The mention of emerging markets often elicits feelings of excitement and adventure.
Bring up Vanguard and—let’s be honest—those aren’t the feelings that first come to mind. People are more likely to associate Vanguard with reliability and trust.1
So, what’s a company like Vanguard doing offering the actively managed Vanguard Emerging Markets Bond Fund?
The newly launched fund further rounds out our stable of low-cost, active bond funds, providing an alternative to Vanguard Emerging Markets Government Bond Index Fund for investors who prefer an actively managed approach. In doing so, the fund opens up an important sector of global fixed income markets to a wider set of investors.
Over the long term, while emerging market bonds are riskier and generally more volatile than investment-grade credit, investors have historically been compensated for that risk.2
But beyond that, emerging markets debt, as a percentage of the global fixed income landscape, has grown meaningfully over the past ten years. Emerging market bonds are an established part of the credit market, which includes corporate bonds, securitized debt, and some government-related securities. As a result, if you have an allocation to these sectors, it can make sense from a diversification standpoint to consider investing in emerging market bonds. Vanguard believes that properly diversified investor portfolios should contain broad exposure to the fixed income market, whether actively or passively managed.
Now, let’s assume an investor understands the risks associated with emerging market bonds and has decided to invest in an emerging market bond fund. It’s incumbent upon the investor to look under the hood of the fund and understand the fund’s strategy and flexibility. There is a lot of diversity among emerging market bond funds, with some even taking on more risk by, for example, investing a percentage of assets in emerging market equities.
Vanguard Emerging Markets Bond Fund pursues a strategy that focuses on investing in U.S. dollar-denominated bonds issued by emerging market governments and government-related enterprises. These bonds give investors exposure to the outstanding debt of emerging market sovereign entities, without subjecting investors to the added risk of emerging market currency fluctuations. That said, on a limited basis, the fund does have the ability to invest in non-U.S. dollar emerging market debt and/or debt issued by emerging market corporations in cases where we identify attractive opportunities.
Whether an investment in emerging market bonds should be considered in the context of an investor’s broader fixed income portfolio depends heavily on the investor’s risk tolerance.
Our perspective is that emerging market bonds are a growing, established fixed-income asset class. Including them as part of a fixed-income allocation can promote benefits of diversification. It’s with this in mind that we’ve been running an emerging market bond strategy across our diversified portfolios for years. And it’s because we’re confident in the value of emerging market bonds and our capabilities in this space that we now offer this strategy in a standalone fund.
¹ Market Strategies International. Cogent Reports US Institutional Investor Brandscape. February 2017.
² Philips, Christopher B., Joanne Yoon, Michael A. DiJoseph, Ravi G. Tolani, Scott J. Donaldson, and Todd Schlanger, 2013. Emerging Market Bonds: Beyond the Headlines. Valley Forge, Pa.: The Vanguard Group.
- Bond funds are subject to the risk that an issuer will fail to make payments on time, and that bond prices will decline because of rising interest rates or negative perceptions of an issuer’s ability to make payments.
- All investing is subject to risk, including possible loss of principal.
- Among other risks, Vanguard Emerging Markets Bond Fund is subject to currency hedging risk, which is the chance that currency hedging transactions may not perfectly offset the fund’s foreign currency exposures and may eliminate any chance for a fund to benefit from favorable fluctuations in relevant currency exchange rates. The fund will incur expenses to hedge its currency exposures.
- Bonds based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.
- Cogent Wealth Reports is a division of Market Strategies International. Market Strategies is a market research consultancy with deep expertise in consumer/retail, energy, financial services, health care, telecommunications, and technology. Its syndicated products, known as Cogent Reports, help clients understand the market environment, explore industry trends, and evaluate and monitor their brand and products within the competitive landscape. The survey referenced here was conducted independently by Cogent. Vanguard neither commissioned nor paid to be included in the Cogent survey. Cogent has conducted unrelated, custom market research for Vanguard in the past.