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Vanguard Global Bond Index: December 2021 Update

Investments can go down as well as up so there is always a danger that you could get back less than you invest. Nothing here is personalised advice, if unsure you should seek advice.
  • Vanguard is a pioneer of passive investing

  • This fund provides broad exposure to a mix of global bonds
  • A simple, low-cost way to track the Bloomberg Barclays Global Aggregate Index
  • We recently added this fund to the Wealth Shortlist of funds chosen by our analysts for their long-term performance potential

How it fits in a portfolio

The Vanguard Global Bond Index fund provides exposure to a range of fixed income investments. Its benchmark, the Bloomberg Barclays Global Aggregate Index, includes investment-grade bonds with maturities greater than one year. It’s made up of a mixture of global government, corporate and securitised bonds.

An index tracker fund is one of the simplest ways to invest, and we think this fund could be a low-cost way to add exposure to global bonds or some long-term growth potential to an investment portfolio. It could also help diversify a portfolio focused on other assets, such as company shares, or form the starting point for a portfolio of passive funds.

Manager

Vanguard is a pioneer when it comes to passive investing, having created the first retail index fund over 40 years ago. It now runs some of the biggest index funds in the world. Given its size, it has a large investment team with the expertise and resources to help its funds track indices and markets as closely as possible, while having scale to keep costs down.

This fund is run by a large global team that is spread across three investment hubs around the world – the US, UK and Australia. The team-based approach means there’s no named managers on the fund.

Vanguard also has a trading analytics team, which is responsible for ensuring the funds buy and sell investments efficiently and at a competitive cost. This involves analysing data from different brokers and banks. Lower costs should help the funds track their benchmarks as closely as possible.

Process

This fund aims to track its benchmark, the Bloomberg Barclays Global Aggregate Index. The index is made up of a mixture of 27,000 global bonds. It has a bias towards global government bonds, which currently make up 65.4% of the fund, while the remainder invests in bonds issued by companies. These are all high-quality investment grade bonds that are deemed to be more likely to pay off their debts than some higher-risk bonds, such as high yield bonds. While the fund invests globally, around 36% is currently in the US.

The fund invests in nearly half the number of constituents in its benchmark, which is known as partial replication. This helps to keep costs down as the fund doesn’t buy every bond that is added to the index. The fund also has the flexibility to invest in higher-risk emerging markets, though these bonds have tended to make up a small part of the fund.

While the team doesn’t invest in every bond, the fund has tended to track its index closely as the team aims to replicate the broader characteristics of the index. For example, they select bonds that together help the fund to closely match the benchmark’s credit rating or yield to maturity. A bond’s credit rating is an assessment of the ability to pay back its debt, while the yield to maturity is the total expected return if the bond is held until it matures.

Vanguard’s global team provides 24-hour market access and consistent fund and bond price monitoring. The team also has access to local bond traders and these relationships can help the team find bonds at attractive prices.

The team also uses currency hedging to convert overseas currency bonds back to sterling. The prices and income of global bonds can fluctuate alongside foreign currency movements, adding volatility for UK investors. By using hedging, investors could experience less extreme price movements over time, which helps smooth returns. This could provide a different type of return and help diversify an investment portfolio that already has exposure to company shares or overseas currencies. This can be achieved by using derivatives which can add risk where used.

Vanguard is more conservative than some other passive fixed income providers. For example, they don’t lend the investments within the fund to other providers in return for a fee, known as securities lending.

Culture

Vanguard aims to put the client at the forefront of everything it does, which drives its focus on quality, low-cost index products. Jack Bogle founded Vanguard in 1975 and is owned by investors. This allows Vanguard to redirect its profits back to investors in the form of lower fees, instead of paying dividends to external shareholders. Bogle believed in creating products that simply track the performance of a market rather than trying to pick individual stocks that may beat it.

Dedicated teams at Vanguard also focus on environmental, social and governance factors (ESG). This involves voting on the companies they invest in, in order to hold company managers and boards accountable. The Vanguard Global Bond Index Fund is not ESG-specific, but we’re pleased to see an active approach at a broader level in engaging with companies to tackle stewardship issues.

Cost

The fund has an ongoing annual fund charge of 0.15%. We believe this is reasonable when compared to other global fixed income trackers in the market. Our platform charge of up to 0.45% per annum also applies.

Performance

The fund aims to track the Bloomberg Barclays Global Aggregate Index and has done so well for the last 10 years*. As you would expect from an index tracker fund, it’s fallen behind the benchmark over the long term because of the costs involved in running the fund such as dealing charges and spreads. However, the techniques used by the managers have helped to keep performance as close to the index as possible and helped reduce the fund’s tracking difference.

The fund currently yields 1.32%. Please note yields and income are not guaranteed and they are not a reliable indicator of future income.

Given Vanguard’s size, experience and expertise, we expect the fund to continue to track the benchmark well in the future, though there are no guarantees. As the currency of overseas bonds is hedged back to sterling, we expect the fund’s performance to be less volatile over time compared to an equivalent unhedged fund.

A glance at the five-year performance table below shows that the fund has seen both positive and negative returns. This reflects the performance of the underlying benchmark, which it follows closely. Remember, past performance isn’t a guide to future returns.

Annual percentage growth
Nov 16 -
Nov 17
Nov 17 -
Nov 18
Nov 18 -
Nov 19
Nov 19 -
Nov 20
Nov 20 -
Nov 21
Vanguard Global Bond Index GBP Hedged 2.30% -1.27% 8.25% 4.89% -1.38%

Past performance is not a guide to the future. *Source: Lipper IM 30/11/2021.

Find out more about the Vanguard Global Bond Index fund, including charges

Vanguard Global Bond Index Key Investor Information

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Important information - Please remember the value of investments, and any income from them, can fall as well as rise so you could get back less than you invest. This article is provided to help you make your own investment decisions, it is not advice. If you are unsure of the suitability of an investment for your circumstances please seek advice. No news or research item is a personal recommendation to deal.


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