Avoiding negative CHF credit interest and protecting against inflation

As a side note, this might make sense (assuming there’s a good, cheap, and efficient way to hedge), if you’re planning to spend your investments in Switzerland. If you’re planning to spend it in any other place, which has less hard currency, there’s less need to hedge anything. I myself plan to do so, so my strategy is simple - I keep CHF in the bank account as a safe part of my portfolio and invest everything else in USDs in VT+KBA+AVUV+AVDV via Interactive Brokers.

Precisely, because the role of bond ETFs is to provide low-volatility returns and currency fluctuations don’t help here. In Switzerland, however, the problem with (non-junk) bond ETFs (in CHF or hedged in other currencies) is that they return negative after costs and inflation - they aren’t any better deal than keeping money in the bank account.

This is exactly what Burton Malkiel recommends in the last edition of his classic Random Walk Down Wall Street - to buy, in the times of zero-interest-rates financial repression, stable high dividend stocks instead of bonds.

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That is only because of the negative interest rates though. Historically, and this is the only valid data we have, the statement of hedging long term bond ETFs is still true.

What about Swisscom stock?

Fully agreed, the environment might change in the future.

Might be a good idea. I don’t know frankly, to make things simple I don’t own any high dividend stocks, although I have to make some research and think it over (especially that now interest rates around the world are being raised to combat inflation). One has to also take into account the effect of tax on dividends in Switzerland and the risks related to low diversification.

PS. It would be nice to see some ETF (like maybe this one) based on these:

Searching for keywords like swiss dividend ETF brought me to:

https://www.ishares.com/ch/individual/en/products/264108/ishares-swiss-dividend-ch-fund

Does it really need to be Swiss dividend stocks? If not Vanguard has: VIG, VYM (US) or their international variant: VIGI, VYMI.

If I remember correctly @MrRIP is invested in some of these.

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That one might be useful as a potential bond and bank account replacement for conservative CHF-based investments. Weird thing is that it doesn’t have cantonal banks within it:

I wonder why…

Well, yeah, the topic of this thread is protecting your francs from inflation while getting positive returns (which currently CHF-denominated bonds and bank accounts/deposits can’t provide). The only solution that is coming to my mind is Swiss high-yield dividend stocks/ETFs.

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If, for a goal of capital preservation, I would like to invest in a basket of Swiss shares with low volatility and high dividend:

Banks in SPI.

Look at cantonal and regional banks like Valiant.

Insurances in SPI:

Check how much they dropped in February - March 2020.

And shares of Raiffeisen, which are more like AT1 bonds.

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The SPI® Select Dividend 20 index includes the 20 stocks which represent the highest-yielding companies with a stable dividend paying record and solid profitability from all stocks in the SPI® index. The weight of each constituent is based on the free float market capitalization and the normalized dividend yield calculated at the annual index review.

Cantonal and regional banks are too small and not diversified, I guess.

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The iShares ETF I mentioned previously with ticker CHDVD tracks exactly that index (SPI Select Dividend 20 Index). So that would be a low cost solution but then with only 20 different holdings one could argue that this is not very diversified I guess…

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Yes, but on the other hand, the other dividend-paying investment in CHF that we have - our job - is also not very diversified, and what’s worse, unless you get regular salary increases, it yields negative due to inflation. Adding to it CHDVD might a good supplementary source of income and a reasonable strategy for capital preservation. :slight_smile:

For capital accumulation, there are obviously better ways, but they require taking relatively more risk (or at least a different kind of risk) on your shoulders: convert CHF to USD and invest into VT/VTI.

Unless you work in a field where salaries are too inflated (for instance jobs disrupted by technological changes), salary follows inflation.

So if your salary doesn’t keep up with inflation, think hard whether you need to pivot, inflation or not you’re probably at risk (and if anything inflation might help avoid layoffs)

In rare times of recession yes, it might, due to “sticky” wages and difficulties of cutting them when companies’ profits are going down. In normal times however inflation systematically lowers purchasing power of peoples’ salaries and forces them to negotiate raises just to keep up with the prices and not become poorer in effect. That’s why I think inflation, when economy is expanding, is not only inefficient, it’s a robbery.

PS. No, I don’t agree with the idiotic Keynesian assumption that inflation is needed to stimulate consumption because consumption is what drives the economy - savings and investments are driving it. I believe that what is true for microeconomics (individual) is also true for macroeconomics (whole economy).

I am not sure what you guys are trying to do. Are you trying to protect against inflation, or buying equity securities that behave like bonds?

The two are really different.

As you know, the value of any asset is the sum of its cash flows from now until judgment day, discounted to today’s value.

Bonds

For bonds, the process is quite simple:

  • Provided that the bond issuer does not go bankrupt, the future cash flows are contractual and are unaffacted by inflation.
  • However, the discounting rate will likely increase with inflation. As an example, take a 15 year bond with a $2000 principal borrowed and a $100 annual coupon. If the discount rate is 5%, the bond is worth $2000. If the discount rate goes up to 7%, the bond’s value is now $1’635 => the bond has lost 20% of its value. Bonds are very fragile against inflation.

Equities

For equities, there are a lot more moving parts. The value is still the present value of future cash flows discounted to today, but the future cash flows have many components.
The free cash flows will be mainly affected by three factors:

  • The ability of the company to raise its prices without losing volume of sales: doable when the company has a strong pricing power (for instance, a brand people are willing to pay for. Not all brands are created equal: you are willing to pay more for a Coca-Cola than for a Klutz-Cola, but you won’t pay more for a Sony Blu-ray player over a Kenwood one…). However if the company operates in a competitive environment, that won’t be possible.the worst case being a provider of a product or service where the only differentiator is the price, i.e a commodity industry. The higher your pricing power, the less you are impacted by inflation.

  • The costs incurred by the company, mainly raw components and labor. While everybody will be impacted by inflation of these costs, the impact on profits will not be the same for everybody - it depends a lot on your margin profile. At fixed sales, if your costs represent 90% of sales (i.e a 10% margin), if costs rise by 1% of sales, then your profits are now 9% of sales instead of 10% → profits dropped by 10%. However, if you have really good margins, for instance 40% margins, if your costs increase by 1% of sales, then profits are now 39% → the drop in profits is only 2.5%. The higher your margins, the less you are impacted by inflation.

  • Finally, free cash flow are impacted by maintenance capital expenditure, i.e the investment needed to make in order to stay at the same level of profitability. Your assets (factories, machinery, etc) wear and tear and need to be replaced after some time. The more you are relying on tangible assets to generate sales (example: mannufacturing, utilities, etc), the higher you will need to pay to replace your assets in case of inflation. Most of your profits will just be consumed by the cost of replacing your assets. The less you rely on tangible assets to generate sales, the less you are impacted by inflation.

  • Finally, inflation tends to increase the discounting rate, same as for bonds.

So in the case of equites, if you want to protect against inflation, you want to buy companies with high profit margins, lots of intangible assets (instead of tangible ones), and with pricing power strong enough to counteract the effect of an increased discounting rate.

Now when I see companies like Swisscom being suggested, it is true that they behave like a bond. Sales have been flat over the last 10 years, as did profits and dividends. Capital expenditure is high, and combined with flat sales it means that most of the profits are gone into replacing the assets to just keep afloat. In other words, the only thing going to the owners are the dividend - retained earnings are never going to add any value. So it behaves like a perpetual bond, with the dividend being the annual coupon.
And like a bond, it will be smashed by an increase in interest rates. Stable, bond-like equities will not protect you against inflation. You will get your regular dividend, but the principal (i.e the share price) will get hacked.

EDIT: Actually in the case of Swisscom and similar businesses, the case is quite easy to compute. Those businesses are functionally equivalent to perpetuities, so the value is simply the dividend dividend by the discounting rate. So let’s say the dividend is 1 CHF and the initial discounting rate is 5%. The value of a share is then 1/0.05 = 20 CHF. But if the rate raises to 7%, the value becomes then 1/0.07 = 14.3 CHF. The share would lose 30% of its value.

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Is there an ETF for this? :smiley:

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Fundsmith.

If you want to go for an ETF to save fees, MSCI world quality index probably gets to a similar result via a more indirect methodology.

Personally I am cautious about factor ETFs and how their algorithms might stand up in a crash. I am happy to pay Fundsmith’s fees given the long term performance. I have a high conviction in their strategy

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SSON? Frankly, it seems more volatile, but it has no better return than VTI:

But maybe it’s too early to tell… Maybe its real value will be shown in the long-term or in the major crisis (although last year’s corona correction in march was worse for SSON than for VTI).

PS. And if you add to the comparison VT, it seems that SSON has a better return than VT, but VT is much less volatile (meaning, it has better risk-adjusted returns).

No, I believe they meant “The FEF”.
SSON (and FEET) is the “baby fund”, easier available via IBKR. :slight_smile:
And I believe SSON is not just US equities (like VTI), and additionally only small&mid cap, so not really comparable.

Btw do these charts properly account for forex? (I’d believe they do, just curious)

Which platform do you use to check ETFs charts adjusted to forex (e.g. in CHF instead of USD) ?

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So what is their benchmark? If you compare SSON to small cap value funds it looks better, but not a lot better:

Google Finance doesn’t account for dividends or forex. It’s a dumb price chart comparison.

You can check the forex by comparing eg. LON:VEUR with AMS:VEUR, the same fund trading on different exchanges.

MSCI World SMID index they say (if that exists :grin:).
Short periods to compare, for both Avantis and them.
I suppose we’ll witness on the long run and when some serious downturns hit. :slight_smile:
In your comparison you can at least see they’ve been hit much less in March 2020.

I keep a bit of all of them (AVUV/DV, SSON, FEET).

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