Bond basics for non-US investors

From Bogleheads

Bond basics for non-US investors applies to EU, UK and some other geographical areas. Because each has its own set of laws and regulations you need to think carefully about how you will plan your investments. It is worth looking for advice from local specialists, and from the Bogleheads forum if appropriate.

For a clear understanding of bonds and why they belong in a Bogleheads style portfolio, see the introductory material in Bond basics. However, that article is written for US investors, making parts of it inapplicable to non-US investors.

Once you have understood the basic fundamentals of asset allocation, you can use articles on the main Wiki site to understand all the characteristics of fixed income. The principles remain the same when applied outside the US. In addition, the main US fund managers, such as Vanguard and iShares, offer analogues of all the types of US bonds that other articles mention, as UCITS ETFs and mutual funds. Options include: global aggregate bond funds; straight copies of the US funds but within UCITS; and some specific duration UCITS bond ETFs that may include for TIPS and short term duration Treasury bonds.

Europe and other markets issue their own debt instruments, such as European government bonds, UK Gilts and Eurobonds.

Overview of US simple portfolio fixed income options

Three-fund portfolio

The standard Bogleheads three-fund portfolio uses these fund types. Bogleheads forum topic: "The three-fund portfolio" makes the case for this arrangement:

  • Total stock market (US - domestic)
  • Total international stock market (Developed markets - ex-US)
  • Total bond market (US - domestic)

US investors can create a three-fund portfolio using these Vanguard ETFs:

  • Vanguard Total Stock ETF (VTI)
  • Vanguard Total International Stock ETF (VXUS)
  • Vanguard Total Bond Market ETF (BND)

Total bond market funds

Vanguard Total Bond Market ETF (BND)

The assets in the total bond market fund used in this portfolio (or the equivalent ETF) are US only bonds. This will create some potential difficulties for you where your home currency is not US dollars. In addition some countries may have tax rules that frustrate or even prevent you from using US domiciled funds.

The total bond market fund BND has these characteristics:

  • Broad exposure to US investment grade bonds
  • Aim is to keep pace with US bond market returns
  • Potential to provide income
  • Moderate volatility
  • More appropriate for medium- or long-term goals
Credit quality

Vanguard classify the risk level for BND fund at 2 on their scale from 1 to 5, where 1 is the lowest risk.

Credit quality Proportion
US Government 64%
Aaa 4%
Aa 3.5%
A 11%
Baa 17%
Duration

BND is and intermediate term bond fund.

Average effective maturity 8.2 years
Average duration 6.0 years
Yield to maturity 2.7%

Vanguard Total World Bond ETF (BNDW)

Starting in 2013, Vanguard includes international bonds (non-USD bonds hedged to USD) in some of their total bond market offerings in the US. Vanguard's Total World Bond ETF seeks to track the performance of a broad, market-weighted index that measures the investment return of investment-grade US bonds and investment-grade non-US dollar-denominated bonds hedged to USD. As of June 2019, the bond allocation for BNDW is 47% US, with the remainder non-US. BNDW seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted Composite Index.[1]

EU version of Bogleheads portfolio

You can find a version of the three-fund Bogleheads portfolio suitable for EU investors in EU investing § Sample portfolios. The article offers two portfolio versions: accumulating, and distributing.

Equivalent non-US bond fund to "total bond market"

The US version of the total global bond market (BNDW) indicates that Vanguard and others now accept an aggregated global bond as a option for US investors. (Although, many US Boglehead investors prefer to stay with the total US bond fund, BND, rather than use the global version.)

For some non-US investors, in particular investors in the EU and the UK, the main asset managers offer bond funds tailored to those countries.

In addition, for EU and UK based investors there is investor protection legislation that makes it hard or impossible to access US domiciled funds. For more, see: EU legislation § UCITS, MiFID II and PRIIPs

The fixed income suggestions are based upon investment grade global funds: the first aggregate version including corporate bonds and the second version only including government bonds:

  • Global aggregate UCITS ETF bond funds
  • Global government UCITS ETF bond funds

See below for more details. There is only brief discussion of the key risk areas of duration and credit quality, and no comprehensive description of the overall risks of investing in bonds. You need to understand the overall bond risks before making any investment decisions.

The data provided below is current as of July 2019. If you plan to use any of these products, please check that these details remain current and accurate.

Non-US global bond funds

For non-US bonds the Wiki suggests either an aggregate global bond ETF of investment grade bonds (accumulating), or a global government bond ETF (distributing).

Geographical spread

Global aggregate bond fund

The UCITS aggregate global bond ETF, for example from iShares (AGGH), has this geographical breakdown:

Location Proportion
1. United States 40%
2. Japan 17%
3. France 5.6%
4. United Kingdom 5%
5. Germany 4.7%
6. Italy 3.4%
7. Canada 3%
8. Spain 2.5%
9. Supranational 2%
10. China 2.6%
11. Netherlands 1.6%

These proportions contrast somewhat with the Vanguard US domiciled bond mix as noted above.

The iShares global aggregate bond UCITS ETF (AGGH, or whichever version is chosen) seeks to track the investment results of an index composed of global investment grade bonds. It uses the Bloomberg Barclays Global Aggregate Bond Index[2] as the benchmark.

Global government bond fund

The UCITS global government bond ETF from iShares (IGLH) has this geographical breakdown:

Location Proportion
1. United States 44.6%
2. Japan 22.75%
3. France 9.48%
4. Italy 8.4%
5. Germany 6.3%
6. United Kingdom 6%
7. Canada 1.8%
8. Spain 2.5%
9. Cash and derivatives 0.5%

The iShares global government bond fund UCITS ETF (IGLH) (distributing and hedged back to sterling) seeks to track the investment results of the FTSE world government bond index (WGBI).[3] This index measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI provides a broad benchmark for the global sovereign fixed income market. Sub-indices are available in any combination of currency, maturity, or rating. This fund is also available as SGLU (issued June 2019) following the same index, accumulating and hedged back to dollars.

Credit quality

Global aggregate bond fund

Investing in AGGH or an equivalent gives:

  • Direct investment in government, government-related, corporate and securitized bonds.
  • Diversified exposure to the global fixed income market.
  • Exposure to investment grade bonds

The majority of fund assets are in BBB rated or superior including treasuries (56%) and other government bonds. There are 3,690 assets in the iShares fund, ranging from US treasuries and local authority bonds to corporate bonds without guarantees.

The top holdings are:

US treasuries 17.6%
Government of Japan 17%
Federal national mortgage association 3.5%
France 3.3%
Italy 3%
Government national mortgage association 2.7%
Uniform MBS 2.7%
United Kingdom 2.7%
Germany 2.2%
Spain 2%

iShares classify the risk level for the global aggregate fund at 3 on their scale from 1 to 7, where 1 is the lowest risk.

Global government bond fund

Investing in ILGH or an equivalent gives:

  • Diversified exposure to global government bonds
  • Direct investment in government bonds
  • Global government bond exposure

Fund assets are BBB rated or superior treasuries (53%) and other government bonds. There are 738 assets in the iShares fund ranging from treasuries to cash.

The top holdings are:

United States 45%
Japan 22%
France 9.6%
Italy 8.6%
Germany 6.3%
United Kingdom 6.1%
Canada 1.8%
Cash 0.32%

iShares classify the risk level for the global government fund at 4 on their scale from 1 to 7, where 1 is the lowest risk. This contrasts with the lower level of risk for the global aggregate fund.

Duration

Global aggregate bond fund

Weighted Average Maturity 8.63 yrs
Weighted Average Coupon 2.44%
Weighted Average Yield To Maturity 1.59%
Effective Duration 6.81 yrs

Global government bond fund

Weighted Average Maturity 9.92 yrs
Weighted Average Coupon 2.17%
Weighted Average Yield To Maturity 1.20%
Effective Duration 8.11 yrs

Hedging to local currency

The fixed income side of the portfolio is designed to give your portfolio some stability. You may be able to use versions of the bond funds that are "hedged" to your home currency, although only a limited number of these exist. Currency hedging reduces your portfolio's volatility from currency swings.

Bond funds for non-US investors

As already mentioned, you can use a global bond fund to add some portfolio stability. You can also include additional bond funds in your portfolio, or even create your own fixed income approach.

The main asset managers offer a range of UCITS and other bond funds. There are lists below of the currently available UCITS fixed income ETFs and bond funds that Vanguard offer. Other asset managers, including iShares fixed income bond UCITS ETF funds provide a range of UCITS fixed income ETFs and bond funds; you can find more on these by visiting the relevant websites. You can also find out more about alternative bond options for specific purposes by using other web platforms such as justETF's bond schedule.

Vanguard fixed income funds

On their website portal for European private investors, as of June 2019 Vanguard lists these fixed income ETFs and funds:

ETFs

  • EUR Corporate Bond UCITS ETF
  • EUR Eurozone Government Bond UCITS ETF
  • Global Aggregate Bond UCITS ETF
  • UK Gilt UCITS ETF
  • USD Corporate 1-3 Year Bond UCITS ETF
  • USD Corporate Bond UCITS ETF
  • USD Emerging Markets Government Bond UCITS ETF
  • USD Treasury Bond UCITS ETF

All of these products are UCITS ETFs and are passively managed index funds. See: Vanguard UCITS bond ETFs. The products have subcategories in many currencies and often offer accumulating, distributing and hedged versions.

Funds

  • 20+ years Euro treasury index fund
  • Euro government bond index fund
  • Euro Investment Grade Bond Index Fund
  • Eurozone Inflation-Linked Bond Index Fund
  • Global Bond Index Fund
  • Global Corporate Bond Index Fund
  • Global Short-Term Bond Index Fund
  • Global Short-Term Corporate Bond Index Fund
  • Japan Government Bond Index Fund
  • SRI Euro Investment Grade Bond Index Fund
  • UK Government Bond Index Fund
  • UK Investment Grade Bond Index Fund
  • UK Short-Term Investment Grade Bond Index Fund
  • US Government Bond Index Fund
  • US Investment Grade Credit Index Fund

All of these products have KIID information and are passively managed index funds. See: Vanguard non-US bond funds. The products have subcategories which offer versions such as accumulating, income, hedged, and inflation linked funds.

Some of these funds may have minimum investment amount of €100,000, when held direct with Vanguard. However, you may be able to hold smaller amounts than this by investing through a professional adviser or an investment platform.

Some of these funds are for institutional investors only. These have very large minimum investment thresholds, and are not available to retail investors.

Comparison of bond fund options

If you plan to tailor your fixed income allocation, so that it contains more than a simple global government or global aggregate UCITS ETF approach, see: Bond basics § Role in a portfolio, and Bond basics § Style boxes.

Suggested fixed income simple adjustment options

If you plan to adjust your bond allocation, perhaps by adding to the suggested Wiki global aggregate or global government bond fund approach, then you could consider these additional or alternative fund:

Adjustments or alternatives
Objective Reasoning Funds
Savings for a big future purchase. If you are saving money for a future purchase: a car, a wedding, a house. Consider investing those savings in a low-risk bond with a maturity date that matches the date you will need the money. iShares Euro Government Bond 7-10yr UCITS ETF
ISIN IE00B1FZS806
iShares Euro Government Bond 3-5yr UCITS ETF
ISIN IE00B1FZS681
Guarding against inflation. To help guard against this risk, you might consider Treasury Inflation Protection Securities (TIPS). iShares Euro Inflation Linked Government Bond UCITS ETF
ISIN IE00B0M62X26
iShares USD TIPS UCITS ETF
ISIN IE00B1FZSC47
iShares USD TIPS 0-5 UCITS ETF
ISIN IE00BDQYWQ65
iShares GBP Index-Linked Gilts UCITS ETF
ISIN IE00B1FZSD53
Managing interest rate risk. Manage this risk by creating a portfolio of bonds with maturities staggered over one, three, five and ten years. iShares Euro Government Bond 0-1yr UCITS ETF
ISIN IE00B3FH7618
iShares Euro Government Bond 1-3yr UCITS ETF
ISIN IE00B14X4Q57
iShares Euro Government Bond 5-7yr UCITS ETF
ISIN IE00B4WXJG34

All of these are already available in some form within the global aggregate funds.

Cash equivalents and short term bonds

You can hold cash investments for several reasons:

  • As the emergency fund,
  • To cover obligations in the short to intermediate term,
  • As part of the fixed income portion of a portfolio next to bonds. Where bonds have a low yield, it can be advantageous to include cash in the portfolio for the guarantee that many governments give.
  • During the withdrawal stage as adequate cash to offset any draw-down so as to avoid selling equities during a protracted market downturn.

Relevant bond indices

The Bloomberg Barclays Global Aggregate Bond Index[2] is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

The FTSE World Government Bond Index (WGBI)[3] measures the performance of fixed-rate, local currency, investment-grade sovereign bonds. The WGBI provides a broad benchmark for the global sovereign fixed income market. Sub-indexes are available in any combination of currency, maturity, or rating.

See also

References

  1. "Bloomberg Barclays Global Aggregate Float Adjusted TR Index". Retrieved July 13, 2019.
  2. 2.0 2.1 "Bloomberg Barclays US Aggregate Bond Index". Wikipedia. Retrieved July 6, 2019.
  3. 3.0 3.1 "FTSE World Government Bond Index (WGBI)". Wikipedia. Retrieved July 6, 2019.

External links

Books