Vanguard Total World Bond ETF: A Core Portfolio (NASDAQ: BNDW)

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cagkansayin

(This article was co-produced with Hoya Capital Real Estate)

Introduction

As I started writing this article, the FOMC raised the federal funds rate by another 75 basis points, with expectations of another 125 basis points before 2023.

Federal Reserve Bank

Federal Reserve Board – Monetary Policy

Most, if not all, of the data is moving in the wrong direction for bond investors, and this trend is spreading around the world. Northern Trust expects US bonds to be among the best to hold over the next five years, but even those would yield less than 4%.

https://www.capitalmarketassumptions.com/

Capital Market Assumptions

The Congressional Budget Office makes current forecasts for inflation and interest rates.

https://capital.com/projected-interest-rates-in-5-years

Capital.com

What might worry bond investors is their projection that the 10-year TSY rate will continue to climb to 4% before stabilizing. As investors know, bond prices move inversely to rates and that has hurt bond funds, including those covered in this article.

While some investors avoid bond funds even when they seem favorable, others want an allocation for various reasons, such as income or the fact that they are not 100% matched to equities. The Vanguard Total World Bond ETF (NASDAQ: BNDW) was designed to give investors the option of owning a globally-covering ETF for investment-grade bonds. For those investors, even with rising rates, I would give BNDW a buy rating.

Vanguard Total World Bond ETF Review

Chart
Data by YCharts

Seeking Alpha describes this ETF as follows:

The investment aims to track the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index, which measures the investment performance of US investment grade bonds and non-US dollar denominated investment grade bonds. The fund is a fund of funds and uses an index investing approach designed to track the performance of the index, which is a custom USD hedged index designed to track capitalized weightings in the global investment grade bond market. Seeks to replicate the performance of the Bloomberg Global Aggregate Float Adjusted Composite Index. BNDW started in 2018.

Source: Alpha Research

BNDW has $570 million in assets and offers a current yield of just over 3%. Vanguard charges 6 basis points in fees.

Index review

Bloomberg provides this description of the benchmark used by BNDW:

The Bloomberg Barclays Global Aggregate Float-Adjusted and Scaled Index is a customized version of the Global Aggregate Float-Adjusted Index. This multi-currency benchmark includes fixed rate treasury bonds, government bonds, corporate bonds and securitized bonds from developed and emerging market issuers with maturities greater than one year.

Source: assets.bwbx.io/documents

Review of NDDB Assets

BNDW primarily owns two other Vanguard bond ETFs:

  • Vanguard Total Bond Market ETF (NASDAQ: BND)
  • Vanguard Total International Bond ETF (BNDX)

Total Global Bond ETFs

BNDW (Vanguard Advisors)

The allocation split between the two ETFs shows little movement over the past year. Vanguard provided some statistics on BNDW holdings.

Total Global Bond ETFs

Vanguard Advisors

global bonds

BNDW (Vanguard Advisors)

The above is a list of countries with a weight of 1+% in BNDW.

credit scores

BNDW (Vanguard Advisors)

About 1.2% of debt is below BBB or unrated.

foreign bonds

BNDW (Vanguard Advisors)

UST/Agency debt represents 24% of the weighting; with US government-backed mortgages up nearly 11%. With only 13% rated “AAA”, little non-US (i.e. foreign) government debt is in the top rating category. Since BNDW is the combination of two other ETFs, understanding them is a necessity.

Vanguard Total Bond Market ETF Review

Chart
Data by YCharts

Seeking Alpha describes this ETF as follows:

The investment aims to replicate the performance of the Bloomberg US Aggregate Float Adjusted Index. This index measures the performance of a broad range of public, investment-grade, U.S. taxable fixed-income securities, including dollar-denominated government, corporate, and international bonds, as well as mortgages and assets. all with maturities greater than 1 year. BND started in 1986.

Source: Alpha Research

BND has $283 billion in assets under management and is yielding 2.6%. Vanguard only charges 3 basis points.

Review of BND assets

BND Symbol

BND (Vanguard Advisors)

BND Funds

BND (Vanguard Advisors)

BND is heavily invested in US government debt. Corporate debt is almost entirely investment grade, with around 40% of it in the BBB rating. The timeline is as follows:

Total Bond Market ETF

BND (Vanguard Advisors)

Assuming the 1-5 years are spread evenly, around 8% of the ETF will not make it into the index and will need to be replaced, hopefully, with higher coupon bonds.

Main holdings

Pioneering ETFs

Vanguard Advisors; compiled by author

The Top 20 represents 8.7% of the portfolio. The following list shows the ten largest corporate bond portfolios.

advisors.avant-garde.com

Vanguard Advisors; compiled by author

Vanguard Total International Bond ETF Review

Chart
Data by YCharts

Seeking Alpha describes this ETF as follows:

The investment aims to track the performance of a benchmark index which measures the investment performance of non-US dollar denominated high quality bonds. The fund uses an index investing approach designed to replicate the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged) Index. This index provides a broad measure of global investment grade fixed rate debt markets. The BNDX started in 2013.

Source: Alpha Research

BNDX has $81.5 billion in assets under management and is currently yielding 4.26%. Vanguard charges 7 basis points in fees.

BNDX Holdings Review

The following list shows each country with a weighting of 1+%, and these represent 90% of the portfolio. The total number of countries is 49.

Symbol BNDX

Vanguard Advisors; compiled by author

Europe is the largest regional exposure (54%), followed by the Pacific (25%). Vanguard aggregates all emerging market debt into a separate region (6%).

BNDX ETFs

Vanguard Advisors; compiled by author

Under Issuer, Foreign would primarily be government debt. Since most foreign debt is not AAA rated, the weighted credit rating here is lower than that of BND. The deadlines are very close between the BND and the BNDX.

Total International Bond ETF

Vanguard Advisors; compiled by author

Main Holdings

INTL Bonds

Vanguard Advisors; compiled by author

I think I found the first corporate bond at #727 on the list (C @.03%). This ETF hedges to reduce currency risk.

BNDW Cast Review

BNDW Symbol

DVD BNDW (Seeking Alpha)

Large year-end payments make monthly values ​​indistinguishable, but they range between $0.09 and $0.13. So far in 2022, these are the payments.

BNDW ETFs

DVD BNDW (Seeking Alpha)

Performance data

Portfolio Visualizer

Portfolio Viewer

Since the underlying ETFs have more history (2013), I calculated the numbers using today’s allocation: this “backtest” translates to a CAGR of only 1.9%. Although adding BNDX with BND provides lower yield, the combination gives BNDW a lower StdDev value.

Portfolio strategy

My concept of a “core holding” is a fund that offers universal coverage of an asset class, such as Vanguard Total World Stock ETF (VT) does this for stocks. These “core” funds do not have to represent a person’s total exposure to this asset class, but a base on which to build and from which to adjust their allocation. Vanguard alone offers 20 bond ETFs (17 US/3 INTL) that will allow users to move up or down the credit rating scale or adjust the overall duration or issuer mix of their bond holdings.

With rates set to climb as the FOMC adds perhaps another 125 basis points to the FFR, it might be a good idea to store funds in a 6 month CD and then reassess buying BNDW at its maturity. Fidelity shows that these CDs earn almost 4%.

To save the fees that BNDW adds to what BND/BNDX charges, splitting between these two ETFs is another simple and more flexible strategy to consider. Others have recently covered these two ETFs in detail:

final thought

After the recent FOMC action, Mott Capital Management released The Federal Reserve delivers a massive shock to the stock market. While it doesn’t address the bond reaction, it reminds investors that higher rates are no friend of the stock market either.

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