As the Consumer Price Index (CPI) continues to rise and interest rates heading in the same direction, bond investors should look to international diversification as a hedging strategy.
Diversifying away risk by dipping into bond markets in other parts of the globe can help with inflation, which can erode bond income. As the Federal Reserve tightens its monetary policy, exposure to bond markets that will be less susceptible to Fed moves can help mute rate risk.
In a CNBC article, CFP Anthony Watson, founder and president of Thrive Retirement Specialists in Dearborn, Michigan, notes that rate risk can be managed by adding diversification to a portfolio. The article notes that the “best way to manage interest rate risk is with a diversified portfolio, including international bonds, with short to immediate maturities that are less affected by rate hikes and can be reinvested sooner, Watson said.”
With an average duration of almost eight years, bond investors will have to take on more rate risk, but can still get diversified exposure with the Vanguard Total World Bond ETF (BNDW). BNDW seeks to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds.
BNDW can be ideal for investors who want exposure to debt markets outside the U.S. but do not want to completely disregard fixed income in the United States. In essence, the ETF provides more of a global aggregate bond fund.
Another option is to get dynamic exposure to the international bond markets with an actively managed fund in the Vanguard Total International Bond Index Fund ETF Shares (BNDX A-). BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds.
As mentioned, international bonds can provide a diversification tool for fixed income investors looking to supplement their current core portfolios. The ETF employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.
Highlights of BNDX:
- Attempts to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged).
- Employs hedging strategies to protect against uncertainty in exchange rates.
- Provides a convenient way to get broad exposure to non-U.S. dollar-denominated investment-grade bonds.
- Is passively managed, using index sampling.
For more news, information, and strategy, visit the Fixed Income Channel.