International bonds can play a major role in the diversification and stability of your portfolio. Recently Vanguard launched a new global bond ETF: BNDW. So, how does BNDW compare to BNDX? What are the differences and which of these two bond funds actually performs better?
The main difference between BNDW and BNDX is that BNDW includes U.S. bonds while BNDX does not. Another difference is their expense ratio: BNDW has an expense ratio of 0.06% and charges 0.02% less in fees than BNDX. BNDW also holds significantly more securities than BNDX. Over the past two years, BNDW has outperformed BNDX with a compound annual growth rate of 8.95%.
BNDW vs. BNDX – Overview
In this post I’ll look at the exact differences between BNDW and BNDX and determine which of these two international bond funds is a better fit for my portfolio. Both funds promise broad exposure to the international bond market but there are some important distinctions between the two:
What’s The Difference?
|Name||Vanguard Total World Bond ETF||Vanguard Total International Bond ETF|
|Index||Bloomberg Barclays Global Aggregate Float Adjusted TR Index||Barclays Global Aggregate ex-USD Float-Adjusted Index (Hedged)|
The Vanguard Total World Bond ETF (BNDW) tracks the Bloomberg Barclays Global Aggregate Float Adjusted TR Index. This index includes more than 16,000(!) bonds from all over the world. United States bonds are not excluded in this fund.
The Vanguard Total International Bond ETF (BNDX) tracks the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). This index includes a little over 6,000 bonds globally. However, U.S. bonds are not included in BNDX.
BNDW has an expense ratio of 0.06%. Considering the sheer number of bonds held in the index it is astounding that Vanguard has managed to keep fees at these levels. A large number of the holdings are also U.S. securities which tend to be lower in administrative cost than international ones.
BNDX has an expense ratio of 0.08%. For an international exchange-traded fund of this size 0.08% is still an extremely competitive expense ratio. However, compared to BNDW it does lag behind slightly. Perhaps the reason for this is that BNDW is simply newer and has been set up more efficiently from the start than BNDX.
It seems likely that in the near future this difference in expense ratios will even out as Vanguard adjusts fees for both funds.
BNDW and BNDX are issued by Vanguard. The company was founded by Jack Bogle with the creation of index funds and has provided investors with the best chances to succeed ever since. Click here to read more about why Vanguard is the best.
BNDW vs. BNDX – Fund Composition
Now, we’ll compare the differences in fund composition in terms of their credit quality, regional allocation, and fixed income maturity.
BNDW is made up largely of AAA-rated bonds. Many of these highly rated bonds will be corporate domestic bonds. The remaining 60% is split up between AA, A, and BBB-rated bonds.
BNDX is made up of mixed credit ratings. Especially, the ratio of AAA-rated bonds is much small overall compared to BNDW. In fact, AAA-rated make up the smallest portion of BNDX.
This difference in credit quality distribution is simply due to the most prominent difference between the two funds: the inclusion/exclusion of U.S. bonds.
This very same difference is also reflected in the regional allocation of BNDW and BNDX. A whopping 46% of BNDW’s assets are allocated to North America. A large portion of that is United States securities.
The picture for BNDX looks rather different: More than half of all bonds come from European companies and North America only plays a minor role of less than 10%.
Next, we’ll take a brief look at the variation of maturities this unequal regional allocation between BNDW vs. BNDX causes:
What’s striking about the above graph is the percentage of maturities that are 20-30 years. However, there is a simply explanation for this weighting: BNDW includes U.S. bonds and thus includes U.S. Treasury Bonds. The highest yielding Treasury Bonds are bonds with maturities of 30 year. Hence, the above distribution.
The fixed income maturity distribution for BNDX looks much more even. Especially, short term bonds make up a large chung of the fund’s holdings compared to BNDW.
BNDW vs. BNDX – Analysis
|Downside Deviation (monthly)||0.42%||0.70%|
|US Market Correlation||0.27||0.44|
BNDW has an annual volatility of 3.63% (1.05% monthly). In the past couple of years – since inception – BNDW has experienced moderate to low volatility. Also a maximum drawdown of 1.72% is extremely low.
BNDX has an annual volatility of 4.16% (1.20% monthly). During the same time frame BNDX was more volatile than BNDW and also experiences a relatively much higher maximum drawdown of 2.91%.
The above chart highlights the drawdowns each fund experiences since January 2019. Even though the time frame is rather short there is a clear difference: BNDX has experienced much higher drawdowns than BNDW.
The above fact simply speaks to the strength of the United States economy during the past years. Globally bonds have simply been more prone to drawdowns.
BNDW vs. BNDX – Performance
This comparison will conclude with a portfolio backtest of $10,000 allocated to each fund: BNDW vs. BNDX:
Since BNDW is a fairly new ETF we only have two full years to compare. In 2019 BNDW has outperformed BNDX by a small margin. But in 2020 the difference is much more pronounced. This depicts clearly the aftermath of the Covid-19 induced market crash and the swift recovery of the U.S. market.
|Portfolio||Initial Balance||Final Balance||CAGR|
$10,000 invested in BNDW would have resulted in $11,453 by now. This equates to a compound annual growth rate of 8.95%. Of course, this is a phenomenal growth rate for bonds. Keep in mind though that the FED has lowered interest rates drastically in 2020 making bonds much more appealing and driving up prices.
A $10,000 BNDX portfolio would have resulted in $11,453. This is equal to a CAGR of 7.15%. These kinds of returns are usually only expected from a pure stock portfolio. The same reason as stated above led to the increase of prices in BNDX. But again, the difference is much more visible in BNDW.
With the creation of BNDW Vanguard has issued a strong global bond fund. With an expense ratio of only 0.06% and more than 16,000 securities included the fund is extremely well put together.
Although BNDW outperforms BNDX in almost all instances, this is not to say that BNDW is necessarily the better fund. BNDW and BNDX simply have different goals:
BNDW is aimed at investors outside the U.S. looking for a global bond exposure that includes U.S. bonds.
BNDX is aimed at U.S. investors who perhaps already hold BND and are looking to gain more international exposure.
And both funds fulfill their respective roles beautifully. While BND still outperforms BNDW on its own it is worth thinking about replacing the domestic fund with a global one instead of adding BNDX. The lower expense ratio and increased performance certainly are strong indicators.
Over the past years, I have discovered several tools and products that have helped me tremendously on my path to financial freedom:
P.S.: The links below are affiliate links, which means I receive a small commission at no extra cost to you when you sign up for one of the services. Thank you for your support!
1) Take a look at M1 Finance, my favorite broker. I love how easy it is to invest and maintain my portfolio with them. I can set up automatic transfers, rebalance my portfolio with one click and even borrow up to 35% of my assets at super low interest rates!
2) Fundrise is by far the best way I've found to invest in Real Estate. You can diversify your portfolio by investing in their eREITs or even allocate capital to individual properties (without the hassle of managing tenants!).
3) If you are interested in crypto, check out Gemini. I've started allocating a small amount of assets to the growing crypto space and Gemini has just been a breeze to use. Once you register, make sure to also open an Active Trader account to buy crypto at the lowest fees on the market (just 0.03%!).
To see all of my most up-to-date recommendations, check out the Recommended Tools section.