Vanguard recently launched the world of bonds within one ETF. The Vanguard global bond ETF ticker VGAB combines the US bond market with the global bond market. It’s a one ticket offering. You can enter that one ticker symbol and gain access to over 15,000 bonds from Canada and the US, from Europe and through Asia. The fund includes modest exposure to developing market bonds as well.
Here’s the overview in 4 simple benefits.
The key benefits or strategy here is more ‘complete’ global diversification, investment grade quality and currency hedging. The fees are very reasonable for a Global fund at .30%.
If you want to look under the hood at the individual index ETFs, here are the links.
This slide details the benefits of currency hedging with respect to volatility.
All said, for the investor it is about the volatility and risk management for the total portfolio. We’re looking for lesser correlation to Canadian, US and International stocks. That can be achieved by way of removing the Canadian home bias with respect to bond exposure. US bonds, Canadian bonds, developing market bonds and developed market bonds will each bring unique characteristics to the table.
Our friends at ModernAdvisor will suggest that developing market bonds offer greater diversification for the Canadian investor. Those bonds are in the mix, but once again, in modest fashion.
Here’s the bond holding overview.
The geographic allocation of VGAB.
We can see that it is dominated by developing markets. Within VGAB we will see developing market bond exposure of …
- Mexico .9%
- China .8%
- Thailand .8%
- Indonesia .7%
- Malaysia .6%
- Russia .4%
- Slovakia .2%
- Slovenia .1%
- Romania .1%
Of course that exposure is reduced in VGAB.
- The trailing yield for the Global fund is 2.54%
- The trailing yield for the US Aggregate fund is 2.36%
But of course in this environment of low rates and even negative bond yields, it’s not about the yield. It’s about using bonds as risk managers.
What percentage of bonds might you need to match your portfolio to your risk tolerance level? Back to that one ticket thought, please have a read of …
Global Bonds and your portfolio.
Here’s a very succinct article making the case for foreign bonds from Q-Trade. They would echo the sentiment of hedging away currency risks for US and other International bonds.
US and Global bond tax considerations.
As readers know there are (minor) tax consequences with these bundled baskets. And foreign bonds can create their own tax slippage thanks to withholding taxes. Fortunately Justin Bender of PWL Capital has already had a look at the funds within VGAB.
In regards to the US Bond component there is minor tax slippage to the tune of .1% in RRSP and TFSA accounts. The amount is recoverable in a taxable account.
With the Global bond component the tax drag is about .3% in RRSP and TFSA accounts. In taxable accounts the tax drag will be .1% according to Justin’s post.
As I had suggested recently, you may choose to not let the tax tail wag the portfolio dog. Asset allocation and risk management can trump taxes at times. That said, you might keep tax consequence in mind as your build your portfolio.
And I’ll leave it to our friends at Vanguard Canada to wrap this up …
With global bonds in your portfolio you benefit from greater diversification while maintaining the total return potential. But global bonds’ currency moves can change a portfolio’s risk and return characteristics. So Vanguard hedges the currency exposure in the Global Aggregate Index Bond ETF to reap the diversification benefits of a global bond investment.
I would only add that an investor may choose to add a Canadian bond ETF (and increased allocation) at times. The fees are lower, and at the core we’d have Canadian bonds managing the risk of Canadian equities. And as per above, there is a modest tax advantage.
And I do think that VGAB is a wonderful addition to the Canadian ETF family. You may choose to use this as your complete bond portfolio.
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