I still fail to understand. In Switzerland, the CPI has been subject to an increase of 2.22% total from May 2007 to December 2021. How does a 37% nominal loss translates into close to a 50% real loss? That would have required inflation in Switzerland to reach 26% total on that period.
That’s on top of San_Francisco’s comment that total returns should be taken into account and that one should reinvest the dividends as they come and not let them sit in a foreign currency during that period.
You are right. Including dividends a Stoxx 600 ETF like the Ishares EXSA did make 45% which was slightly more than the 37% EUR depreciation against the CHF. However this was still not enough to offset inflation.
Total Eurozone inflation was more than 20% during this period. Together with a 37% depreciation (Euro was 1.68 and now 1.04) you lost even if stocks went up.
Hedging currency risk and inflation is really important for Swiss investors.
Simply combining the nominal devaluation of EUR against CHF with the Eurozone inflation doesn’t make sense. If you want to compare between a Swiss investor and a Eurozone investor, it would make sense to compare between these two performance figures:
Also note that a significant part of the holdings of STOXX 600 are not listed in the Eurozone (and the listed currency is not that relevant for global companies anyway).
Swiss retail investors are only marginally exposed to Eurozone inflation.
They are mainly exposed to Swiss inflation (housing, healthcare, most of their consumption budget). Which was, according to Wolverine above, barely above zero. Even if you bought all of your food and what not in the Eurozone, you would not have “lost” (over the long run, and considering that most investors finance their consumption from income and not savings), since, as you said said yourself, the Swiss Franc considerably gained value against the EUR.
Like cantonal banks, for example. They are very much like bonds.
Do you have tickers to share ? I’v currently some % in BND but considering other options for the non fluctuating part of the portfolio
Hi @FrankG. My 2 cents is that a swiss investor looking at index performance in Euros is like comparing apples with oranges.
The Gross Return in CHF is available on Stoxx page (STOXX® Europe 600 - STOXX). In my view the poor performance of the index in CHF is not due to currency risk but poor performance of the underlying companies in the index and of countries in the Euro region.
Coming back to your idea, if you found an inefficiency in the market such that you can earn the nominal return of indexes denominated in depreciating currencies in CHF that would be interesting. However would this not have lost money in 2021 if you applied this to USD? (USDCHF Dec 31 2020 0.883 vs Dec 31 2021 0.915)
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.
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.
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.
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.
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.
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…
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. 
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.
For bonds, the process is quite simple:
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.
Is there an ETF for this? 
