CHF hedged International Bonds

Investing / Portfolios
21

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.

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22

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)

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24

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?

25

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.

26

See ICTax - Income & Capital Taxes for example. It’s taxed similarly to accumulating equity ETFs.

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28

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.

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30

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).

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31

I meant us Treasuries vs. Swiss government bonds, not corporate bonds. Both are absolutely safe. Sorry for the confusion.

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32

To stay on topic: here for example one global corporate bonds ETF, CHF hedged, if you want some more yield for more risk.

33

No, you’re right. Dividends are taxable either way (accreting or distributing), so my stated possible benefit isn’t a benefit.

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35

I would like to gain some exposure to the Global Aggregate index, and I like the ESG flavour.

This ETF has a spread of 18 bps and a volume of 26 Mio; its euro-hedged version has a volume of a bit more than 100 Mio. It is way smaller and less liquid than what I am used to.

Is there a better alternative? I just want it to be global, cheap, CHF-hedged and with reasonable ESG transparency.

Thank you!

36

Maybe place a buy order in the middle? There might be market makers.

(That said with short term interest as 0.25% and going down, does a bond fund with 0.16% TER make sense? we’ll soon reach the point where cash in a bank will be the better option)

37

As far as I know, it’s mainly the total fund AUM that matters with regards to liquidation risk. A share class is not very expensive to manage. Although, still more expensive than just a separate listing of the same share class, I suppose. Total AUM of that ETF is still relatively small with CHF 250 Mio., though.

Trading volume of CHF ETFs is often very low, especially compared to major US ETFs, however, this should be less of an issue with ETFs than individual stocks, as market makers have an obligation to provide sufficient liquidity. Higher spreads are indeed to be expected, though.

Have you considered https://www.justetf.com/en/etf-profile.html?isin=IE000Z8F16G5? The fund has a total AUM of $3.1 billion and a TER of 0.10%. It has a longer duration than the ETF you linked but I don’t know whether you’re actually looking for a short duration fund or whether that wasn’t intentional.

Another option would be https://www.justetf.com/en/etf-profile.html?isin=LU0942970442 with a total AUM of $700 Mio and also a TER of 0.10%.

38

Thank you! I was looking for a relatively short duration indeed, that would (in theory) be less sensitive to what happens in the White House.