By Murray Coleman

Mutual funds giant Vanguard says itll move to close perhaps one of the biggest gaps in its lineup international bonds.

The companys CEO Bill McNabb confirmed today that the company is planning to launch funds thatll broadly track international developed bond markets and, separately, one to provide exposure for emerging markets bonds. In government filings, Vanguard indicated that it expects to bring the bond funds to market in 2012s first-quarter.

The concept is similar to its popular Vanguard Total International Stock Fund (VGTSX ) and its sister Emerging Markets MSCI Stock Fund (VEIEX ).

The new bond funds will be:

• The Vanguard Total International Bond Index Fund. It will track the investment performance of the Barclays Global Aggregate ex-USD Float Adjusted Index (Hedged).

The benchmark does hedge its bets.  By hedging currency exposure, the fund’s investment returns are expected to more closely correlate with the underlying performance of international bonds without currency distortions, Vanguard said in a statement. Most international bond funds dont use hedging strategies, says Lipper.

The fund will provide exposure to more than 7,000 global government, agency and corporate securities in 57 countries in Asia, Europe, Canada and South America.

• The Emerging Markets Government Bond Index Fund will offer exposure to  a Barclays index that tracks 200 government bonds in 39 countries.

By investing solely in U.S. dollar denominated international bonds, the fund will not subject U.S.-based investors to currency risk, Vanguard added.

The new funds will come in both mutual fund and ETF share classes.

• The Total International Bond Fund will charge an expense ratio of 0.4% in investors share classes and 0.3% for admiral shares, which require minimum initial investments of $10,000. The ETF class, with no minimums or short-term penalties for traders, will charge 0.3%.
• Vanguards emerging markets bond fund will come with an annual expense ratio of 0.5% through investor share classes and 0.35% for admiral shares. ETFs will go for 0.35%.

One caveat: Vanguards traditional international bond mutual funds will charge purchase fees 0.25% for Total International Bond and 0.75% for Emerging Markets Bond. Since those fees will be paid directly to the funds. Its a policy the fund company has used before and is designed to limit short-term trading in portfolios. As a result, Vanguard in the past has argued that such upfront charges shouldnt be considered similar to loads since all such proceeds go back into the funds coffers.

In terms of existing total market funds, Vanguard offers ETFs covering developed international stocks (VXUS ) along with an emerging markets stocks (VWO ).

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