Key points

• Growing investor concern around geopolitical instability has injected volatility into markets.

• With uncertainty unlikely to abate in the near term, investors may wish to find ways of guarding against turbulence and potential market downturns.

• Bond ETFs offer investors a cost-effective way to add a buffer to portfolios while potentially benefitting from the structural drivers that can support fixed income returns.

Geopolitical tensions inject new uncertainty into markets

Volatility has returned as geopolitical tensions rise, compounding existing market concerns about whether ambitious AI-driven revenue projections can be met. 

Elevated geopolitical risk often translates into wider dispersion of returns, faster-moving cycles of optimism and caution and a more fragile foundation for asset valuations. In this environment, portfolios can benefit from allocations that help absorb shocks, maintain resilience and provide ballast when uncertainty becomes the dominant market driver. Hedged global bonds have shown characteristics that may help moderate the impact of market volatility as part of a diversified portfolio.

The shock-absorbing role of hedged global bonds

Hedged global bonds, which help to mitigate the impact of currency movements, have shown volatility of roughly 3% per year over a period of more than 20 years, compared with more than 17% for equities (as the table below illustrates). This has translated into far smaller drawdowns: while US and global equities have at times fallen by as much as –55% and –58% over this two-decade time period, hedged global bonds’ maximum decline was –12%.

Historical data indicates (see table below) that hedged global bonds have exhibited lower volatility than certain other major asset classes over the period shown¹.

Hedged global bonds: Key components of diversified portfolios

Asset classes ranked by volatility, 31 May 2004 to 31 December 2025

Past performance is not a reliable indicator for future results. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index. Source: Bloomberg, Vanguard. Data is for the period 31 May 2004 to 31 December 2025 and in USD². Annualisation is based on weekly returns. The Sharpe ratio assumes a zero risk-free return.

For investors seeking ways to mitigate the risk of drawdowns on portfolios, the shock-dampening properties offered by hedged global bonds can be significant. From a risk-adjusted perspective, global hedged bonds have comfortably beaten most other asset classes—except for short-duration bond exposures—during the past 21 years³.

Beyond their role as portfolio anchors, our research points to a supportive outlook for high quality fixed income. Markedly higher yields than in the the pre-pandemic decade underpin our expectation of stronger risk-adjusted returns over the next five to ten years⁴.

The ETF vehicle, given its cost-efficiency and accessibility, provides investors with an effective building block for adding global bond exposure to portfolios. 

How Vanguard adds value when managing indexed fixed income ETF strategies

A common misconception is that managing index exposures is a ‘set-it-and-forget-it’ exercise.

In reality, managing fixed income index funds and ETFs requires significant expertise. Because replicating every bond in a benchmark is rarely practical or cost effective, portfolio managers use sampling techniques to match index characteristics while keeping costs low. This approach helps maintain tracking accuracy and avoid unnecessary transaction costs that can erode long-term returns.

For index ETFs, the primary objective is to track the performance of a benchmark with as little tracking error as possible. 

The global bond universe, which comprises tens of thousands of individual fixed income securities, is a case in point. When Vanguard’s portfolio managers aim to replicate the Bloomberg Global Aggregate Float Adjusted and Scaled Index, they hold around one third of the constituents from the 31,000+ total names in the index⁵. And, although the Vanguard Global Aggregate Bond UCITS ETF holds less than one third of the individual securities, its holdings still comprise almost two-thirds of the universe by market capitalisation.

The chart below shows how sampling techniques allow portfolio managers to closely match index weightings while holding only a portion of the underlying securities. By targeting specific bond issues based on factors such as liquidity, credit quality and maturity, managers can minimise transaction costs while preserving key risk characteristics.

Index sampling: An efficient liquidity management tool

Fund and index weights by category

Source: Bloomberg, as at 31 December 2025. Data are derived from constituents for the Vanguard Global Aggregate Bond UCITS ETF and the Bloomberg Global Aggregate Float Adjusted and Scaled Index. This chart illustrates historical characteristics of the index or fund over the period shown. Historical results should not be relied upon as a guide to future performance.

Even while a fund holds far fewer bonds than the index, its portfolio managers can closely match the benchmark’s essential risk characteristics such as duration, credit risk and yield as they seek to mirror the index’s performance. In the case of managing a global aggregate bond ETF, our managers have historically kept tracking error consistently tight across market cycles and environments – for further information, please visit our fund pages⁶. 

Learn more about investing with bond ETFs

For investors who would like to explore the topic further, our ETF resources page has information on our ETF offering and fixed income exposures more specifically. And in our fixed income outlook, we consider how high real yields support the case for bonds in 2026 – although quality is key as AI-driven risks rise and tight valuations leave little room for error.

¹ These observations relate to the specific timeframe and should not be interpreted as indicative of future outcomes.

² Benchmarks and indices used: US equities = S&P 500 Net Total Return Index, UK equities = FTSE All Share Net Total Return Index, developed market equities = MSCI World Net Total Return Index, global markets all cap equities = MSCI ACWI IMI Net Total Return Index, Europe equities = MSCI Europe Net Total Return Index, eurozone equities = MSCI EMU Net Total Return Index, developed Asia Pacific ex Japan equities = MSCI Pacific ex Japan Net Total Return Index, Japan equities = MSCI Japan Net Total Return Index, emerging market equities = MSCI Emerging Net Total Return Index, global market equities = MSCI ACWI Net Total Return Index, developed market small-cap equities = MSCI World Small Cap Net Total Return Index, global aggregate fixed income = Bloomberg Global-Aggregate Total Return Index Unhedged USD, US aggregate fixed income = Bloomberg US Aggregate Total Return Index Unhedged USD, US short-duration fixed income = Bloomberg US Aggregate 1-3 Year Total Return Index Unhedged USD, US long-duration fixed income = Bloomberg US Aggregate 7-10 Year Total Return Index Unhedged USD, US government fixed income = Bloomberg US Treasury Total Return Unhedged USD, US inflation-linked fixed income = Bloomberg US Government Inflation-Linked All Maturities Total Return Index Unhedged USD, US corporates fixed income = Bloomberg US Corporate Total Return Index Unhedged USD, global short-duration fixed income hedged = Bloomberg Global Aggregate 1-3 Year Total Return Index Hedged USD, global long duration fixed income hedged = Bloomberg Global Aggregate 7-10 Year Total Return Index Hedged USD, global government fixed income hedged = Bloomberg Global Aggregate Treasuries Total Return Index Hedged USD, global inflation-linked fixed income hedged = Bloomberg Global Inflation-Linked Total Return Index Hedged USD, global corporates fixed income hedged = Bloomberg Global Aggregate Corporate Total Return Index Hedged USD, global high yield fixed income hedged = Bloomberg Global High Yield Total Return Index Hedged USD, global aggregate fixed income hedged = Bloomberg Global Aggregate Total Return Index Hedged USD, commodity alternatives = Bloomberg Commodity Index Total Return, global REITS alternatives = S&P Global REIT Net Total Return Index, global infrastructure alternatives = S&P Global Infrastructure Net Total Return Index, global private equity alternatives = S&P Listed Private Equity Net Total Return Index.

³ Sharpe ratio is a measure of risk-adjusted return. To calculate a Sharpe ratio, an asset’s excess return (its return in excess of the return generated by risk-free assets such as Treasury bills) is divided by the asset’s standard deviation.

⁴ Future market conditions are uncertain, and the behaviour of fixed income markets will depend on a range of economic and geopolitical factors. The information provided reflects research conclusions based on current data at the time of publication and does not constitute a forecast.

⁵ As at 31 January 2026, the index comprised 31,683 securities.

⁶ The fund’s objective is to track its benchmark as closely as reasonably possible; actual tracking differences will vary depending on market conditions and operational factors.