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Emerging market bond fund now available

May 14, 2013

If you're looking to incorporate government bonds from emerging-market countries into a broadly diversified portfolio, Vanguard Emerging Markets Government Bond Index Fund may be a good option. The new fund is now open to investors during a subscription period that will run through May 30 with exchange-traded fund (ETF) shares expected to be available in early June.

During the subscription period, the fund will invest in money market instruments as it accumulates sufficient assets to construct a representative, diversified portfolio. It will then seek to track the Barclays USD Emerging Markets Government RIC Capped Index. The fund will invest solely in U.S. dollar-denominated emerging markets bonds.

The role of an international bond fund in your portfolio

Ken Volpert of Vanguard's Fixed Income Group and Sarah Houston of Vanguard Flagship Services® explain how international bond funds can help diversify a portfolio and offset contrary movements in domestic markets.

Learn more »

Vanguard research finds that emerging markets bonds have historically presented low correlations (a measure of how prices move together) with domestic and developed bonds, and have the potential to add value for certain risk-tolerant investors holding an otherwise broadly diversified portfolio.

Something to keep in mind: While government bonds from emerging markets can have higher yields, they also carry higher risks than other types of bonds. These risks include the potential for greater volatility, higher correlation to equity markets, and more exposure to political instability.

Because of this higher risk profile, we recommend that only investors with well-diversified, balanced investment programs consider the new fund for a portion of their overall holdings. (Diversification does not ensure a profit or protect against a loss in a declining market.)

A closer look at the fund

The benchmark includes approximately 560 government, agency, and local authority issuers. It excludes exposure to corporate and securitized debt, as well as all emerging markets local currency debt. When necessary, the index will limit weightings of individual debt issuers to meet IRS diversification requirements for regulated investment companies (RICs).

As of March 31, 2013, the benchmark's top three country holdings were Turkey (5.6%), Brazil (5.3%), and Russia (5.3%).

Vanguard Fixed Income Group, one of the world's largest fixed income managers, will manage the fund. The group oversees more than $658 billion in bond and money market fund assets.

Josh Barrickman, CFA, and Yan Pu, CFA, will co-manage the new fund. Mr. Barrickman, head of Vanguard's Bond Index Group, has more than 14 years of experience in the investment field. Ms. Pu joined Vanguard in 2004 and has more than 10 years of investment management experience.

Share classes and expense ratios

Along with Investor Shares, Admiral™ Shares of the fund are available now, with ETF Shares scheduled to be available in June. Here are the expense ratios for each share class:

Share class Estimated expense ratio Minimum initial investment Purchase fee
Investor 0.50% $3,000 0.75%
Admiral 0.35% $10,000 0.75%
ETF 0.35% None None
Institutional 0.30% $5 million 0.75%

In comparison, the average emerging markets bond fund features an expense ratio of 1.21%, according to Lipper.

The fund will incur significant transaction costs buying and selling bonds in emerging markets. Because of these costs, all non-ETF shares of the fund will have a purchase fee of 0.75%.

Notes:

  • All investing is subject to risks, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss in a declining market. The Emerging Markets Government Bond Fund and ETF 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. They seek to track the performance of an index that measures the investment return of dollar-denominated bonds issued by governments of emerging market countries (including government agencies and government-owned corporations). They are subject to risks including country/regional risk, which is the chance that political upheaval, financial troubles, or natural disasters will adversely affect the value of securities issued by foreign governments, and emerging market risk, which is the chance that bonds of governments located in emerging markets will be substantially more volatile and substantially less liquid that the bonds of governments located in more developed foreign markets.
  • All asset figures are as of March 31, 2013.
  • Vanguard ETF Shares are not redeemable with the issuing fund other than in creation unit aggregations. Instead, investors must buy or sell Vanguard ETF Shares in the secondary market with the assistance of a stockbroker. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.
  • Vanguard Marketing Corporation, Distributor.
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