The rate-cutting cycle is bringing more investors to international bonds to not only diversify, but gain attractive yields. That’s especially the case when considering emerging markets (EM) debt. Vanguard has a pair of international bond ETFs that can give investors the ideal path for exposure, whether it’s to diversify or seek more income.
Making a recent list of Kiplinger’s best bond ETFs is the Vanguard Total International Bond Index Fund ETF Shares (BNDX). The fund is an ideal complement to a fixed income portfolio that already has concentrated exposure to U.S. bonds, namely Treasuries. The fund will also appeal to risk averse investors who want to get international bond exposure, but are wary of the credit risks involved. BNDX contains primarily investment-grade debt to mitigate said credit risk in primarily developed markets.
Based on its fund description, BNDX tracks the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. As mentioned, developed markets comprise the majority of the exposure, but EM bonds do get just over a 7% weighted exposure (as of October 31). Like the majority of Vanguard’s full roster of fixed income ETFs, it features a low expense ratio of 0.07% or $7 per every $10,000 invested.
Of course, those who don’t mind the risk premium to get more yield should look at a fund that focuses strictly on EM bonds.
EM Bonds Continue to Outperform
Abdallah Guezor, head of EM debt absolute return at asset management firm Schroders, noted the appeal of EM bonds during the month of October. The J.P. Morgan Emerging Markets Bond Index (EMBI) came off a strong October that saw it gain just over 2%, with a year-to-date return of over 13%. While lauded for their yield, EM bonds in the current market are also showing stronger underlying fundamentals amid a weakening dollar.
“These positive trends remain underpinned by appealing yields, resilient EM macro-economic fundamentals, and abundant global financial liquidity,” Guezor noted.
Given the upside in EM debt, the Vanguard Emerging Markets Government Bond ETF (VWOB) should certainly be up for consideration when looking to get exposure. The fund tracks the performance of the Bloomberg USD Emerging Markets Government RIC Capped Index. The index specifically measures the investment return of U.S.-dollar-denominated bonds issued by governments and government-related issuers in EM countries.
As of December 4, VWOB’s 30-day SEC yield is 5.68% with an expense ratio of 0.15% or $15 per every $10,000 invested.
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