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

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.

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

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

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

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

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.