BNDX: International Interest Rate Cuts Could Lead to a Good Capital Raise (NASDAQ:BNDX)

Investment thesis

Some central banks, such as European and Canadian banks, have recently begun to cut interest rates, triggering a rise in capital in associated long-term bond ETFs. Vanguard Aggregate Bond Index ETF Shares (Nasdaq: BNDX) Invest in government and corporate bonds outside the United States of America, and their value will rise In light of the global climate of reducing interest rates.

Fund structure

BNDX is an ETF released by Vanguard Group, Inc., in 2013. It seeks to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (Hedged). The fund invests in low-risk government and taxable corporate bonds outside the United States, primarily in Europe and Japan.

The fund holds just over 6,800 bonds, with a yield to maturity of 5.1% and an average bond duration of 7.2 years. (You can visit Vanguard official website for more details). The fund has approximately $92 billion in assets under management, with an expense ratio of 0.07%. It is worth noting that the fund has seen a significant positive inflow of $3 billion in the past three months, indicating growing confidence in its potential.

Turning to the bonds held by the fund, we note that it invests heavily in Europe, the Pacific and North America (excluding the United States of America). These top three hold approximately 87% of the fund’s total bonds, making the fund sensitive to interest rates in the countries mentioned above. We will discuss this more comprehensively in a moment.

BNDX has low risk exposure. As mentioned, it is invested in a diversified bond portfolio featuring low-risk government and taxable corporate bonds, reflecting the strong credit rating of BNDX’s holdings. However, the fund does contain some non-investment grade bonds, but they have only a small minority stake and do not change the low-risk characteristics of the fund.

Quite unexpectedly, despite this very low risk exposure, BNDX is still riskier than other bond ETFs created to track and hold the US bond market. Comparing BNDX with its counterpart, the Vanguard Total Bond Market Index Fund ETF (BND), which has the same characteristics as the fund but invests exclusively in the US bond market, several indicators show BND outperforming as a lower-risk asset, as US Treasuries are generally considered The safest or risk-free assets in the financial markets.

Comparing BNDX with its counterparts in the same category, international bond holding ETFs, we can notice the strong preferences that BNDX enjoys. BNDX is associated with a much lower expense ratio of 0.07%; The ETF returns the highest total return among other funds in the last 10 years. Furthermore, BNDX is a comprehensive ETF. Almost dozens a For the various sectors seeking an Alpha ETF score: Expenses, Dividends, Risk, Liquidity, and Score Dr In a momentum that can be linked to its disruptive characteristics by holding international treasury bonds, whose prices are directly linked to global interest rates, taking into account that most central banks have kept interest rates unchanged since September 2023.

BNDX is safe, is it profitable?

BNDX saw a serious price decline starting at the end of 2022. The price of the ETF fell approximately 16%, and has been at this low level ever since. As a result, those who invest in this ETF suffer huge writing losses and actual losses if they decide to sell. This decline in prices can be explained by the rise in inflation rates in the United States of America, Europe, and the rest of the global economies after the epidemic, in addition to repeatedly published reports about raising interest rates in the United States of America, followed by the European Central Bank and others. Major central banks. Eventually, the European Central Bank (where the majority of BNDX bonds are concentrated) began a series of interest rate hikes in July 2022 from 0% reaching a final interest rate of 4.5% in September 2023. These aggressive increases immediately caused the value of bond capital to decline held by BNDX, which is directly reflected in this sharp decline.

However, BNDX has consistently achieved gains on cost of between 4 and 5%, which is a reasonable compensation for lower ETF prices. However, compare With its BND counterpartWe can see that BNDX’s 30-day stock yield is only about 3.3% lower than BND’s 4.6% yield on SEC and 4.8% yield on 10-year US Treasuries. However, diversification in investment allocation is always a good practice since the US economy is still under inflationary pressure, and it may be worse than it seems (investors can find some details here)

Advance capital appreciation

As mentioned above, BNDX has an average duration of 7.2 years for bonds, which (average duration) is a measure of the sensitivity of bond prices – and bond mutual funds – to interest rate trends according to Vanguard’s official website. As a result, if the average duration of a bond ETF is 7.2 years, its price will rise by about 7.2% when interest rates fall by one percentage point. The opposite is true: the bond’s price will fall by about 7.2% when interest rates rise by one percentage point.

Therefore, we can directly link the price of BNDX to the interest rates of the primary bond issuer; If these issuers cut interest rates, the BNDX stock price will rise. The European and Canadian Central Banks recently officially cut interest rates by 25 basis points, with strong expectations and analysis for them to continue doing so. I summarized the interest rate expectations for the major bond-issuing countries as follows:

Based on the above facts, I think it is an ideal entry point into BNDX; Some major bond issuers, which account for 60% of the fund’s holding, have already begun cutting interest rates, which will increase the fund’s capital under management and push the price of ETFs higher. However, the characteristics of a fund’s holdings are intertwined, making it very difficult to create a direct mathematical model that characterizes the relationship between interest rate and capital appreciation. However, let’s keep it simple: lowering interest rates on the bond issuer will increase the price of BNDX. This situation could continue until the ETF’s share price returns to its 2022 price level of $56 (about a 15% upside in the share price from today’s $48.7 value).

Disadvantages of the Fund and the risks associated with it

BNDX is a low-risk investment that pays good monthly dividends and has strong capital appreciation potential. However, all of this is accompanied by many negative consequences and conceivable risks, which can be summarized as follows:

• there nothing A clear strategy for BNDX. It is a collection of various government and corporate bonds. The fund is allocated entirely outside the United States, as investors and even governments around the world view US Treasuries as the least risky among other Treasuries.

• BNDX’s yield is low compared to that of other peers. However, you can get a very low and relatively high return of 5% using T-Bills ETFs. Or you can capture potential price appreciation with an acceptable 3.7% return using long-term Treasury ETFs.

• Indeed, the European Central Bank and other central banks around the world have begun to lower interest rates, but the United States has not done so, and will not do so soon. The Fed’s monitoring tool still shows that there will be a possibility of one or two maximum interest rate cuts at the end of this year. At the same time, economics reporters continue to point out that US inflation rates are higher than expected. As a result, if the US does not cut interest rates, other major central banks will not be able to continue cutting interest rates because this imposes enormous pressure. On local currencies.

Investor takeaways

BNDX is an ETF that invests in low-risk bonds (government and cooperative) outside the United States. It is well diversified and has a portfolio of extensive holdings in broad financial markets. Therefore, you can expose yourself to the international bond market and reduce the concentration of your investments.

However, exposure to non-U.S. bond markets can be irrational, especially if the U.S. interest rate is equal to or higher than other market rates. Many investors and governments classify Treasury debt as risk-free, and there are many ETFs on the market geared toward U.S. Treasuries, which can offer a more accurate strategy and a safer investment in several ways.

On the other hand, BNDX is a good solution for short and medium investments. Investors can use it to simultaneously expose themselves to international investment grade bond markets, including Europe, Japan, Canada, the United Kingdom and other financial markets. Investors can usefully grow their portfolios from potential capital gains every time one of these countries cuts interest rates.

Finally, as described above, BNDX has strong investment characteristics, including diversification, potential capital appreciation, steady monthly income, low expense ratio, and investment-grade holdings. Therefore, I give a strong buy recommendation for BNDX because now is a good time to invest in an ETF that will benefit greatly from lower interest rates around the world.