A big trend right now is that investors are looking for opportunities beyond the US market. If you want to diversify your portfolio away from U.S. stocks and bonds, one way to do that is to buy an international bond fund, such as Vanguard All Global Bond ETF (NASDAQ: BNDX ).
But if you want higher returns and are willing to accept some extra risk, you can buy it Vanguard Emerging Markets Government Bond ETF (NASDAQ: VWOB ). This global bond fund allows you to acquire government debt from futures and futures markets. VWOB has outperformed BNDX and another popular bond index fund Vanguard Total Bond Market ETF (NASDAQ: BND )For the past year.
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Here are a few reasons why you might want to consider VWOB for your bond portfolio — and why you should be aware of the risks, too.
When you buy emerging market bonds, you are investing in debt issued by foreign governments from countries with emerging economies. These include countries whose economies are more developed than some of the world’s poorest countries, but which have not yet reached the level of prosperity of developed economies such as the United States, Japan, Canada, or Western Europe.
Some of the emerging economies represented in the Vanguard Emerging Markets Government Bond ETF include:
The Vanguard Emerging Markets Government Bond ETF holds 902 bonds and carries an expense ratio of 0.15%. It has delivered an average annual return (by net asset value) of 2.6% over the past five years, 9.99% over the past three years, and 11.6% over the past year.
High yields on bonds can be exciting. But emerging market government debt is riskier than advanced economy debt. Some of these countries are politically unstable, facing economic crises, or otherwise may struggle to repay their loans to bond investors like you.
Let’s compare emerging market government bond risk to US bonds. For example, about 41% of the emerging market bonds in VWOB have a credit rating of BB or lower, making them speculative grade. But in the Vanguard Total Bond Market ETF, 69% of the fund’s bonds are U.S. government bonds (generally considered some of the safest in the world), while another 31% of the bonds have an investment-grade credit rating of BBB or higher.
