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Vanguard is expanding its family of low-cost bond offerings with plans to introduce Vanguard Emerging Markets Government Bond Index Fund and its ETF Shares by the end of the second quarter of 2013.

Vanguard manages over USD720bn in fixed income assets, including 13 bond index funds and ETFs.

In early February, Vanguard announced plans for a Total International Bond Index Fund, which along with the new fund, represent the companys first international fixed income offerings for US investors. In October 2012, the firm broadened its domestic offerings with the introduction of the Short-Term Inflation-Protected Securities Index Fund.

An amended registration statement for the new fund filed by Vanguard with the US Securities and Exchange Commission reflects a new target benchmark the Barclays USD Emerging Markets Government RIC Capped Index. The benchmark features approximately 540 government, agency and local authority bonds from 155 issuers and, when necessary, limits weightings of individual debt issuers to meet IRS diversification requirements. The top three country holdings (as of 31 January) were Russia (13.8 per cent), Brazil (10.6 per cent), and Mexico (8.5 per cent). The fund will invest solely in US dollar denominated emerging market bonds to protect US-based investors from currency risk.

The expense ratios for the ETF, Investor, Admiral, and Institutional Shares will range from 0.30 per cent to 0.50 per cent. The average emerging markets bond fund features an expense ratio of 1.21 per cent. The fund will assess a purchase fee of 0.75 per cent on all non-ETF Shares to help offset the higher transaction costs associated with buying emerging markets bonds.

Our research shows that emerging markets bonds have presented low correlations with domestic and developed market bonds, and have the potential to add value for certain risk-tolerant investors holding an otherwise broadly diversified portfolio, says Vanguard chief executive Bill McNabb. Nevertheless, we do caution investors against simply investing on the basis of the higher yields offered by emerging markets bonds, as the higher yields are accompanied by higher risks, including greater volatility and higher correlation to equity markets, as well as political risk.

Vanguard Emerging Markets Government Bond Index Fund is designed for investors seeking low-cost exposure to a sizeable and growing portion of the international fixed income universe, and who are willing to accept the generally higher risk of emerging markets bonds relative to the aggregate international fixed income market. Vanguard recommends that only investors with well-diversified, balanced investment programmes consider the fund for a portion of their overall holdings.