Vanguard is expanding its family of bond offerings with plans to introduce a Vanguard Emerging Markets Government Bond Index Fund and its ETF Shares by the end of the second quarter of 2013. "Our research shows that emerging markets bonds have presented low correlations with domestic and developed market bonds, and have the potential to add value for certain risk-tolerant investors holding an otherwise broadly diversified portfolio," said Vanguard CEO Bill McNabb. "Nevertheless, we do caution investors against simply investing on the basis of the higher yields offered by emerging markets bonds, as the higher yields are accompanied by higher risks, including greater volatility and higher correlation to equity markets, as well as political risk."
An amended registration statement for the new fund filed by Vanguard with the U.S. Securities and Exchange Commission (SEC) reflects a new target benchmark-the Barclays USD Emerging Markets Government RIC Capped Index. The index features approximately 540 government, agency and local authority bonds from 155 issuers and, when necessary, limits weightings of individual debt issuers to meet IRS diversification requirements. The top three country holdings (as of January 31, 2013) were Russia (13.8%), Brazil (10.6%), and Mexico (8.5%). The fund will invest solely in U.S. dollar denominated emerging market bonds to protect U.S.-based investors from currency risk.
The proposed Vanguard Emerging Markets Bond ETF will charge annual expenses of 0.35%. The fund will compete with existing ETFs in the emerging markets bond market iShares Emerging Markets USD Bond ETF (NYSEARCA:EMB) and the PowerShares Emerging Markets Sovereign Debt Portfolio (NYSEARCA:PCY). EMB charges annual expenses of 0.59% and holds a portfolio of 159 different securities. PCY charges 0.50% annually and carries an SEC 30-day yield of 4.25%.
Declining Expense Ratios
The expense ratios of most share classes of nine Vanguard international index funds have fell from reported 2011 fiscal year figures. The table below shows the expense ratio declines for the respective share classes of the funds. The reductions are a function of asset growth, operating cost reductions, or a combination of both. The related savings are delivered to fund owners in the form of lower expenses.
In early February, Vanguard also announced plans for a Total International Bond Index Fund.
Vanguard manages over $800 billion in fixed income assets, including 13 bond index funds and ETFs.
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