BNDW: Global Bonds Preferable To Global Stocks

Torsten Asmus

Regular readers will beryllium good alert that I judge US bonds will importantly outperform US stocks complete nan coming years, but nan caller outperformance of world stocks comparative to bonds besides suggests that world bonds should besides outperform. The Vanguard Total World Bond ETF (NASDAQ:BNDW) is truthful preferable to world equity benchmarks. The BNDW offers a well-diversified portfolio of bonds successful position of geography, sector, and in installments risk. The 4.7% output acold outstrips nan output connected nan MSCI World equity scale and nan ETF faces overmuch little downside consequence successful nan arena of a world recession.

The BNDW ETF

The BNDW seeks to way nan capacity of a broad, market-weighted scale that measures nan finance return of investment-grade U.S. bonds and investment-grade non-U.S. dollar-denominated bonds. The ETF is dollar hedged and comprised of adjacent parts of nan Vanguard Total Bond Market (BND) and nan Vanguard Total International Bond Index (BNDX), pinch geographic vulnerability truthful tilted heavy towards nan US. In position of assemblage exposure, authorities bonds predominate nan ETF, but location is besides important vulnerability to business and financial assemblage credits. The weighted mean maturity is presently 8.9 years while nan long is 7.0 years. The weighted mean output to maturity sits astatine 4.7%, while nan disbursal ratio is conscionable 0.05%.

International Bond Yields Increasingly Attractive

The caller emergence successful world enslaved yields has dramatically improved their semipermanent return prospects, peculiarly comparative to equities, which person soared complete caller months. With nan objection of Japan, each nan awesome markets successful nan BNDW now connection yields successful excess of semipermanent ostentation expectations. Even successful Europe, wherever existent yields person been profoundly antagonistic for complete a decade, nan caller spike successful yields has restored affirmative existent return prospects.

German 10-Year Inflation-Linked Bond Yield, % (Bloomberg)

With nan dividend output connected world stocks falling sharply alongside nan rally successful equity prices, enslaved yields are now supra equity dividend yields for astir of nan markets successful nan BNDW. Even successful nan UK, nan caller rip higher successful stocks and nan emergence successful Gilt yields has near enslaved yields connected par pinch nan FTSE's dividend yield. This marks a awesome turnaround from 3 years agone erstwhile UK stocks yielded arsenic overmuch arsenic 6.4% supra 10-year Gilts.

FTSE Dividend Yield Vs 10-Year Gilt Yield (Bloomberg)

4.7% Yield Far Higher Than Yield On Global Stocks

With US enslaved yields acold successful excess of US equity dividend yields, it should beryllium nary astonishment that nan BNDW's output of 4.7% outstrips nan output connected nan MSCI World handsomely. Even pinch dividend payments astatine grounds highs comparative to sales, nan MSCI World dividend output is conscionable 2.1%, meaning that income from bonds should beryllium 2.6pp higher than stocks all-else equal. This is nan highest specified dispersed since November 2007, pursuing which world bonds surged and equities crashed.

Over nan past decade dividends connected nan MSCI World person grown by an yearly complaint of 4.6%, and if this were to continue, stocks would outperform assuming nary alteration successful nan dividend yield. However, developed marketplace maturation is apt to beryllium astatine slightest 2pp slower complete nan coming years comparative to nan past decade successful my view, meaning that basal returns connected bonds and stocks are apt to travel successful astir connected par.

BNDW Has Much Less Downside Risk

While expected returns connected world stocks and world bonds possibly similar, nan risk-reward outlook for bonds is highly favorable owed to nan overmuch little duration. For instance, if investors were to request a 1 percent constituent higher output connected nan BNDW, nan value of nan ETF should beryllium expected to autumn by astir 7% which is nan existent duration. In contrast, a 1pp emergence successful required returns connected nan MSCI World would require nan dividend output to emergence to 3.1%, requiring banal prices to autumn by a third. Global investors person historically required astir 5% higher returns connected stocks comparative to bonds to compensate for their higher volatility and nan consequence of losses during precarious economical conditions. This suggests that nan existent equity consequence premium of astir zero represents a bully clip for world investors to return immoderate consequence disconnected nan table.

I americium a full-time investor and proprietor of Icon Economics - a macro investigation institution focussed connected providing contrarian finance ideas crossed FX, Equities, and Fixed Income based connected Austrian economical theory. Formerly Head of Financial Markets astatine Fitch Solutions, I person 15 years of acquisition investing and analysing Asian and Global markets.