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A different approach to fixed income

The fixed income landscape has undergone seismic shifts over the past year.

While investors are approaching the dawn of a future beyond Covid-19—thanks to rapid vaccine development and deployment—markets continue to grapple with the impact of the pandemic. And bond investors face significant challenges: among them, curtailed economic growth; vastly expanded quantitative easing (QE) programmes; the prospect of low or negative interest rates for decades to come; and ballooning government debt.

Amid these uncertainties, what does this mean for fixed income assets? Is it time for investors to rethink their approach to bond investing?

Adding value for bond investors

While we do expect a rebound in corporate fundamentals this year as the economy recovers, the recovery is likely to be uneven and will drive differentiation between issuers. Here, our approach to active fixed income investing can add value for investors. With little room for error priced into credit bonds, a considered approach to security selection—rather than broad directional calls on credit—is more important than ever in the active global credit sphere. And combining active global credit with government bonds or a global bond index solution can offer complete core bond exposure in a portfolio.

In emerging market bonds, with debt restructurings on the rise, some investors harbour concerns over the sustainability of sovereign debt across some developing countries. But the prospect of restructuring presents an opportunity as well as a threat. Managed in the right way, with rigorous fundamental analysis and a robust risk-focused investment process, investments across emerging market sovereigns can make a meaningful positive return and income contribution to investor portfolios.

As QE programmes consume an increasing part of the global bond universe, Vanguard’s fixed income index funds more accurately represent bond investors’ opportunity set by tracking float-adjusted bond indices. And amid heightened volatility, our bond index funds and ETFs have consistently preserved shareholder value while tracking indices tightly, integrating our active credit research capabilities into index fund management and offering a diversified approach to fixed income indexing while managing liquidity and downside risk.

A longer-term perspective

As fixed income investors navigate these challenges, Vanguard’s approach to active and index fixed income funds remains uncompromising. Everything we do is about creating consistency for investors, be it tracking an index or delivering long-term alpha.

Whether investors seek exposure to a broad market or more narrow segments of the fixed income universe, the teams managing our bond funds haven’t deviated from their collaborative, risk-controlled approach, and they have no plans to.

Furthermore, thinking about active and index fixed income is not necessarily an either/or decision. Investors can benefit from taking a holistic approach to fixed income, by exploring combining active and index bond strategies in portfolios and considering the risk and return tradeoffs across different strategy blends.

Vanguard has been serving fixed income investors through many market cycles – we take a longer-term perspective. We are fixed income pioneers. We established the first retail bond index fund in the United States in 1986, and we are one of the largest active bond fund managers in the world.

Find out how Vanguard’s fixed income solutions can help your clients meet their goals.

Emerging Markets Bond Fund

The Fund seeks to provide total return while generating a moderate level of income by investing primarily in bonds of issuers in emerging market countries. The Fund employs an “active management” strategy, and while the Fund will invest in components of the J.P. Morgan EMBI Global Diversified Index (the “Index”), its investment manager will follow distinct approaches in managing the Fund’s assets.

Global Credit Bond Fund

The Fund seeks to provide a moderate and sustainable level of current income by investing in a diversified portfolio of global credit bonds. The Fund employs an “active management” strategy, and while the Fund will invest substantially in components of the Bloomberg Barclays Global Aggregate Credit Index, its investment manager will follow distinct approaches in managing the Fund’s assets.

Global Bond Index Fund

The Fund employs a passive management – or indexing – investment approach and seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index (the “Index”). The Index includes investment-grade and government bonds from around the world with maturities greater than one year. The Index is a market-weighted index of global government, government-related agencies, corporate and securitised fixed income investments with maturities greater than one year.

Global Aggregate Bond UCITS ETF

The Fund employs a passive management – or indexing – investment approach, through physical acquisition of securities, and seeks to track the performance of the Bloomberg Barclays Global Aggregate Float Adjusted and Scaled Index (the “Index”). The Fund invests in a representative sample of bonds included in the Index in order to closely match the Index’s capital and income return. The Index includes investment-grade and government bonds from around the world with maturities greater than one year.

 

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Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Some funds invest in emerging markets which can be more volatile than more established markets. As a result the value of your investment may rise or fall.

Investments in smaller companies may be more volatile than investments in well-established blue chip companies.

Reference in this document to specific securities should not be construed as a recommendation to buy or sell these securities, but is included for the purposes of illustration only.

ETF shares can be bought or sold only through a broker. Investing in ETFs entails stockbroker commission and a bid- offer spread which should be considered fully before investing.

Funds investing in fixed interest securities carry the risk of default on repayment and erosion of the capital value of your investment and the level of income may fluctuate. Movements in interest rates are likely to affect the capital value of fixed interest securities. Corporate bonds may provide higher yields but as such may carry greater credit risk increasing the risk of default on repayment and erosion of the capital value of your investment. The level of income may fluctuate and movements in interest rates are likely to affect the capital value of bonds.

The Vanguard Emerging Markets Bond Fund and Vanguard Global Credit Bond Fund may use derivatives, including for investment purposes, in order to reduce risk or cost and/or generate extra income or growth. For all other funds they will be used to reduce risk or cost and/or generate extra income or growth. The use of derivatives could increase or reduce exposure to underlying assets and result in greater fluctuations of the Funds net asset value. A derivative is a financial contract whose value is based on the value of a financial asset (such as a share, bond, or currency) or a market index.

Some funds invest in securities which are denominated in different currencies. Movements in currency exchange rates can affect the return of investments.

For further information on risks please see the “Risk Factors” section of the prospectus on our website at https://global.vanguard.com.

Important information

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For professional investors only (as defined under the MiFID II Directive) investing for their own account (including management companies (fund of funds) and professional clients investing on behalf of their discretionary clients). In Switzerland for professional investors only. Not to be distributed to the public.

The information contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so. The information in this document is general in nature and does not constitute legal, tax, or investment advice. Potential investors are urged to consult their professional advisers on the implications of making an investment in, holding or disposing of shares and /or units of, and the receipt of distribution from any investment.

Vanguard Investment Series plc and Vanguard Funds plc have been authorised by the Central Bank of Ireland as a UCITS and has been registered for public distribution in certain EEA countries and the UK. Prospective investors are referred to the Funds' prospectus for further information. Prospective investors are also urged to consult their own professional advisers on the implications of making an investment in, and holding or disposing shares of the Funds and the receipt of distributions with respect to such shares under the law of the countries in which they are liable to taxation.

The Manager of Vanguard Investment Series plc is Vanguard Group (Ireland) Limited. Vanguard Asset Management, Limited is a distributor of Vanguard Investment Series plc.

The Manager of Vanguard Funds plc is Vanguard Group (Ireland) Limited. Vanguard Asset Management, Limited is a distributor for Vanguard Funds plc.

For further information on the fund's investment policies, please refer to the Key Investor Information Document (“KIIDs”). The KIID for this fund is available in local languages, alongside the prospectus via Vanguard’s website https://global.vanguard.com/.

The Indicative Net Asset Value (“iNAV”) for Vanguard’s ETFs is published on Bloomberg or Reuters.  Refer to the Portfolio Holdings Policy at https://global.vanguard.com/portal/site/portal/ucits-documentation for holdings information.

For Dutch investors only: The fund(s) referred to in this document are listed in the AFM register as defined in section 1:107 Dutch Financial Supervision Act (Wet op het financieel toezicht).For details of the Risk indicator for each fund listed in this document, please see the fact sheet(s) which are available from Vanguard via our website https://www.vanguard.nl/portal/instl/nl/en/product.html.

For Swiss professional investors: The Manager of Vanguard Funds plc and Vanguard Investment Series plc is Vanguard Group (Ireland) Limited. Vanguard Investments Switzerland GmbH is a financial services provider, providing services in the form of purchase and sales according to Art. 3 (c)(1) FinSA. Vanguard Investments Switzerland GmbH will not perform any appropriateness or suitability assessment. Furthermore, Vanguard Investments Switzerland GmbH does not provide any services in the form of advice. Vanguard Funds Series plc and Vanguard Investment Series plc have been authorised by the Central Bank of Ireland as a UCITS. Prospective investors are referred to the Funds' prospectus for further information. Prospective investors are also urged to consult their own professional advisors on the implications of making an investment in, and holding or disposing shares of the Funds and the receipt of distributions with respect to such shares under the law of the countries in which they are liable to taxation. Vanguard Funds plc has been approved for offer in  Switzerland by the Swiss Financial Market Supervisory Authority (FINMA). The information provided herein does not constitute an offer of Vanguard Funds plc or Vanguard Investment Series plc in Switzerland pursuant to FinSA and its implementing ordinance. This is solely an advertisement pursuant to FinSA and its implementing ordinance for Vanguard Investment Series plc and Vanguard Funds plc. The Representative and the Paying Agent in Switzerland is BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich. Copies of the Articles of Incorporation, KIID, Prospectus, Declaration of Trust, By-Laws, Annual Report and Semiannual Report for these funds can be obtained free of charge from the Swiss Representative or from Vanguard Investments Switzerland GmbH via our website https://global.vanguard.com/.

Issued in EEA by Vanguard Group (Ireland) Limited which is regulated in Ireland by the Central Bank of Ireland.
Issued in Switzerland by Vanguard Investments Switzerland GmbH.
Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

© 2021 Vanguard Group (Ireland) Limited. All rights reserved.
© 2021 Vanguard Investments Switzerland GmbH. All rights reserved.
© 2021 Vanguard Asset Management, Limited. All rights reserved.

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