bit different with more diversification benefit.
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Re: Re-evaluating Total World Bond (BNDW)?

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watchnerd wrote: Fri Feb 19, 2021 12:32 pm Are there now more compelling reasons than before for US investors to consider a total world bond approach?
Considering how many foreign central banks had to depend on the U.S. Federal Reserve's generosity with bank liquidity swaps during both he GFC and the pandemic; no.

Or put differently: when the USD stops being the global reserve currency then non-USD bonds might be something to consider. Until then there is no additional safety to be gained from adding foreign bonds to a US investors portfolio.
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Re: Re-evaluating Total World Bond (BNDW)?

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goonie wrote: Fri Feb 19, 2021 9:43 pm
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
Slightly more diversification for slightly more expense. That's actually not all that different from what Vanguard says in their research paper.

Regardless, Bernstein and Vanguard are both basing diversification benefit on past history. There's always the possibility that the future is quite a bit different with more diversification benefit.
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by Always passive »

I know that I am moving a bit out of subject, but I am very comfortable just using only TIPS. Every time I compare SCHP (Schwab TIPS) with total bond and other bond funds of similar credit risk, SCHP comes ahead.
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Re: Re-evaluating Total World Bond (BNDW)?

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.....
Last edited by AerialWombat on Thu Apr 01, 2021 10:56 pm, edited 1 time in total.
This post is a work of fiction. Any similarity to real financial advice is purely coincidental.
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Re: Re-evaluating Total World Bond (BNDW)?

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AerialWombat wrote: Sat Feb 20, 2021 12:45 am
Always passive wrote: Sat Feb 20, 2021 12:34 am I know that I am moving a bit out of subject, but I am very comfortable just using only TIPS. Every time I compare SCHP (Schwab TIPS) with total bond and other bond funds of similar credit risk, SCHP comes ahead.
In terms of what specific metric(s)?
We have agreed that the main goal of bonds as an asset class is to provide portfolio stability, protection when you need it the most, i.e., equity drawdowns. TIPS seem to me that they meet all those characteristics: zero credit risk, zero inflation risk, and very low correlation to equities. You may wish to use short term TIPS since they are less volatility, but we have all agreed here that intermediate term bonds are a good compromise between volatility and return.
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Re: Re-evaluating Total World Bond (BNDW)?

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Alchemist wrote: Fri Feb 19, 2021 10:10 pm
watchnerd wrote: Fri Feb 19, 2021 12:32 pm Are there now more compelling reasons than before for US investors to consider a total world bond approach?
Considering how many foreign central banks had to depend on the U.S. Federal Reserve's generosity with bank liquidity swaps during both he GFC and the pandemic; no.

Or put differently: when the USD stops being the global reserve currency then non-USD bonds might be something to consider. Until then there is no additional safety to be gained from adding foreign bonds to a US investors portfolio.
Do you think that also applies to the EM bond portion of BNDW?
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Re: Re-evaluating Total World Bond (BNDW)?

Post by goonie »

watchnerd wrote: Sat Feb 20, 2021 12:23 am
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
The US bond market is heavier in corporate bonds than ex-US. That's one difference.

I think it's also heavier in mortgage-backed securities but I'm not certain on that.
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Re: Re-evaluating Total International Bond (BNDW)?

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watchnerd wrote: Fri Feb 19, 2021 1:06 pm That's an interesting alternative.

The idea being that developed markets are more similar to US Treasuries, so not much diversification is gained?

The challenge I have with EM government bonds, at least when I look at VWOB/VEMAX, is a the dominance of <Baa bonds.
USD EM Bonds have much higher credit risk than Local Currency EM bonds. Would prefer the later over the former and EM Equities if one wants Diversification.
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Re: Re-evaluating Total World Bond (BNDW)?

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goonie wrote: Sat Feb 20, 2021 9:52 am
watchnerd wrote: Sat Feb 20, 2021 12:23 am
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
The US bond market is heavier in corporate bonds than ex-US. That's one difference.

I think it's also heavier in mortgage-backed securities but I'm not certain on that.
Neither of those are factor differences, though.

If you just want to tilt the weightings to be less Corp / MBS, you don’t need ex-US bonds to do that.

Geo-political risk is the only un-hedged unique factor I can think of, and I don’t think that can be separated from generalized beta / volatility
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Re: Re-evaluating Total World Bond (BNDW)?

Post by DB2 »

watchnerd wrote: Sat Feb 20, 2021 12:23 am
goonie wrote: Fri Feb 19, 2021 9:43 pm
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
Slightly more diversification for slightly more expense. That's actually not all that different from what Vanguard says in their research paper.

Regardless, Bernstein and Vanguard are both basing diversification benefit on past history. There's always the possibility that the future is quite a bit different with more diversification benefit.
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
I suppose, one could ask, what if something (for the much worse) changes within the U.S. bond market? This is where international could be beneficial. Do you want to put all of your bond eggs on in one country basket for the rest of your life? Are you certain the U.S. bond market will remain superior for the rest of your lifetime?
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Re: Re-evaluating Total World Bond (BNDW)?

Post by goonie »

watchnerd wrote: Sat Feb 20, 2021 10:05 am
goonie wrote: Sat Feb 20, 2021 9:52 am
watchnerd wrote: Sat Feb 20, 2021 12:23 am
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
The US bond market is heavier in corporate bonds than ex-US. That's one difference.

I think it's also heavier in mortgage-backed securities but I'm not certain on that.
Neither of those are factor differences, though.

If you just want to tilt the weightings to be less Corp / more MBS, you don’t need ex-US bonds to do that.

Geo-political risk is the only factor I can think of, and I don’t think that can be separated from generalized beta / volatility
Yeah, you could tilt weightings within the US market so that you're less corporate and/or less MBS.

You make a good point about geo-political risk. It's already accounted for in credit risk and interest rate risk. The only thing I would add is what I mentioned before. Our assumptions about these risks and the small diversification benefits that result from a wider aggregate of bonds are based on past history and relatively recent history at that. I know that's a vague point to make and I'm not nailing down anything specific here.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by ruud »

Out of curiosity, why BNDW when it's just an ETF-of-ETFs holding BND and BNDX?

(I guess for the same reason why someone would prefer VT over VTI+VXUS, though VT holds the actual stocks, not another layer of ETFs).
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

ruud wrote: Sat Feb 20, 2021 11:04 am Out of curiosity, why BNDW when it's just an ETF-of-ETFs holding BND and BNDX?

(I guess for the same reason why someone would prefer VT over VTI+VXUS, though VT holds the actual stocks, not another layer of ETFs).
Convenience
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

DB2 wrote: Sat Feb 20, 2021 10:37 am
watchnerd wrote: Sat Feb 20, 2021 12:23 am
goonie wrote: Fri Feb 19, 2021 9:43 pm
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
Slightly more diversification for slightly more expense. That's actually not all that different from what Vanguard says in their research paper.

Regardless, Bernstein and Vanguard are both basing diversification benefit on past history. There's always the possibility that the future is quite a bit different with more diversification benefit.
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
I suppose, one could ask, what if something (for the much worse) changes within the U.S. bond market? This is where international could be beneficial. Do you want to put all of your bond eggs on in one country basket for the rest of your life? Are you certain the U.S. bond market will remain superior for the rest of your lifetime?
Can you give me an example about how that plays out in a way that USD-hedged bonds aren't also impacted, too?

Any scenario I can think of impacts the value of the dollar, which then carries over to USD-hedged bonds...
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Re: Re-evaluating Total World Bond (BNDW)?

Post by GAAP »

watchnerd wrote: Fri Feb 19, 2021 8:29 pm
GAAP wrote: Fri Feb 19, 2021 6:42 pm I think it partly depends upon how you define risk. My definition includes economic failure in the US (a black swan to most in this forum), but my reading of history tells me that all empires fail, and that the time to failure has become shorter as the pace of change has increased. I also spent 30 years in Telecom, and am a true-believer in the optimism of Mr. Murphy -- it just could happen in my lifetime...

Another influence is that I'm married to someone with triple citizenship -- a post-pandemic retirement is still quite possible.

My portfolio is composed exclusively of VT (World Stock) and BNDW (World Bonds) plus sufficient cash to ensure liquidity.
60/40?
I don't understand the question -- my choice of AA is separate from my choice of investment vehicles. I would be happy with that combination of funds with any AA that included both asset classes.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

GAAP wrote: Sat Feb 20, 2021 12:25 pm
watchnerd wrote: Fri Feb 19, 2021 8:29 pm
GAAP wrote: Fri Feb 19, 2021 6:42 pm I think it partly depends upon how you define risk. My definition includes economic failure in the US (a black swan to most in this forum), but my reading of history tells me that all empires fail, and that the time to failure has become shorter as the pace of change has increased. I also spent 30 years in Telecom, and am a true-believer in the optimism of Mr. Murphy -- it just could happen in my lifetime...

Another influence is that I'm married to someone with triple citizenship -- a post-pandemic retirement is still quite possible.

My portfolio is composed exclusively of VT (World Stock) and BNDW (World Bonds) plus sufficient cash to ensure liquidity.
60/40?
I don't understand the question -- my choice of AA is separate from my choice of investment vehicles. I would be happy with that combination of funds with any AA that included both asset classes.
The reason I asked is because the combination of VT/BNDW at 60/40 is the current 'EZ mode' approximation of the Sharpe portfolio.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by DB2 »

watchnerd wrote: Sat Feb 20, 2021 12:18 pm
DB2 wrote: Sat Feb 20, 2021 10:37 am
watchnerd wrote: Sat Feb 20, 2021 12:23 am
goonie wrote: Fri Feb 19, 2021 9:43 pm
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...when you take foreign sovereign bonds and hedge them back to the dollar—you’ve basically got U.S. bonds.

Maybe you get a tiny bit of extra diversification, but it’s a trivial amount—plus you’re paying higher expenses and higher transactional costs to deal with foreign bonds.
AlwaysLearningMore wrote: Fri Feb 19, 2021 2:38 pm
Bernstein: ...owning a currency-hedged bond international fund is just basically getting into slightly more expensive U.S. bond exposure.
Slightly more diversification for slightly more expense. That's actually not all that different from what Vanguard says in their research paper.

Regardless, Bernstein and Vanguard are both basing diversification benefit on past history. There's always the possibility that the future is quite a bit different with more diversification benefit.
If every foreign bond is hedged to USD, eliminating currency diversification, what unique factor remains to provide diversification?

Given credit quality, duration, and yield factors already exist in the US bond market.
I suppose, one could ask, what if something (for the much worse) changes within the U.S. bond market? This is where international could be beneficial. Do you want to put all of your bond eggs on in one country basket for the rest of your life? Are you certain the U.S. bond market will remain superior for the rest of your lifetime?
Can you give me an example about how that plays out in a way that USD-hedged bonds aren't also impacted, too?

Any scenario I can think of impacts the value of the dollar, which then carries over to USD-hedged bonds...
Even hedged, there have been years where BNDX outperforms BND. It could happen more frequently in the future (or not) depending on circumstances. If the rest of the world one day says, "You know what. You (U.S.) are holding the privilege of world's reserve currency for what reason any longer? You are benefiting from this far more than we are. We are done with it. We are not buying your debt any longer." Even hedged, I think there could possibly be some benefit. If not, BNDX should not have outperformed BND IN 2014, 15, 16 and 18 which didn't even deal with my U.S. calamity hypothetical.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by ruud »

watchnerd wrote: Sat Feb 20, 2021 12:15 pm
ruud wrote: Sat Feb 20, 2021 11:04 am Out of curiosity, why BNDW when it's just an ETF-of-ETFs holding BND and BNDX?
Convenience
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Re: Re-evaluating Total International Bond (BNDW)?

Post by Nightowl99 »

My opinion of international bonds has changed over time so that, for now, I'm not holding much of them, and may not buy more for the foreseeable future. I had thought they'd add diversification to my bond allocation and maybe counteract the weakness of the dollar, but now I'm thinking of shifting more from US stocks to foreign stock funds instead. (Instead of staying the course, I'm making a slight course correction...to lower asset allocation a little due to recent increases.)

I was just skimming through this article on Vanguard's website (their outlook for 2021, not sure how to link it here): https://institutional.vanguard.com/VGAp ... mVEMO2021s --and they're predicting that international bonds' performance will probably be muted in the near term due to low or negative yields. On the other hand, it's possible that more exposure to international equities may be beneficial. Everyone's goals are different, though, so who knows, maybe international bonds will surprise us all sometime in the future.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

DB2 wrote: Sat Feb 20, 2021 1:01 pm If the rest of the world one day says, "You know what. You (U.S.) are holding the privilege of world's reserve currency for what reason any longer? You are benefiting from this far more than we are. We are done with it. We are not buying your debt any longer."
But if that is the scenario you're really trying to protect against, un-hedged international bonds is what you really want.
Last edited by watchnerd on Sat Feb 20, 2021 1:27 pm, edited 1 time in total.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by DB2 »

watchnerd wrote: Sat Feb 20, 2021 1:24 pm
DB2 wrote: Sat Feb 20, 2021 1:01 pm If the rest of the world one day says, "You know what. You (U.S.) are holding the privilege of world's reserve currency for what reason any longer? You are benefiting from this far more than we are. We are done with it. We are not buying your debt any longer."
But if that is the scenario you're really trying to protect against, un-hedged international bonds is what you really want.
Oh I agree, that would be far better. But still, you did you see how BNDX outperformed BND in four out of five years recently without this scenario?
Last edited by DB2 on Sat Feb 20, 2021 1:29 pm, edited 2 times in total.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

DB2 wrote: Sat Feb 20, 2021 1:27 pm
watchnerd wrote: Sat Feb 20, 2021 1:24 pm
DB2 wrote: Sat Feb 20, 2021 1:01 pm If the rest of the world one day says, "You know what. You (U.S.) are holding the privilege of world's reserve currency for what reason any longer? You are benefiting from this far more than we are. We are done with it. We are not buying your debt any longer."
But if that is the scenario you're really trying to protect against, un-hedged international bonds is what you really want.
Oh I agree, that would be far better. But still, you did you see how BNDX outperformed BND in four out of five years recently without this scenario?
I did.

There is some 'extra return', sometimes, from the currency hedging -- Vanguard has said as much.

Which is interesting, but I don't think I'd invest in something just for the possibility of some currency hedging extra returns that shows up sometimes.
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Re: Re-evaluating Total International Bond (BNDW)?

Post by DB2 »

Nightowl99 wrote: Sat Feb 20, 2021 1:07 pm My opinion of international bonds has changed over time so that, for now, I'm not holding much of them, and may not buy more for the foreseeable future. I had thought they'd add diversification to my bond allocation and maybe counteract the weakness of the dollar, but now I'm thinking of shifting more from US stocks to foreign stock funds instead. (Instead of staying the course, I'm making a slight course correction...to lower asset allocation a little due to recent increases.)

I was just skimming through this article on Vanguard's website (their outlook for 2021, not sure how to link it here): https://institutional.vanguard.com/VGAp ... mVEMO2021s --and they're predicting that international bonds' performance will probably be muted in the near term due to low or negative yields. On the other hand, it's possible that more exposure to international equities may be beneficial. Everyone's goals are different, though, so who knows, maybe international bonds will surprise us all sometime in the future.
I think this thread is an accidental duplicate - you might want to post here: viewtopic.php?f=10&t=340570
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Re: Re-evaluating Total World Bond (BNDW)?

Post by goonie »

watchnerd wrote: Sat Feb 20, 2021 1:29 pm
DB2 wrote: Sat Feb 20, 2021 1:27 pm
But still, you did you see how BNDX outperformed BND in four out of five years recently without this scenario?
I did.

There is some 'extra return', sometimes, from the currency hedging -- Vanguard has said as much.

Which is interesting, but I don't think I'd invest in something just for the possibility of some currency hedging extra returns that shows up sometimes.
Are you sure that the recent outperformance is due to currency hedging?
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Re: Re-evaluating Total World Bond (BNDW)?

Post by vineviz »

goonie wrote: Sat Feb 20, 2021 10:54 am You make a good point about geo-political risk. It's already accounted for in credit risk and interest rate risk. The only thing I would add is what I mentioned before. Our assumptions about these risks and the small diversification benefits that result from a wider aggregate of bonds are based on past history and relatively recent history at that. I know that's a vague point to make and I'm not nailing down anything specific here.
It's safe to say that SOME of the risks associated with ex-US bonds are accounts for with credit, term, and currency risks, but certainly not all of them are.

The diversification benefits of ex-US currency-hedged bonds are relatively inconsequential except in the cases of portfolios with EXTREMELY high overall bond allocations (e.g. bonds are >70% or more of the total portfolio) but they do exist.
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Re: Re-evaluating Total World Bond (BNDW)?

Post by watchnerd »

goonie wrote: Sat Feb 20, 2021 1:40 pm
watchnerd wrote: Sat Feb 20, 2021 1:29 pm
DB2 wrote: Sat Feb 20, 2021 1:27 pm
But still, you did you see how BNDX outperformed BND in four out of five years recently without this scenario?
I did.

There is some 'extra return', sometimes, from the currency hedging -- Vanguard has said as much.

Which is interesting, but I don't think I'd invest in something just for the possibility of some currency hedging extra returns that shows up sometimes.
Are you sure that the recent outperformance is due to currency hedging?
I have not de-composed the return for every constituent component of each index, determined the contribution to portfolio return, backed-out currency effects across multiple currency regimes, normalized over time, and compared them to each other.

Which would be quite an under-taking.

I doubt anyone has done this.

Aside from currency hedge returns, which Vanguard has said, differences in credit quality weightings would be another area (EM bonds vs high yield, for example).

But if the performance differences are due to variant weightings in credit quality, that's not a unique factor.
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