3388: The Risks and Rewards Of International Bonds by Robert Farrington of The College Investor on Global Bond Market

Summary

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Podcast Summary

Optimal Finance Daily, Episode 3388

Title: The Risks and Rewards Of International Bonds
By: Robert Farrington (read and hosted by Diania Merriam)
Date: December 15, 2025

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Main Theme & Purpose

This episode explores the complexities, advantages, and pitfalls of investing in international (foreign) bonds as part of a diversified investment portfolio. Diania Merriam reads and discusses Robert Farrington’s post from The College Investor, unpacking why international bonds matter, how they work, and practical steps for including them in your asset allocation. The episode aims to help listeners understand how global bonds can enhance diversification, the risks they bring, and how to approach investing in them.

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Key Discussion Points and Insights

1. The Scope and Role of Global Bonds

• Market Size & Importance:

  • The global bond market is, on average, 79% larger than the global stock market. Bonds provide stability in contrast to the inherently volatile nature of stocks.
  • [01:14] “The global bond market is far larger and more liquid than the global stock market.” — Robert Farrington

• Portfolio Allocation:

  • Typical portfolios, especially as investors near retirement, increase their bond allocation (e.g., the classic 60/40 portfolio).
  • Bonds, including international ones, provide a cushion for withdrawals and help manage risk as retirement approaches.
  • [01:18] “In a 60/40 portfolio, 60% is allocated to stocks, while the other 40% goes to bonds...” — Robert Farrington

2. Why International Bonds?

• Diversification:

  • International bonds add another layer of diversification, potentially protecting your portfolio during US market downturns.
  • Having exposure to other regions—Europe, Asia, etc.—can offset domestic risks.
  • [01:37] “Foreign bonds provide another means of portfolio diversification...give you exposure to other parts of the world.” — Robert Farrington

• Risk Spectrum:

  • Bonds from developed countries (e.g., UK, Germany) are safer than those from emerging markets (e.g., Indonesia, Kenya).
  • Exposure to emerging market bonds should generally be small.
  • [02:08] “Bonds from developed countries...generally safer than bonds from emerging markets such as Indonesia, Malaysia, and Kenya.” — Robert Farrington

• Rebalancing:

  • As values shift, international bonds should be rebalanced to maintain one's target allocation.
  • [02:26] “For rebalancing purposes, foreign bonds are part of your overall bond allocation...so that each area of your portfolio remains within its target allocation.” — Robert Farrington

3. Mechanics and Risks of Foreign Bonds

• Currency Risks:

  • Foreign bonds are denominated in their local currencies. Thus, exchange rates directly impact returns.
  • Currency appreciation relative to the dollar benefits the US investor; depreciation is a risk.
  • [02:40] “Foreign bonds denominated in the issuing country’s currency...will have an inverse correlation with the dollar.” — Robert Farrington

• Other Influencing Factors:

  • Prices can also be affected by interest rate directions, inflation, credit quality, economic growth, and home country policies.
  • [03:04] “There are other factors that affect foreign bond prices...inflation expectations, credit of the issuer, currency markets, economic growth, and monetary and fiscal policies.” — Robert Farrington

4. How to Invest in International Bonds

• Via Mutual Funds and ETFs:

  • Direct investment in foreign bonds is complex and impractical for most individuals.
  • Instead, use mutual funds and ETFs, which offer instant diversification and professional management for a small fee.
  • [03:27] “You can invest in foreign bonds through mutual funds and ETFs. These financial instruments will also be more diversified than a single bond.” — Robert Farrington

• Expense Ratios and Fees:

  • Fees have generally decreased, with many reputable international bond ETFs charging under 0.5%.
  • [03:42] “Expense ratios have come down a lot in recent years. Finding a bond with a fee of less than half a percent should not be difficult.” — Robert Farrington

• Examples of International Bond ETFs (Vanguard):

  • Total World Bond ETF (BNDW):
    • Expense ratio: 0.06%.
    • Contains 44.1% US holdings; may not offer strong foreign diversification.
    • [04:02] “If you’re looking for a bond ETF that is mostly foreign holdings, this might not be what you want.” — Robert Farrington
  • Total International Bond ETF (BNDX):
    • Expense ratio: 0.08%.
    • Only 3.4% allocated to US; offers robust global diversification.
    • [05:13] “BNDX provides good foreign bond diversification for anyone who doesn’t already have investments in foreign bonds.” — Robert Farrington

5. Final Takeaways

• International bonds can enhance portfolio diversification and potentially smooth returns, but come with their own unique risks (mainly currency and country-specific risks).
• Selecting low-cost, diversified ETFs is an accessible way for most investors to gain international bond exposure.
• [06:12] “International bonds can provide a great diversification to your portfolio. Just like other investments, they do carry risks, but they also carry unique returns that could work well for your asset allocation needs.” — Robert Farrington

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Notable Quotes & Memorable Moments

• On Diversification
  • [01:37] “A well-diversified portfolio protects capital against drawdowns, or at least outsized drawdowns. Foreign bonds also give you exposure to other parts of the world.” — Robert Farrington
• On Complexity and Access
  • [03:27] “Rather than buying the bonds of some country directly, which can be complex, you can invest in foreign bonds through mutual funds and ETFs.” — Robert Farrington

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Host Commentary & Personal Perspective

Commentary by Diania Merriam starts at [09:16]:

• Diania reflects on the conventional advice to increase bond allocation as one approaches retirement, but shares her own approach:
  • She holds a 100% stock portfolio because she’s investing for the very long term and is able to tolerate higher volatility.
  • She manages risk by maintaining a healthy cash buffer and not checking her investment balances frequently.
  • For her, the emotional comfort that bonds provide (i.e., reduced portfolio swings) isn’t worth the lower expected returns at this stage of her investing journey.
• Quote:
  • [09:34] “For me, I’ve solved for this by keeping a strong cash position and not watching my investments too closely. Because I have a 100% stock portfolio, I don’t need to rebalance, so I have even less of a need to look at it.” — Diania Merriam

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Timestamps for Important Segments

• [01:13] — Introduction to global bond market’s scale and portfolio role
• [01:37] — The diversification benefits of international bonds
• [02:08] — Risk profiles: developed vs. emerging market bonds
• [02:26] — Portfolio rebalancing with foreign bonds
• [02:40] — How foreign bonds work; currency impact explained
• [03:27] — How to easily access international bonds via ETFs
• [04:02] — Overview of the Total World Bond ETF (BNDW)
• [05:13] — Overview of the Total International Bond ETF (BNDX)
• [06:12] — Farrington’s final thoughts on international bonds
• [09:16] — Diania Merriam’s personal investing perspective and closing

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Conclusion

This episode offers a practical, easy-to-understand primer on international bond investing, emphasizing the potential portfolio stability, enhanced diversification, and accessible investment vehicles (like ETFs) that even novice investors can utilize. The episode balances expert insight (Farrington’s) with the host’s transparent personal perspective, giving listeners a nuanced appreciation of whether, when, and how to incorporate international bonds into their own financial strategies.

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Transcript

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[Robert Farrington]

This is Optimal Finance Daily The Risks and Rewards of International Bonds by Robert Farrington of TheCollegeInvestor.com the global bond market is far larger and more liquid than the global stock market. Over the last 25 years, the bond market has on average been 79% larger than the stock market. According to learnbonds.com bonds provide stability against the volatile nature of stocks. In a 6040 portfolio, 60% is allocated to stocks, while the other 40% goes to bonds. As an investor approaches retirement, their allocation to bonds increases, mainly so that there's capital for them to withdraw during retirement. Foreign bonds can make a part of the bond allocation within a portfolio. Let's see why someone might consider the risks and rewards of foreign bond funds as part of their investment. Why international bonds? Where do foreign bonds fit into portfolio allocation? Foreign bonds provide another means of portfolio diversification. A well diversified portfolio protects capital against drawdowns, or at least outsized drawdowns. Foreign bonds also give you exposure to other parts of the world. If you have bonds in European and Asian countries that are doing well while the US Economy is declining, your bonds will do well. Also, although your US Bonds might not in this case being diversified outside of the US limits, the negative impact of your bond holdings from a US Decline of course there are risks when investing in foreign bonds. Bonds from developed countries such as the uk, France and Germany are generally safer than bonds from emerging markets such as Indonesia, Malaysia and Kenya. For those reasons, bonds from developing countries should only make up a smaller portion of your foreign bond holdings, assuming you have any at all. For rebalancing purposes, foreign bonds are part of your overall bond allocation. As your foreign bonds rise in value and surpass your bond allocation target, some of those bonds should be sold and the funds reallocated to weaker areas of your portfolio. This is general portfolio rebalancing, so that each area of your portfolio remains within its target allocation, such as 60:40 how do foreign Bonds Work? Foreign bonds denominated in the issuing country's currency, such as UK bonds in British pounds, will have an inverse correlation with the dollar. That means if the country's currency rises relative to the dollar, your bond will benefit. This correlation is a double edged sword though. If the dollar rises relative to the country's currency, your bonds will be at a disadvantage. There are other factors that affect foreign bond prices, direction of interest rates, inflation expectations, credit of the issuer, currency markets, economic growth, and monetary and fiscal policies of the issuing country. How to Invest in International Bonds Rather than buying the bonds of some country directly, which can be complex, you can invest in foreign bonds through mutual funds and ETFs. These financial instruments will also be more diversified than a single bond. For this convenience, you'll pay a management fee or expense ratio. Expense ratios have come down a lot in recent years. Finding a bond with a fee of less than half a percent should not be difficult. Plus, many places allow you to invest in bond funds and bond ETFs for free. As an example, go to the Personal Investor section of Vanguard.com and then Vanguard ETFs and browse Vanguard ETFs Here you'll find a section called International Bond ETFs which currently lists three different types of International Bond ETFs. Lets look at two of them to understand what exactly they're invested in. Total World Bond ETF this ETF has an expense ratio of only 0.06%. What makes it international? If you navigate to the portfolio management tab for any of Vanguard's investments, you'll see what the investment is holding. BNDW is allocated to the following regions emerging markets 3.3% Europe 31.9% Pacific 14.1% Middle East 0.2% North America 48% and other 2.5% in that same section you can see that the ETF does have some holdings in non US dollar denominated bonds. Scrolling down a little more you reach distribution by issuer. You can see the sectors and types of investment this ETF is invested in. They include Asset Backed, Commercial Mortgage Backed Finance, Foreign Government, Mortgage Backed, Industrial, other Treasury Agency and utilities. Next to that section is the credit rating distribution for the bonds held in the etf. Below those is the market allocation. Now we get into the various country bonds that make up this etf. If you're looking for a bond ETF that is mostly foreign holdings, this might not be what you want. Notice that 44.1% of the holdings are in the US. If you already have US bond funds, you may decide to look at other products for better diversification into foreign bond markets. Total International Bond ETF or BNDX Using the same techniques from before to investigate, we can see that this ETF holds only a 3.4% allocation to the US providing good exposure to foreign bond markets. BNDX provides good foreign bond diversification for anyone who doesn't already have investments in foreign bonds. The expense ratio is only 0.08%. As you look at bond fund offerings from different brokerages, you'll see similar fees and information about each bond. Armed with this knowledge, you should feel more confident in your ability to find a foreign bond fund that suits your portfolio. Final Thoughts International bonds can provide a great diversification to your portfolio. Just like other investments, they do carry risks, but they also carry unique returns that could work well for your asset allocation needs. You just listened to the post titled the Risks and Rewards of International Bonds by Robert Farrington of TheCollegeInvestor.com.

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[Robert Farrington]

Top of this article that bonds provide stability against the volatile nature of stocks, and as an investor approaches retirement, their allocation to bond increases mainly so there is capital for them to withdraw during retirement. However, I've also heard that you should own your age in bonds. I, however, have opted to have a 100% stock portfolio and I'll tell you why. As you get closer to drawing down on your portfolio, you'll want more bonds to help smooth the ride of market fluctuations. I, however, am nowhere close to touching my investments. So as a long term investor, I'm able to handle the volatility or market fluctuations because I don't invest money I need anytime soon. The way I see it, if you don't plan to touch that money for more than 10 to 15 years, it seems to me that smoothing volatility is much more about the emotional benefit of not watching the wild swings with your money. For me, I've solved for this by keeping a strong cash position and not watching my investments too closely. Because I have a 100% stock portfolio, I don't need to rebalance, so I have even less of a need to look at it. And that's it for today. Thank you for listening and being a subscriber of the show. Have a great rest of your day and I'll see you tomorrow where your optimal life awaits.