(PUB) Investing 2015

2.12% yield, so there is potential here. That said, I wouldn’t want you to think I expect the fund to keep pace with the stock market. TheTaxThing Bonds are complicated, as you no doubt have come to realize over the past few months. One final issue we should talk about is taxes. Vanguard has a stable of excellent tax-exempt funds, which I’ll get to next month. Until then, I encourage you to review the tax-equivalent yield information on page 9 to determine if it makes more sense for you to use a taxable or tax-exempt option. Just remember that when comparing taxable and tax-exempt funds, you should look at funds with comparable maturities (or durations). More next month—stay tuned. n

Still, courageous investors have been amply rewarded over time for the risks taken in emerging markets bonds. With a return of 628% since the end of December 1992, an index very similar to this fund’s bogey has trounced the return of Total Bond Market (242%) and has kept just ahead of Total Stock Market (607%). Emerging Markets Government Bond is off to a relatively slow start, gaining only 3.4% compared to Total International Bond’s 8.7% return, as concerns surrounding China’s slow- ing growth and tumbling commodity prices have dampened investors’ appe- tite for emerging markets. The fund’s 4.67% yield, however, is well ahead of Total International Bond’s 0.98% and more than double Total Bond Market’s

about 70% of the portfolio is in gov- ernment securities, but it also includes corporate and securitized issues. And, as the name implies, it excludes bonds denominated in U.S. dollars. That said, once the bonds are purchased, the managers hedge their foreign currency exposure back to the greenback. Removing the currency aspect gives the index more of a pure bond feel—at least in the sense of feeling like the U.S. bond market. The bogey’s MCL, a 6.3% drop, was only a bit steeper than Total Bond Market’s 5.8% decline. However, it was much more palatable than the -18.0% MCL of the unhedged version of this index. Total International Bond has got- ten off to a good start, outpacing Total Bond Market 8.7% to 4.5% since incep- tion. But I am not as quick to jump on the bandwagon as Vanguard is. Using historical data for the Barclays index, Jeff and I didn’t find much advantage, from either a risk or return perspective, to mixing hedged international bonds with a typical U.S. bond allocation. We think the benefits here are more from a marketing perspective than an invest- ment perspective and have been way oversold. Emerging Mkts. Gov’t Bond Idx. Buy. Of Vanguard’s two international bond funds launched in late May 2013, this is the more interesting one, focus- ing on bonds issued by governments in emerging markets. The fund tracks the Barclays Capital U.S. Dollar Emerging Markets Government RIC Capped Index, which covers over 800 securities and is dollar-based, so again, investors aren’t exposed to currency risk. But this isn’t your typical bond index fund if all you know is the U.S. mar- ket. Take, for example, its benchmark’s MCL of -34.5%, reached in August of 1998, largely the result of the devalua- tion of the Russian ruble and subsequent default. The index dropped 29.8% in one month. Since early 1993, when data for the index starts, there have been 15 months when this index dropped 3.5% or more in a single month—something the U.S. bond market has not done once over the 23.5 years.

QUOTABLE How Do You Spell “Security”?

WHAT DO VANGUARD, TARGET CORP. AND THE IRS have in common? All three are low-cost providers who’ve faced public cyber security issues. Now, to be clear, Vanguard has not been hacked and client data has not been lost to the best of our knowledge. However, one Vanguard employee feels the company could be doing much more to protect our information and assets, and after failing to generate enough concern inside the company, she took her worries public. Karen Brock, a client relationship manager who serves 640 of Vanguard’s Flagship clients, has called Vanguard out, filing a whistleblower tip with financial regulators at the SEC and FINRA. Brock’s complaint is that Vanguard is not doing enough to prevent outsiders from accessing client accounts. Brock identified a number of weaknesses in Vanguard’s security system. Clients were able to access accounts online after misspelling answers to security questions. The son of one client was able to impersonate his father and trick Vanguard’s voice verification system. Brock also found client information published in training manuals. Vanguard’s response has been about what I expected: “…we remain confident in our secu- rity practices and efforts to keep our clients’ confidential information and their assets safe.” This isn’t just the typical response from Vanguard, but seems to be the standard line when questioned about security. Given how much of our lives have moved onto the web, it would be refreshing to see a company stand up and really take ownership of both their problems and solutions as they relate to cyber security. Unfortunately, I don’t expect that company will be Vanguard, which, you may recall, had almost nothing to say about a series of letters sent to bro- kerage clients from a former service provider, a tale I recounted in the December 2014 letter. With more than $3.0 trillion in assets under management here in the U.S. alone, there is no excuse for Vanguard not to have industry-leading security. But this could well be a situation where Vanguard’s low-cost structure is more of a handcuff than an advantage. As I’ve said before, you can’t be the low-cost provider without cutting corners and costs somewhere. At the end of the day, neither Jeff nor I are pulling our money from Vanguard over this, but while Vanguard works through this latest security issue, there is something you can do immedi- ately to better secure your own account: Opt in for two-step verification. This means that you’ll need your password and a unique six-digit code, which Vanguard sends you via text message every time you attempt to access your account. It’s not foolproof, but it is an added layer of secu- rity that both Jeff and I use for our Vanguard accounts and recommend you adopt for yours.

The Independent Adviser for Vanguard Investors • September 2015 • 13

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