FYI: Vanguard plans to launch foreign bond funds

BOSTON (AP) ? Vanguard’s lineup of more than 170 mutual funds is diverse, but there’s something lacking. The nation’s largest mutual fund company doesn’t offer foreign bond funds, an area where low-cost options are hard to come by.

It has been a significant gap because there’s been great investor interest recently in foreign bonds. Investors deposited a net $31 billion into world bond funds for the 12-month period ended Sept. 30, according to Morningstar. That’s more than any other fund category that Morningstar tracks. Emerging markets bond funds attracted $14 billion in new cash

All that’s about to change. Vanguard announced plans on Monday to introduce two such funds, one investing in government and corporate bonds around the globe, and another in bonds issued by governments in fast-growing emerging market nations. Vanguard filed applications with regulators, and expects to launch the funds in the first quarter of next year.


? Total International Bond Index

This fund will invest in bonds issued in 57 foreign countries; covering Asia, Europe, and South America, and including Canada. The fund will seek to match the performance of a foreign bond index. However, unlike many foreign bond funds, it will also use strategies to protect investors from exchange rate risk. Vanguard expects that returns will more closely resemble those of the fund’s underlying index, compared with foreign bond funds that don’t use currency hedging.

? Emerging Markets Government Bond Index

This offering will track an index of 200 types of government bonds issued in 39 emerging markets, including fast-growing nations such as China, India and Brazil. Bonds in these countries are typically more volatile than stocks in the U.S. and other developed countries. To avoid currency risks, the fund will limit investments to bonds priced in U.S. dollars.


Vanguard expects that individuals in Total International Bond Index will pay an expense ratio of 0.30 percent to 0.40 percent depending on the share class. Those are the ongoing charges for operating the fund, expressed as a percentage of assets.

Expenses for the Emerging Markets Government Bond Index are expected to be slightly higher, from 0.35 percent to 0.50 percent.

Those expenses are far below the average fees of funds in their respective categories. Expenses at world bond funds tracked by Morningstar average 1.12 percent, while emerging markets bond funds average 1.31 percent. Those averages include actively managed funds, which typically charge higher expenses than index funds because of the costs from having pros pick investments.

Despite their low ongoing fees, there’s a catch to Vanguard’s two new funds. It costs more to invest in and trade foreign bonds than in U.S. bonds, so Vanguard plans to offset those costs by assessing fees that investors pay when they buy shares. Those will be 0.25 percent of assets for Total International Bond Index, and 0.75 percent for Emerging Markets Government Bond Index.


Vanguard expects to sell both funds in conventional mutual funds shares, and in exchange-traded fund shares that won’t assess up-front fees.

Those purchasing the ETF shares will be investing in the same underlying investments as those buying the conventional shares, but with a different structure. Mutual funds are priced once a day. This means that when an investor sells, the value is determined by the fund’s price at the close of the market. ETFs are priced throughout the trading day and are traded like stocks. That makes it possible to lock in a preferred price without waiting for a closing price, unlike with mutual funds.

The ETF shares will charge 0.30 percent for Total International Bond Index, and 0.35 percent for Emerging Markets Government Bond. ETFs can be purchased for as little as the cost of a single share, but buying them typically means incurring brokerage fees.