Vanguard plans to launch a new international bond index fund for its Target Retirement series and LifeStrategy Funds. It filed a registration statement with regulators Thursday and hopes to launch the Vanguard Total International Bond II Index Fund in early 2020.
The fund giant says its new bond fund will receive future cash flows from the Vanguard Target Retirement series and LifeStrategy Funds. Also, current funds of funds’ holdings in the existing Vanguard Total International Bond Index Fund will be moved into the new fund “in a prudent and tax-sensitive manner over time.”
“As our Target Retirement series and LifeStrategy Funds have grown, they have become increasingly large shareholders of their underlying index funds,” Chief Investment Officer Greg Davis said in a statement.
Vanguard’s Target Retirement series, rolled out in 2003, now has over $800 billion in assets.
“We believe it is in the best interest of shareholders to segregate the transaction costs produced by these funds of funds from the costs generated by other investors in the Total International Bond Index Fund,” Davis explained.
About 29% of assets in the Vanguard Total International Bond Index Fund come from target date funds tracked by Morningstar, according to Alec Lucas, Ph.D., a senior analyst of manager research with the fund research firm.
“In the early days of a target date fund, for instance, it doesn’t makes sense to launch other funds, but as such [funds of funds] get bigger, it can make sense to do so,” Lucas said. “Transaction costs tied to glide path changes, for instance, can become a bigger part of the enchilada and have an effect.”
The Vanguard Total International Bond II Index Fund will aim to mirror the investment strategy of the Vanguard Total International Bond Index Fund, the fund giant says, and to track the same benchmark index, the Bloomberg Barclays Global Aggregate ex-USD Float Adjusted RIC Capped Index (which is U.S. dollar hedged).
Also, the launch of the new bond fund will not affect the investment strategies, asset allocations, glide path and expense ratios of existing funds of funds, the firm says.
It took this same approach in 2009, when it introduced the Vanguard Total Bond Market II Index Fund to give the Vanguard Target Retirement series and other funds of funds exposure to the U.S. bond market.
“It’s a very responsible and shareholder-friendly move for Vanguard to launch a sibling or identical-twin version of its [international bond] strategy, so those generating transaction costs due to glide path changes are the ones that pay for [such trades] and others not investing in the target date series do not subsidize them,” Lucas said.
The move, he adds, shows “how seriously Vanguard takes its ownership structure and pays attention to details” and how much it values “the investor-centric perspective, which differentiates them.”