Vanguard to Further Diversify TDFs

February 6, 2013 ( Vanguard plans to add an international bond index fund to 20 all-in-one funds, including Vanguard Target Retirement Funds.

The international bond component will complement the three other core holdings of Vanguard’s all-in-one funds: Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund and Vanguard Total Bond Market II Index Fund.  

Vanguard’s 12 Target Retirement Funds, four LifeStrategy Funds, two of its three Managed Payout Funds and two Vanguard Variable Insurance Funds will apportion 20% of their respective fixed-income allocations to the new Vanguard Total International Bond Index Fund, which is in registration with the U.S. Securities and Exchange Commission (SEC) (see “Vanguard to Launch International Bond Index Fund”). 

In addition, Vanguard Short-Term Inflation-Protected Securities Index Fund (Short-Term TIPS Fund) will replace Vanguard Inflation-Protected Securities Fund in the three Target Retirement Funds that offer exposure to TIPS: the Target Retirement Income, 2010 and 2015 Funds. The Short-Term TIPS Fund will have initial weightings in the Target Retirement Income, 2010 and 2015 Funds of 17%, 11% and 4%, respectively.

The overall strategic asset allocation and glidepath of the Target Retirement Funds will not change. The addition of hedged international bonds represents a refinement of the funds’ fixed-income component, bringing long-term diversification benefits. An allocation to short-term TIPS provides retirees and preretirees with improved inflation protection with less volatility. 

The Short-Term TIPS Fund, which features an average duration of less than three years, will replace the Inflation-Protected Securities Fund, which has a current average duration of 8.5 years. The Short-Term TIPS Fund seeks to track the performance of the Barclays U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, a market-weighted index that measures the performance of inflation-protected public obligations of the U.S. Treasury with a remaining maturity of less than five years. As of December 31, 2012, the index had an average duration of 2.5 years and an average maturity of 2.6 years.