Aggregate overseas and domestic debt funds: Comparing the returns

Returns comparison

In the last four parts, we compared the risks and returns inherent in domestic and international bond funds that invest primarily in corporate and government debt (TLT) securities. In this part, we will discuss and compare domestic and overseas aggregate funds (BND) with exposure to debt issued by both governments and corporates.

For the purpose of comparisons, we will be considering the following ETFs:

  • The iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB), which has an expense ratio of 0.6% and Net Assets of ~$4.37 billion (as on April 30, 2014).
  • The iShares Total U.S. Bond Market ETF (AGG), which has an expense ratio of 0.08% and Net Assets of ~$16.71 billion (as on April 30, 2014).
  • The Vanguard Total International Bond ETF (BNDX), which has an expense ratio of 0.2% and Net Assets of ~$23.05 billion (as on April 30, 2014).

From the graph above, EMB appears to have performed better than AGG over the past three-year and five-year period, clocking returns of 6% and 9.4%, respectively, compared to 3.4% and 4.6% for AGG over the same period. Since BNDX is a new fund (inception in May, 2013), the comparable returns history is not available.

However, EMB has a higher proportion of its holdings invested in non investment-grade and unrated debt (~45%) compared to AGG (~3%) and less than 1% for BNDX. Investors demand a higher yield to undertake higher risk.

In the next part, we will discuss the risk aspects of the funds considered above.