Vanguard has delayed the introduction of its two new international bond index funds and ETFs, a move that harkens back to their decision almost exactly one year ago to delay the introduction of the three municipal bond index funds and ETFs. That decision, made as the muni bond market was being roiled, was said to be due, in part, to the fact that fund outflows were rising — Vanguard said it preferred to wait for the market to stabilize.
With 20/20 hindsight, it turns out Vanguard’s move was a pretty poor bit of market timing as investors quickly swept past the negative predictions about muni bonds and bought with gusto. In addition, their purchases of all manner of bond funds and bond ETFs meant Vanguard missed a big opportunity to show how ignoring short-term market noise could lead to long-term investment gains. Vanguard never caught up and, to this date, the municipal bond index funds and ETFs are still, apparently, on hold.
Why the delay for the international bond funds? Vanguard’s not saying.
But the move is strange given Vanguard’s stated belief that “a strategic allocation to hedged international bonds in the range of 20% to 40% of the fixed income portion of a portfolio represents a reasonable starting point to improve diversification.”
If there’s one thing you can say about Vanguard, it’s that it loves to preach the gospel of diversification as well as ignoring short-term noise in the markets. Unfortunately, in this case, it is saying one thing while doing another.
The “old” Vanguard, led by founder Jack Bogle, didn’t let a little short-term market noise get in the way of fund introductions it thought were necessary. I can just see Bogle, with his nautical allusions at the fore, screaming, “Damn the torpedoes — introduce ’em!”
Take a step back to February 1994. This is when the Fed began its long campaign to raise interest rates, with their first hike of 0.25% on Feb. 4 — by the time they were done, the fed funds rate had gone from 3.25% to 6%. Vanguard didn’t flinch and introduced its first three bond index funds just weeks later, in March 1994. Vanguard knew the time was right for bond index funds, and it went against the grain of the market and put them on the market.
While the short-term and intermediate-term funds quickly gained assets (the Vanguard Intermediate-Term Bond Fund (NYSE:BIV) broke the billion-dollar barrier in September 1998), it wasn’t until almost a decade later that the Vanguard Long-Term Bond Index (MUTF:VBLTX) grew to more than $1 billion.
Is the “new” Vanguard risk-averse? I think investors would love to get their hands on (and their money into) both municipal bond index funds and foreign bond funds run in the traditional, plain-vanilla, low-cost Vanguard style.
What’s the hold-up?