Corporate bonds funds

The iShares Core CHF Corporate Bond ETF (CH) is not a government bond ETF, but I skimmed through the first few listings and most of these companies seem quite big and stable and do not seem on the verge of defaulting on their loans.
The Weighted Avg YTM of 2.04% seems quite attractive when also taking in account the Weighted Avg Coupon of only 0.80%. If we take 20% marginal tax rate (0.16% deduction from the coupon) and 0.15%TER this would leave 1.73% nominal yield on this ETF, assuming no defaults.
Wouldn’t this be more attractive than a savings account? Am I missing something here?
The only thing coming to my mind is that the Weighted Avg Maturity is 4.55 yrs, which creates some risk in a rising interest rate environment.

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The benefit and a disadvantage of corporate bonds ETFs, I think, is the fact that they don’t mature. With individual bonds or medium term notes I can fix duration and the nominal yield at purchase. What to do with a corporate bonds ETF I don’t know. Rebalance? The correlation with stocks is too high. Accumulate for a long term investments? Stocks have a better return long term.

Why to buy corporate bonds if you can buy stocks?

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Less volatility? Isn’t that the point of bonds?

Theoretically yes, but with this level of correlation corporate bonds are like 30% stocks 70% cash.

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The fact that they don’t mature is a general feature of bond ETF if I’m not mistaken (except for funds with a fixed maturity date). However, for rebalancing and volatility reduction purposes, I don’t see this as a problem.
I see the benefit of a known maturity date mostly where one has a fixed known date, where a predetermined amount of money has to be in cash. This is not exactly rebalancing and volatility reduction of a fund where the planned withdrawal date is far away, like for most retirement funds. Even here, volatility reduction is mostly done for unforeseen events requiring an early (partial) withdrawal. (or if you can’t mentally hold out too much volatility in your portfolio)

Ben Felix made a video about bonds funds and if I understood it correctly, a bond with fixed maturity is not really better than a bond fund with the same average maturity. It’s merely an accounting trick if one skips the reevaluation of a bond if interest rates change, since this bond couldn’t be sold at this price if required.

Do you have any further reading material about this and how large the difference in correlation between corporate and government bonds to equity is? I know that gov bonds had negative correlation in the last ~20 years, but this was not a given in the past, especially in inflationary environment, the correlation was positive

Yes sure.

It’s not a problem by itself. But corporate bonds ETFs are not effective diversifiers for stocks and you can’t even use them as a replacement of a fixed term deposit. From the portfolio construction point of view, a corporate bonds ETF is more or less equivalent to 30-50% stocks + cash.

I found this article useful:

For a quick calculation of correlation coefficients etc PortfolioVisualizer.com is perfect.

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Concerning specifically this fund, I do following:

Go to investing.com
Download historical fata for the fund of interest and something for comparison, for example CHSPI (also traded in CHF). Or SIX also provides historical values of indices.
Calculate math characteristics, here is an example:

And if you do it, I would do the same for 3 Swiss governmental bonds ETFs originally in question. Otherwise SIX has also some indices for bonds.

I have forgotten that it is possible to calculate correlation coefficients with TradingView. I don’t understand completely how it is done, but here are some quick results for comparison:

Correlation coefficient over 25 days, long term average,

VT in CHF with
CHCORP 0.05
CSBGC0 -0.08
CSBGC3 -0.13

CHCORP / CSBGC3 0.31
CHCORP / CSBGC7 0.58
CHCORP / CSBGC0 0.67

Not so bad but still assetwise CHCORP is kind of a mixture of governmental bonds, stocks and maybe cash.

What makes it interesting is actually

Still it is not a replacement for a savings account.

Bonds didn’t give strong diversification benefits during ultra low interest rates

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The fact that they don’t mature isn’t unique to bond ETFs, it’s unique to funds in general. The reason is that you own shares in a fund. You do not own the underlying assets.

The same holds true for ETFs which invest in futures, life settlements, and other investments with limited terms. The underlying assets mature, but the fund keeps right on going.

Personally I don’t see too much point to using bond ETFs. For stocks, ETFs make a lot of sense because stock prices fluctuate so you want a broad diversification to keep things balanced, and the potential upside is high in relation to the cost of using a fund. But with bonds, the yields are fixed and relatively modest, so any TER is just negating from the interest you earn. To me it makes more sense to buy bonds directly.

A possible argument for a bond ETF is if you use an accreting ETF so that you make a (tax-free) capital gain instead of getting (taxable) interest.

If you want corporate (or other non-government) bonds, you definitely want diversification. Buying many CHF bonds directly is likely much more expensive (and cumbersome).

If you’re happy just owning Swiss gov bonds, direct ownership may make sense, especially as it seems there is only roughly one ISIN per maturity year. If you have a broker with reasonable bond transaction fees, this may be cheaper than the typical 0.15% TER + ETF transaction cost.

YTM for ~5 year Swiss gov bonds: 0.93%
YTM for ~3 year SBI AAA-AA: 1.33%
YTM for ~5 year SBI AAA-AA: 1.42%
YTM for ~3 year SBI AAA-BBB: 1.57%
YTM for ~5 year SBI AAA-BBB: 1.57%

I can understand diversification against the risk of a company becoming insolvent (that risk would be identical for the company’s stock). But if you spread your capital over say, 100 different bonds in top-rated companies, that’s a pretty good diversification.

Diversification for the purpose of balancing price fluctuations, which is arguably the main reason for mass diversification in stock investments, doesn’t apply.

I’m sure there are use cases where an ETF can make sense for bond investments, like the tax-related use case I mentioned above. Another use case may be if the brokerage fees for buying 100 bonds would be higher than the cumulative cost of buying ETF shares and paying the TER over your investment term. Another one might be if you want to invest in bonds which you can’t buy directly (in specific markets, for example).

But on the whole, I feel ETFs don’t offer as much added value over direct inverstments in bonds as they do in stocks.

Buying 100 bonds à CHF 1000 at Swissquote would cost CHF 2’500 in fees, i.e. 2.5% (+ buy-sell spread). I don’t know whether there are any fees when a bond matures. On the other hand I can trade a bond index fund for CHF 9 + a load fee of 0.25-0.35% + about 0.15% TER p.a.

At Flowbank it would be even more expensive with a CHF 50 minimum per transaction. At IBKR I don’t see Swiss bond commissions.

However, even if the overall fees were comparable, I’d probably still buy a bond index fund instead of manually buying 100 individual bonds. Don’t forget that you might have to keep track of the credit rating if you don’t want to hold junk bonds. Way too much effort for maybe 0.1% p.a. of the bond part of the portfolio.

I might feel different if it’s just about a few Swiss gov bonds. However, for corporate bonds, I think index funds make more sense for most people.

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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?

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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.

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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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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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Almost, usually hedging also costs an extra premium on top of the swap rate (in the two digit range of basis points, sometimes as high as 80bp or more at least for individuals).

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.