The Best Global Bond ETFs (2024)

How to choose a Global Bond ETF

Like global equity ETFs, global bond ETFs allow instant geographical diversification, protecting your portfolio from localised volatility. Rather than concentrating your investments in your home country, global diversification is a way of reducing risk and smoothing returns.

The bond portion of a long-term portfolio is a stabilising element – it works to smooth out your returns and protect your capital from severe market movement. The greater your percentage of bonds, the less severe the drawdowns. This is at the cost of lower returns, since the stability of bonds applies to the upside as well as the downside. They may only offer a few percent of annual return, but during a market crisis they tend to be a steadying influence.

Are bonds still a good investment?

After a disappointing 2022, many investors are shunning bonds and claiming they no longer provide the diversification they once did. They are wrong: bonds, and in particular global bond ETFs, are still a crucial part of any investment portfolio.

For the last two decades, investors have come to rely on bonds moving in the opposite direction to stocks, providing a buffer against a falling stock market. For most, 2022 came as a nasty surprise. And yet, although it was an outlier in terms of magnitude, stocks and bonds have historically moved mostly in the same direction.

One year performance is never a large enough sample to make rash decisions about the long term viability of an investment. Bonds still offer an important level of protection, even when they move in the same direction as stocks, and the importance of correlation is often overstated.

What is a bond?

A bond is a type of investment where you lend money to a company, government, or other organization. When you buy a bond, you are essentially giving them a loan, and they promise to pay you back the money you lent them, plus interest, at a later date.

For example, let’s say that you decide to buy a bond from the government. The government will use the money you give them to fund various projects, like building roads or schools. In return, they will promise to pay you back the money you lent them, plus a small amount of interest, at a predetermined time in the future.

When you buy a bond you are also agreeing to a set of terms, such as the interest rate and the length of time until the bond matures. The longer the bond takes to mature, the more interest you will typically receive.

Diversification of your bond investments is important, just as it is with your stock portfolio. Global bond ETFs make this very easy.

Are stocks and bonds correlated?

Stocks and bonds were negatively correlated for most of the time between 2000 and 2021, meaning when stocks went down, bonds went up (and vice versa). Historically, however, stocks and bonds have tended to be positively correlated, moving (to some extent) in the same direction most of the time.

During 2022, the correlation swung positive, surprising many who expected their bond holdings to provide more protection against a falling stock market. In the past, high inflation and rising interest rates have been a good predictor of positive correlation between stocks and bonds. This dynamic is complex, and the unpredictability of the relationship has lead some to argue that there is no mathematical correlation at all.

If the world is entering an era of positive correlation between stocks and bonds, what does it mean for a stocks/bonds portfolio? Will bonds still provide diversification? Yes – for long term investors, the important characteristic of the stock/bond relationship is how they behave during market crises. When stock markets crash, there is an inevitable flight to safety and even during eras of persistently positive correlation (such as in 1987), a stock market crash sees the dial swing negative as people shed risky assets for bonds.

The other important thing to note is that, even when stocks and bonds generally move in the same direction, they don’t move with the same magnitude. Correlation actually tells us very little about the relative performance of the two investments. Bonds are less generally less volatile than stocks, and when the stock market falls, the decline in bonds will be less pronounced. This still provides an element of stability for your portfolio, though not as much as when there is negative correlation. The similar declines in stocks and bonds in 2022, though painful for many, was a clear historical outlier.

Global Government Bond ETFs

Global Bond ETFs, for the purposes of this article, come in two flavours. Government bond ETFs, as the name suggests, invest in broad range of bonds issued by the world’s governments, such as US treasuries and UK gilts. They hold thousands of bonds of differing duration, and unlike the global equity ETFs we looked at, the selections below tend to focus on developed nations only: the Xtrackers options follow the FTSE World Government Bond Index – Developed Markets, while the iShares offerings are more focused, tracking the FTSE G7 Government Bond Index.

Global Aggregate Bond ETFs

Aggregate Bond ETFs, on the other hand, allocate about 60% of their holdings to government bonds, with the remainder mostly made up of corporate bonds and government-backed mortgage products. They tend to offer less stability and protection in market crises, but do tend to provide more income through higher yields.

Currency Hedging

Like diversification, hedging provides a layer of protection to your investment. Without going into too much detail, bond investors are highly exposed to the whims and fancies of foreign currency fluctuations. Hedging an investment to your local currency cancels out these movements and gives you a much smoother journey. For UK and European investors, hedging has historically also provided better returns over the long run when it comes to bonds.

When it comes to equity investments, it is less critical that you purchase a fund hedged to your home currency. However, bond ETFs are a different story and it is a good idea to choose an appropriately hedged fund as they tend to outperform their unhedged competitors.

Accumulating vs Distributing Bond ETFs

As with equity ETFs, accumulating bond ETFs reinvest the income produced back into the fund, while distributing ETFs will pay you the income. Your choice will very much depend on your individual tax status, the tax regime in your home country, and your stage of life. See What is an ETF? for more discussion on this topic, and look out for future articles covering the tax implications of ETF investing.

Further reading:

Click on the ETF of choice to visit the fund’s official page. There you will find more information about the ETF’s characteristics, as well as links to each fund’s fact sheet and Key Investor Information document.

USD Hedged Global Bond ETFs for US Investors

• iShares Global Govt Bond UCITS ETF (Acc) – SGLU
• Global Government Bond UCITS ETF 3C (Acc) – XGSO
• SPDR Bloomberg Global Aggregate Bond UCITS ETF (Acc) – GLAD
• iShares Core Global Aggregate Bond UCITS ETF (Acc) – AGGU
• SPDR Bloomberg Global Aggregate Bond UCITS ETF (Dist) – GLAU
• iShares Core Global Aggregate Bond UCITS ETF (Acc) – AGUG

GBP Hedged Global Bond ETFs for UK Investors

• Xtrackers Government Bond UCITS ETF (Dist) – XGSG
• iShares Global Government Bond UCITS ETF (Dist) – IGLH
• Vanguard Global Aggregate Bond UCITS ETF (Acc) – VAGP
• Vanguard Global Aggregate Bond UCITS ETF (Dist) – VAGS
• SPDR Bloomberg Global Aggregate Bond UCITS ETF (Dist) – GLAB
• iShares Core Global Aggregate Bond UCITS ETF (Dist) – AGBP

EUR Hedged Global Bond ETFs for European Investors

• Xtrackers Global Government Bond UCITS ETF (Acc) – DBZB
• Xtrackers Global Government Bond UCITS ETF (Acc) – XGVD
• iShares Global Government Bond UCITS ETF (Dist) – IGLE
• Vanguard Global Aggregate Bond UCITS ETF (Acc) – VAGF
• iShares Core Global Aggregate Bond UCITS ETF (Acc) – AGGH
• Vanguard Global Aggregate Bond UCITS ETF (Dist) – VAGE
• SPDR Bloomberg Global Aggregate Bond UCITS ETF (Dist) – SPFE