Q3 saw strong returns for bonds across the board, opening up opportunities in various types of bonds. From international bonds to core-plus options, investors have a plethora of choices, including a few from Vanguard.
A Morningstar report sang the praises of investment-grade bonds in Q3, which returned their best quarterly performance in over two decades. One area that saw strength was the international bond market. As the rate cutting cycle sets in and the dollar subsequently weakens, there could be more upside for the debt market outside of U.S. borders.
“Even global bond funds, whose performance suffered as the US dollar strengthened alongside rising rates over the past few years, generated strong returns for investors,” the report added. “The average fund in the unhedged global bond category rose 6.4% as the US dollar weakened during the quarter.”
Given this, one fund to consider for pure international exposure and added diversification is the Vanguard Total International Bond Index Fund ETF Shares (BNDX). It seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index. Its portfolio is primarily investment-grade debt, so credit risk is minimized.
Investors looking for more yield in the international debt markets can look to emerging markets (EM) or more specifically, the Vanguard Emerging Markets Government Bond ETF (VWOB ). Overall, the fund seeks to track 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.
Risk Pays Off for Core-Plus
Another key metric cited was risk paying off for core-plus bond funds. That was especially the case if fund managers turned up the risk dial, resulting in greater rewards.
“Core-plus bond managers, who venture further out on the yield curve than their core and short-term bond counterparts, have faced many challenges during market volatility in 2022 and 2023,” Morningstar noted. “Some managers weathered the storm, while others struggled. But as interest rates reversed course during 2024′s third quarter, those who took more interest-rate risk finally reaped the rewards over managers who adhere to more cautious approaches.”
Fixed income investors seeking a core bond option with active management should consider using the Vanguard Core-Plus Bond ETF (VPLS ). Investors who are seeking more yield while still maintaining investment-grade quality will want to consider this fund. VPLS adds exposure to riskier credit profiles such as emerging market debt. Nonetheless, its active strategy can help temper said risk.
For more news, information, and analysis, visit the Fixed Income Channel.
