Do These Vanguard Fund Updates Impact Investment Strategy?

Vanguard to Launch Global BondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index.

Should you hold the whole bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. world in your hands?

Starting in August, Vanguard will give fixed-income investors the opportunity to do so with a single exchange-traded fundA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. (ETF)A type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. at rock-bottom prices. But how big of a difference will it actually make in your portfolio’s return?

Vanguard filed paperwork last week in preparation to launch Total World Bond ETF. The new offering will mix two existing ETFs—the $197 billion Vanguard Total Bond Market ETF and the $106 billion Vanguard Total International Bond ETF—upon its early August debut.

Total World Bond ETF will aim to track the Bloomberg Barclays Global Aggregate Float-Adjusted Composite index, a broad measure of the global investment-grade fixed-rate debt market, containing government, corporate and securitized bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. with maturities of more than one year. As of March 30, 2018, the index comprised 44% U.S. bonds and 56% from overseas.

Total World Bond ETF doesn’t mark Vanguard’s first foray into the “fund-of-funds” realm, in this case, an ETF-of-ETFs. Total Corporate Bond ETF, which hit the market in November 2017, mixes three other Vanguard bond ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index.. Learn more about Vanguard Total Corporate Bond ETF.

The benefit of these funds-of-funds? As with most things Vanguard, lower costs. The blended ETF can trade at tighter spreads at a cheaper price than a direct investment in the separate components.

How’s that work? The two funds that compose Total World Bond ETF collectively hold $303 billion in assets, giving the new offering the scale to mimic its benchmark closer than if it was a new fund starting from scratch. Total Bond Market ETF costs 0.05% and Total International Bond ETF has a 0.11% expense ratio. By combining the funds, Total World Bond ETF offers exposure to the entire global bond market for an estimated 0.09% expense ratio.

For investors looking for a fully diversified basket of investment-grade bonds from around the globe, you can’t find lower costs on the market. But do U.S. investors really benefit from this type of diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not.? A closer look suggests that adding foreign bonds to a diversified portfolio of investment-grade U.S. bonds doesn’t really move the needle very much compared to holding U.S. bonds exclusively.

Let’s check the historical record of the mutual fund upon which Total Bond Market ETF is based. From January 1990 through the end of 2017, Total Bond Market Index returned 397%, with a maximum loss of 5.0% from an all-time high to a bottom before a new high was reached (also known as a “drawdown”).

Now we look at a 50-50 combination of Total Bond Market Index and foreign bonds (using the Bloomberg Barclays Global Aggregate ex-USD Hedged index before the mutual fund Total International Bond’s launch). That blend returned 407%, with a maximum drawdown of 5.4% over the nearly three-decade stretch.

Sure, the foreign exposure improved performance slightly. But the magnitude of the improvement—less than 0.10% per year—isn’t what you’d call dramatic. Most investors would be hard-pressed to feel that impact in their diversified portfolio. On top of that, remember that we’re talking ETFs here, not mutual funds. Investors don’t buy and sell at net asset value, as they do with mutual funds, but at whatever price the market sets. That 0.10% outperformance might be improved upon. It could also disappear completely.

It’s a simple, one-stop solution for fixed-income investors looking for yieldYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. in all corners of the globe at a low cost. But we’re not convinced that this combination of funds is the best approach to globally diversifying the bond segment of a portfolio. Your mileage may vary.

Fund Manager David Glocke Calls it a Career

Nafis Smith named successor on Vanguard Prime Money Market and Vanguard Treasury Money Market funds.

Elsewhere in Malvern, David Glocke announced his retirement from Vanguard effective at the end of June. Glocke is portfolio manager of Vanguard’s Prime Money Market and Treasury Money Market funds. He’s managed Prime Money Market since 2003 and Treasury Money Market since 1997.

He will be succeeded by Nafis Smith, who was named a co-manager of the funds in December 2017. We don’t expect shareholders will notice much of a change with Glocke’s departure.

One thing to note: Glocke was the only portfolio manager employed at Vanguard with more than $1 million of his own money invested alongside shareholders. Regular readers know that’s a level of conviction we like to see from fund managers, and an investment strategy we’ve embraced at Adviser Investments, where employees invest their money in the same managers and funds as our clients through our 401(k) planA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn..

Our broad take on money market funds is that they are not very good long-term investments, but they are useful cash management vehicles. Vanguard’s got a long track record of keeping tight controls and managing riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. well in its money-market offerings, something we don’t expect to change with a new manager at the helm.

Please note: This update was prepared on Friday, June 1, 2018, prior to the market’s close.

About Adviser Investments

Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process., institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFs, socially responsible investments and tactical asset allocation strategies, with particular expertise in Fidelity and Vanguard mutual funds. We take pride in being The Adviser You Can Talk To.

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