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I am STANCO 25 Professor of Finance, Emeritus at Stanford University and a recipient of the 1990 Nobel Prize in Economic Sciences. More than you will ever want to know about me can be found at my Stanford web site: www.stanford.edu/~wfsharpe

Tuesday, October 29, 2019

BNDW: The Vanguard Total World Bond Exchange Traded Fund

In prior blogs, I suggested that a useful way to implement a World Bond Stock (WBS) fund would be to invest in two Vanguard exchange traded funds – VT (the Total World Stock ETF) and BNDW (The Total World Bond ETF), with the proportions reset periodically based on information from the FTSE Adaptive Asset Asset Allocation calculator website. I discussed the FTSE site in a September post and VT in an October post. This post deals with BNDW.

The Vanguard site provided the following information for BNDW at the end of September 2019:

But how could Vanguard have covered 15,029 bonds with only 172.9 million dollars? The answer is given in an accompanying table:

Aha! The fund actually holds shares in only two securities – each of which is itself a Vanguard ETF. They are: the Total International Bond ETF (BNDX) and the Total (U.S.) Bond Market ETF (BND). At the end of October 2019, each had significantly more assets than BNDW, as the table below shows.

Note that the total value of BNDW shares is by far the lowest (in the $Millions, not $Billions). This presents an investor interested in world bonds with a dilemma. The easiest course would be to invest in BNDW, letting Vanguard worry about covering both U.S. and non-U.S. Bonds in market proportions. But it would be cheaper to invest in BND and BNDX. Of course one would then need to periodically adjust the proportions invested to reflect relative market values of U.S. and non-U.S. Bonds. This could be done using the proportions of the two ETFs in the most recent BNDW monthly report with adjustments for changes in their values since that date. Such a strategy would also cost less, since roughly half the assets would incur an expense ratio of 0.09%, and the rest only 0.04% for a total of approximately 0.065%. Of course it is entirely possible that assets in BNDW will grow and that Vanguard will then lower its expense ratio. But at present, a home-made BNDW using shares of BNDX and BND would cost less than BNDW itself.

[ Update: On Oct. 30 (after the above was written and published) the Vanguard website showed that the expense ratio for BND had fallen to 0.035%, the others remained the same. ]

This is not all. At present, BND and BNDX shares are considerably more liquid than those of BNDW. The table below, from October 28th 2019, shows the average daily volume traded over the previous 45 trading days and the average spread during that period between the highest bid price and the lowest ask price.

A portfolio that includes BND and BNDX will incur lower expenses and lower likely trading costs than one that includes only BNDW. But BNDW simplifies the investor's life, since Vanguard takes care of any rebalancing required to keep the proportions of U.S. and non-U.S. Bonds similar to those in the indices representing the bond markets. You pay your money and take your choice.

Practical investors may well choose to hold a three-ETF (BND, BNDX and VT) proxy for the world bond/stock (WBS) portfolio. But for research purposes, it is easier to use the slightly more expensive two-ETF (BNDW and VT) proxy. Henceforth, I will generally do just this.

Now back to the analysis of BNDW. Here is Vanguard's breakdown of the bonds in its two component ETFs at the end of September, 2019:

And the top ten holdings by country:

For bond aficionados, here are some key characteristics of the bonds held:

With bonds as with stocks, United States securities constitute by far the largest proportion of world portfolios. For stocks, the U.S. percentage is somewhat over 50%; for bonds it is somewhat under 50%. But there are many companies, industries and securities outside the United States. To hold a piece of the world bond/stock portfolio, one needs U.S. and non-U.S. Securities. VT and BNDW can provide both.

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