Vanguard [profile] will add an  international bond index fund to 20 all-in-one funds, including Vanguard Target Retirement Funds, in order to further diversify these portfolios. The international bond component will complement the three other core holdings of Vanguard’s all-in-one funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market II Index Fund.  

Vanguard’s 12 Target Retirement Funds, four LifeStrategy Funds, two of its three Managed Payout Funds, and two Vanguard Variable Insurance Funds will apportion 20% of their respective fixed income allocations to the new Vanguard Total International Bond Index Fund, which is in registration with the U.S. Securities and Exchange Commission.

The Total International Bond Index Fund will seek to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The index comprises approximately 7,000 high-quality corporate and government bonds (average credit quality AA2/AA3) from 52 countries.  

Here is the press release:

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Company Press Release

VANGUARD TO FURTHER DIVERSIFY TARGET RETIREMENT FUNDS

VALLEY FORGE, PA (February 6, 2013)—Vanguard today announced plans to add an  international bond index fund to 20 all-in-one funds, including Vanguard Target Retirement Funds, that will serve to further diversify these broad, balanced portfolios. The international bond component will complement the three other core holdings of Vanguard’s all-in-one funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market II Index Fund.  

Vanguard’s 12 Target Retirement Funds, four LifeStrategy® Funds, two of its three Managed Payout Funds,* and two Vanguard Variable Insurance Funds will apportion 20% of their respective fixed income allocations to the new Vanguard Total International Bond Index Fund, which is in registration with the U.S. Securities and Exchange Commission. (See the separate announcement, “Vanguard to Introduce Low-Cost International Bond Index Fund and ETF,” issued by Vanguard today.)

In addition, Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010, and 2015 Funds.

The overall strategic asset allocation and glidepath of the Target Retirement Funds will not change. The addition of hedged international bonds represents a refinement of the funds’ fixed income component, bringing long-term diversification benefits. An allocation to short-term TIPS provides retirees and pre-retirees with improved inflation protection with less volatility.

“We make changes to our Target Retirement Funds and other funds of funds only after careful analysis and when we’ve identified long-term benefits for investors. Adding these two new funds is expected to better dampen volatility for pre-retirees and retirees, for whom diversification on the fixed income side matters most,” said Vanguard Chief Investment Officer Tim Buckley.

Addition of Total International Bond Index Fund

The Total International Bond Index Fund will seek to track the performance of the Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD Hedged). The index comprises approximately 7,000 high-quality corporate and government bonds (average credit quality AA2/AA3) from 52 countries.  

The Total International Bond Index Fund will represent 20% of the fixed income allocation of the 20 funds-of-funds, with an overall allocation weighting that will range from 2% to 16% of total fund assets, depending on the fund. For example, the new international bond index fund will assume an initial 6% weighting (see chart below) in Vanguard’s largest all-in-one fund—the $20 billion Vanguard Target Retirement 2025 Fund.

Vanguard Target Retirement 2025 Fund
                      Current Allocation New Allocation
Stocks         71%           71%
Domestic         50%           50%
International         21%           21%
Bonds         29%           29%
Domestic         29%           23%
International         --%           6%


Vanguard research shows that the primary factors driving international bond prices are relatively uncorrelated to those driving the U.S. bond market. International bonds thus have the potential to help reduce portfolio return volatility in a manner similar to the diversification benefit expected when an investor adds international equities to a portfolio of domestic equities. Vanguard research has also determined that currency volatility can overwhelm any diversification benefit. By hedging currency risk, an allocation to international bonds can lead to lower average portfolio volatility over time.  

Addition of Short-Term Inflation-Protected Securities Index Fund

The Short-Term TIPS Fund will have initial weightings in the Target Retirement Income, 2010, and 2015 Funds of 17%, 11%, and 4%, respectively.

The Short-Term TIPS Fund, which features an average duration of less than three years, will replace the Inflation-Protected Securities Fund, which has a current average duration of 8.5 years. The Short-Term TIPS Fund seeks to track the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, a market-weighted index that measures the performance of inflation-protected public obligations of the U.S. Treasury with a remaining maturity of less than five years. As of December 31, 2012, the index had an average duration of 2.5 years and an average maturity of 2.6 years.

Vanguard research found that TIPS have historically offered protection from unexpected inflation similar to that offered by commodities, but at a fraction of the volatility. Shorter-term TIPS provide higher correlation to realized inflation with less duration risk than do longer-term TIPS securities.

Change in Expense Ratio for Only One Fund

Current expense ratios are 0.16% to 0.18% for the Target Retirement Funds, 0.13% to 0.17% for the LifeStrategy Funds, and 0.34% to 0.46% for the Managed Payout Funds. A single fund may experience a change in its expense ratio as a result of adding the new underlying funds—the expense ratio of the LifeStrategy Income Fund has the potential to increase by an estimated one basis point.

The changes are expected to be completed by the end of the second quarter of 2013.

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the workforce. The fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.

About Vanguard

Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages $2 trillion in U.S. mutual fund assets, including $245 billion in ETF assets. The firm offers more than 170 funds to U.S. investors and more than 70 additional funds in non-U.S. markets.

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