interest rate went up in the past but the result was different , with an acceptable % drop . This is a big exception
thanks, that seems like a good thread to read
While we are here… What are alternatives to this?
I am also dissappointed by my Bond ETFs which where supposed to be the stable part. But that is not the case with bond funds because they don’t just hold the bonds till they expire.
Like this they are more speculation on the interest rates, than small but stable profits.
(And a similar thing with REIT ETFs. I wanted something that represented the value of local real estate, but instead I got speculation on the interest rate for mortgages…)
I don’t have an answer…
If you look at the low risk profile in the link below, apparently there are competitors who did much better…so we might want know who are those competitors
Can you image you have a couple of years left to retirement, and your capital drops 15%?..that’s not nice.
Liability matched individual bonds or medium term notes (Kassenobligationen), or savings accounts.
Higher returns mean higher risk. No market risk, no credit risk and no duration risk means cash.
Edit: just to note: individual bonds prices also drop when interest rates rise, it’s just that they get back to face value as they near their maturity date. Bond funds also auto-correct and claw their NAV back with time, it’s just that since we can’t hold them to “maturity”, it’s harder to match their duration with our expected liabilities. Short term liabilities (nearing retirement) would warrant a shortening of duration of the bond fund, which would in turn reduce its sensitivity to interest rates.
I thought they are always kept to an average duration… thus representing the value of a bond that is always maturing in X years (but never gets there)… which is kinda bad.
This depends on the fund. Index funds typically track all bonds with a term to maturity within a predefined range. E.g. “iShares Swiss Domestic Government Bond 7-15” tracks Swiss Gov Bonds that mature in 7-15 years. The weighted average maturity will vary a bit.
However, there are also bond funds that track all maturities (e.g. all bonds with a certain minimum credit rating) and bond funds where the maturity range starts at 0 (or something very short such as 1 month). With such bond funds, the performance should be close to holding individual bonds to maturity, except that the fund will keep buying new bonds as they are issued or fall into the predefined maturity range. Not suitable for liability matching, though.
I’m wondering, what kind of bond allocation would you recommend for a 50 year drawdown FIRE portfolio (60/40)? Withdrawing monthly from the best-performing funds.
I was thinking of an equal weight allocation:
10% long term treasuries
10% intermediate term treasuries
10% short term treasuries
10% cash
Or might I aswell just buy a total bond market fund like BNDW (CHF-hedged, of course)?
I’m not sure I like the idea of non-rolling bond ladders / liability-matching, because they don’t give me diversification from my stock allocation. And that’s the whole idea behind safe withdrawal rate research according to Bengen, ERN etc. Or am I wrong?
1 Like
One feature Bond funds can offer is currency hedging if the underlying bonds are not in CHF.
I just did some correlation analysis of most government bond ETFs hedged to CHF or available in CHF to VT in CHF (non hedged).
Sadly, the US treasury ones as well as the EU gov bond ETF are pretty new, so not sure how reliable this information is. Btw, SHY (the non hedged 1-3 Year US Treasury Bond fund) has a correlation of -0.24 with VT in CHF from 2008 to 2022.
I also added CHCORP and AGGH to the list just to see how it compares.
| Ticker | Name | TER % | Yield to Worst % | Kupon % | Restlauf-zeit (Jahre) | Options-bereinigte Duration | Yield nach Steuern (-20% von Kupon) | Correlation with VT in CHF | Start of Corr measure | End of Corr masure |
|---|---|---|---|---|---|---|---|---|---|---|
| CSBGC3 | iShares Swiss Domestic Government Bond 0-3 ETF (CH) | 0.15 | 0.86 | 2.41 | 1.33 | 1.31 | 0.38 | -0.05 | 02/07/2009 | 09/12/2022 |
| CSBGC7 | iShares Swiss Domestic Government Bond 3-7 ETF (CH) | 0.15 | 0.91 | 2.22 | 5.07 | 4.79 | 0.47 | -0.13 | 26/06/2008 | 09/12/2022 |
| CSBGC0 | iShares Swiss Domestic Government Bond 7-15 ETF (CH) | 0.15 | 1 | 1.58 | 11.16 | 10.16 | 0.68 | -0.1 | 26/06/2008 | 09/12/2022 |
| IBTC | iShares $ Treasury Bond 1-3yr UCITS ETF | 0.1 | 4.41 | 1.44 | 1.94 | 1.87 | 4.12 | -0.07 | 26/06/2019 | 09/12/2022 |
| IDTC | iShares $ Treasury Bond 7-10yr UCITS ETF | 0.1 | 3.53 | 1.64 | 8.58 | 7.79 | 3.20 | -0.21 | 26/06/2019 | 09/12/2022 |
| DTLC | iShares $ Treasury Bond 20+yr UCITS ETF | 0.1 | 3.69 | 2.51 | 25.95 | 17.86 | 3.19 | -0.14 | 23/10/2017 | 09/12/2022 |
| IEGC | iShares Core € Govt Bond UCITS ETF | 0.12 | 2.4 | 1.78 | 9.22 | 7.7 | 2.04 | 0.02 | 14/05/2020 | 09/12/2022 |
| CHCORP | iShares Core CHF Corporate Bond ETF (CH) | 0.15 | 1.98 | 0.8 | 4.57 | 4.4 | 1.82 | 0.13 | 13/01/2014 | 09/12/2022 |
| AGGH | iShares Core Global Aggregate Bond UCITS ETF | 0.1 | 3.42 | 2.11 | 8.74 | 6.89 | 3.00 | 0.14 | 03/04/2018 | 09/12/2022 |
Looking at these yields, how exactly do I find the costs of currency hedging? Can I just look at the past tracking error of the fund to get a rough estimate?
E.g. the non hedged equivalent of DTLC is IDTL which had a tracking error of ~0.1% in the last years, which roughly corresponds to the TER. DTLC, however, had a tracking error of ~3%. Can I naively assume, that this is due to hedging and that future deviations will be on the same order of magnitude?
1 Like
Well, just looking at yields I see that IBTC, IDTC, DTLC, DTLC, AGGH must be exposed to bonds in USD and IEGC to bonds in EUR. This is a completely different story, hedging or not. There is AGGS hedged in CHF but, as far as I understand how it should work, YTM data are meaningless because it’s just a mathematical weighted average of YTM of individual bonds, no matter if they are quoted in CHF or TRY.
And of course you should calculate correlation between price data expressed in the same currency.
2 Likes
Yes, all funds are hedged to CHF and are, except for AGGH and CHCORP, government bond funds which at least in the short term should have a similar credit rating to Swiss Gov Bonds.
So the thing I don’t understand is: Why bother with Swiss Gov Bonds funds if currency hedged ETFs with US treasuries with the same duration and a higher YTM exist. I’m pretty sure I’m overlooking something. My first guess is that the hedging costs are too high.
Yes, this is what I did. These funds (except for SHY whose correlation calculation should be considered as a back of the envelope calculation) are all only traded in CHF and are hedged to CHF in case of IBTC, IDTC, DTLC and DTLC. To get the VT data in CHF, I multiplied the VT dollar value with the USD/CHF exchange rate of the corresponding day.
1 Like
As you guessed there’s a relationship between those. The hedging cost is exactly the delta of the risk free rates between currencies (+probably some leakage in how things are implemented, but I assume it’s negligible).
So except for unexpected short term changes, the expectations is that with the same risk you get the same returns. I’m not quite sure using international sovereign bond funds is super useful (I guess you get a bit more risk since it will include lower rated countries like italy or greece, so a bit higher returns long term)
3 Likes
Yes that’s what I meant to say with leakage, I would have thought for someone like BlackRock or Vanguard it’s a few bps?
If someone is curious https://summer.skku.edu/summer/board/academic.do?mode=download&articleNo=28418&attachNo=15579 explains it pretty well
edit: truewealth also seems to think it’s a few bp: Do currency-hedged investment instruments incur additional costs?
Is that how things work in Switzerland? Genuine question, I have no idea about bond funds. But I would have assumed they are treated the same as stock funds, that dividends are taxed regardless of whether the fund pays the dividends out or automatically reinvests them.
See ICTax - Income & Capital Taxes for example. It’s taxed similarly to accumulating equity ETFs.
2 Likes
I don’t want to finance US budget.
Only in nominal USD terms. Hedging or expected USDCHF depreciation will pull yield in CHF down to the same level as Swiss government bonds. That how it should work according to the effective market hypothesis and you should present me very convincing proof if you think that these markets are not efficient.
So I can turn your question around: why bother with US Treasuries if you either get more or less the same yield (before taxes) in CHF if you hedge or the yield in CHF is not known (but the expectation is that it should be the same) if you don’t hedge.
2 Likes
As I understand it, there are two aspects why the performance of CHF-hedged foreign currency bonds may differ from CHF bonds (ignoring credit risk and short term currency fluctuations):
- Yield curve: Funds typically use short term currency hedges (1-3 months). The yield difference between currencies for longer term bonds may not match the short term yield difference.
- Interest rate / yield changes don’t happen in all currencies at the same time or by the same magnitude but they have a big effect on the valuation of (longer term) bonds
Either of these aspects can be positive or negative, however, they increase diversification, which may reduce volatility.
If anyone has more insight, please correct me.
I have 5% of AGGS (CHF-hedged global aggregate) in my investment strategy for diversification. The rest of my bond allocation is in CHF (SBI parts).
1 Like
I meant us Treasuries vs. Swiss government bonds, not corporate bonds. Both are absolutely safe. Sorry for the confusion.
2 Likes
To stay on topic: here for example one global corporate bonds ETF, CHF hedged, if you want some more yield for more risk.
No, you’re right. Dividends are taxable either way (accreting or distributing), so my stated possible benefit isn’t a benefit.
1 Like