Vanguard’s Newest Fund

Vanguard Opens Emerging Markets 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. Fund

After numerous delays, Vanguard has finally brought its first international 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. fund to market. For a while, it looked like Total International Bond Index would open first, but Vanguard began a subscription period for Emerging Markets Government Bond Index this month—it’s scheduled to kick into full operation at the start of June.

The fund tracks the Barclays USD Emerging Markets Government RIC Capped index, which holds about 560 U.S. dollar-denominated 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. issued by emerging markets governments and agencies. The “RIC” in the name stands for “registered investment company” and means that the underlying index (and fund) will limit exposure to individual bond issuers to meet IRS 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. standards for mutual funds.

Once operations begin in June, there will be four share classes available for investment: Investor, Admiral, Institutional and 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. (all but the ETF are currently open as part of the subscription period). You can see minimums and fees in the table below—with the Investor, Admiral and Institutional share classes all charging a purchase fee, it’s likely that the ETF shares of Emerging Markets Government Bond Index will be most popular with investors.

Emerging Markets Government Bond Index’s Four Share Classes

The fund will be co-managed by Joshua Barrickman and Yan Pu. Barrickman manages a number of Vanguard’s fixed-income index funds, along with the bond portion of Balanced Index, and has been with the firm since 1999. Pu has been with Vanguard since 2004 and manages a couple of fixed-income funds for non-U.S. investors. She has also been tabbed to manage Vanguard’s Total International Bond Index fund when it opens later this year.

As we’ve discussed in past Adviser Fund Updates, Vanguard resisted introducing international bond funds for quite some time, but has finally chosen to do so as yieldsYield 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. on U.S.-focused offerings have dropped to near historically low levels. It’ll be interesting to see how quickly the new funds gather assets, as investors have been seeking higher yields, including in international bond funds, for some time now.

Emerging Markets Government Bond Index is the riskier of Vanguard’s two international bond offerings. While the fund will invest only in U.S. dollar denominated bonds, eliminating currency 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. from the portfolio, emerging markets investments bring other risksThe 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., such as the potential for increased price volatilityA measure of how large the changes in an asset’s price are. The more volatile an asset, the more likely that its price will experience sharp rises and steep drops over time. The more volatile an asset is, the riskier it is to invest in. and exposure to less stable governments. We advise that interested investors carefully weigh their portfolio objectives and the risks of holding this fund before investing here.

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