On this episode of the “ETF of the Week” podcast, VettaFi’s Head of Research Todd Rosenbluth discussed the Vanguard Total International Bond ETF (BNDX) with Chuck Jaffe of “Money Life.” The pair talked about several topics regarding the fund to give investors a deeper understanding of the ETF overall.
Chuck Jaffe: One fund … on point for today. The expert to talk about it. Welcome to the ETF of the Week, where we examine trending, new, newsworthy, unique, and intriguing exchange traded funds with Todd Rosenbluth, the head of research at VettaFi. And at VettaFi.com, you’ll find all the tools you need and the research that can help you become a better, smarter, savvier investor in ETFs.
Todd Rosenbluth. It’s great to chat with you again.
Todd Rosenbluth: Excited to be with you, Chuck.
Chuck Jaffe: Your ETF of the week is …
Todd Rosenbluth: The Vanguard Total International Bond ETF, BNDX.
Chuck Jaffe: The Vanguard Total International Bond ETF, BNDX. OK. International bonds now? Why this fund, in this market?
Todd Rosenbluth: Well, the fund is doing quite well. It’s actually outperforming the U.S. version of the Vanguard Total Bond Market ETF (BND) in the past year, as well as thus far in 2024. We find that many advisors and investors have international equity exposure to round out and provide diversification. But,their fixed income exposure — the bonds inside the portfolio — tend to be tracking the U.S. Aggregate Bond Index.
And they’re leaving out a good part of the benefits of diversification through fixed income. Vanguard offers a great fund. It’s index-based, it’s low cost, it’s well diversified. It’s exactly what many investors realize they need, but haven’t really thought much about it till now.
Chuck Jaffe: OK, but we’re still in an environment where we’re waiting for a rate cut. And we’re watching what’s happening around the world. What happens with this pick? Is this a pick saying, “ride the wave and wait for the cuts to happen”? Or is this an allocation choice? “Yes, you need that international exposure. So go get it and hang on to it?”
Todd Rosenbluth: Most of the time that I’m on, I offer more tactical, short-term-oriented, or even a small slice of a portfolio. BNDX can sit within the core of your allocation, but in a similar manner than you might with international equities. So most people have a 60/40 or a 70/30, with equity versus fixed income and more than two-thirds. Probably three-quarters of that equity or equity exposure is to the U.S., and a slice of that is to international equity.
We think that’s appropriate to do for fixed income also. So have BND, which is the U.S. version of Vanguard’s product, paired with BNDX, the international version. And you get the benefits of geographic diversification. So yes, we’re watching the U.S. Fed. It’s not clear if they’re going to cut this year and how much. But BNDX is going to be impacted by what’s happening in Europe, in Asia, and even in emerging markets.
This is total international. So you’re getting some emerging market exposure. All of this, in one ETF for a very low fee. And it’s yielding 3%. So you’are getting paid for that international exposure using the Vanguard product.
Chuck Jaffe: One of the things I’m always asking is, how does something fit into the portfolio? How does it play with others? You’re clearly saying, first, get your U.S. bond exposure. Then if you don’t have the international exposure, use a tool like BNDX to to get that. But if somebody has their domestic exposure, what kind of balance are you looking for?
Is this 10% of your bond allocation, or do you split your bond allocation domestically and internationally? What’s the allocation you’re going to tend to favor?
Todd Rosenbluth: So I’m going to defer to individual investors to work with their advisor to make sure they understand the risk tolerance. But international investing is riskier than U.S. investing. There tends to be often more volatility. And BNDX has a emerging market component. Even though BNDX is currency-hedged, you’re not taking on that same level of potential risk or potential reward, based on the euro, the yen, or whatever currency you want to think of relative to the U.S. dollar. It’s important to have an allocation that makes sense.
I’m not advocating for 50/50. Typically, people have more money in U.S.-based investments than international investments for a home bias. Because that’s the market that they best understand. But having some allocation to international bonds probably makes sense. Vanguard being a leading provider of not only ETFs, but fixed income ETFs, is a logical partner to consider. And this is a low-cost product.
So, you’re going to be able to put most of the money to work with a Vanguard ETF instead of paying a high management fee. And that’s just what people should be hoping for with a broad asset allocation product.
Chuck Jaffe: Now, this is a total bond market ETF. And total — when you’re talking to international — includes emerging markets and the rest. And some folks are uncomfortable being in those parts of the world right now. So, do you worry at all about that? Or is this a way to kind of get over that discomfort without going, “Hey, let me go get an emerging markets bond fund as well?”
Todd Rosenbluth: I think the latter. I think people who want to have broad exposure should be aware of how much exposure is to different regions and different geographies, and they should do their homework. And you can find that information on our ETF Database website. I’m not looking at it at the moment. But I believe the emerging market exposure is around 10%-15% of this portfolio.
So, it is the minority. But there is exposure to emerging countries and the bonds that are issued. And you get a combination of sovereign bonds, though again, being issued by the government, as well as corporate bonds. So that’s the total part, or that’s part of the total part. You’re getting broader market exposure. Geographically, you’re getting broader fixed income exposure across some of the bond sectors.
And this tends to be investment-grade-oriented bonds. Bonds rated. AA and A are primarily what you’d find within this portfolio. You get the benefits of diversification. If you want to dedicate exposure to emerging markets with fixed income, there are products that are available, from some of the leading providers. This is going to have a small slice toward emerging markets, but most of it’s going to be in developed Europe and Japan, for example.
Chuck Jaffe: I think we’d be remiss if we talk about a Vanguard fund and don’t talk about expenses. Because they’re known for being low-cost leaders. The expense ratio on this one is 0.07%. Not that expenses have to be a selling point, but since we know that returns aren’t guaranteed and expenses are, is that the other side here? That if you’re going to get international bond exposure, get it as cheaply as you can? There’s not much that’s going to be cheaper than this fund?
Todd Rosenbluth: You certainly want to be aware of the expense ratio. And I find that expense ratios for broad asset allocation products are roughly the same from some of the leading providers. iShares, Vanguard, State Street, among others. So this is quite cheap in general, and it certainly is cheaper than if you were to get an actively managed mutual fund, to get exposure to international bonds.
The Vanguard ETF is quite cheap. But it’s important to know what’s inside and understand this is currency-hedged. Some of the other products are not. This includes emerging markets. Some of the other products don’t have that. Make sure you understand what you’re getting inside the portfolio, not just what BNDX costs.
Chuck Jaffe: And if you’re looking for that international diversification, BNDX, the ETF of the Week, the Vanguard Total International Bond ETF is something you might want to be looking at. Todd, great stuff as always. Thanks so much. We’ll talk to you again next week.
Todd Rosenbluth: Sounds great, Chuck.
Chuck Jaffe: The ETF of the Week is a joint production of VettaFi and Money Life with Chuck Jaffe. That’s me. You can read all about my hour-long weekday podcast by going to MoneyLifeShow.com, or by searching wherever you find great podcasts.
Now if you’re searching for great information on ETFs, make sure you check out VettaFi.com, as they have that great information and a full suite of tools that’s going to help you be a better investor in ETFs. They’re on Twitter or X at @Vetta_Fi. Todd Rosenbluth, their head of research, my guest, he’s on Twitter too. He’s at @ToddRosenbluth.
The ETF of the Week is here for you every Thursday. Make sure you don’t miss an episode by following along on your favorite podcast app. We’d love to have you here every week. And until next week, happy investing everybody!
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