Lets say I plan to live my entire life and retire in Switzerland.
Is it worth it to have a small percentage of your portfolio in the swiss market say 10-15% to mitigate exposure to other currencies?
The argument against that would be home bias and increased risk, because my income comes from switzerland. That got me thinking, what catastrophic event could occur only in switzerland that would tank the local market, lose me my job, but leave ROW untouched?
An argument for this strategy would be that Switzerland has performed quite similarly to any World index, I also believe it will continue to perform better than europe and say japan in the longterm and better than EM shortterm.
Maybe switzerland is quite a sound investment, what are your opinions?
That is an interesting statement…
Below is the total return performance of the Swiss market over the last 20 years. 22% over 20 years makes 0.9% per year on average. I am not sure it even beats inflation.
MSCI World on the other hand went from 1141 to 2044 on the same period, which makes 83%. Not incredible, but already better (3% per year) (I could not find on this graph if it was total return (including dividends) or not).
Maybe Switzerland will continue to be a stable country, as it always has.
Or maybe the Swiss National Bank will have printed so many franks that the whole Swiss economy will tumble.
Or Maybe Switzerland will do just fine, but US will collapse with all their debt.
Maybe Japan will wake up from two decades of non-returns and become a competitive stock market again.
Or maybe not.
My point is, if you start indexing, you do not want to guess what will happen to a given country over the next decades. So your best hedge is to buy companies making earnings everywhere in the world, so that what happens in one country has less effect on what happens to others. This is what a world index does. This is what the S&P500 or VTI does as well in a certain measure, since all those companies make money all over the world (even if they are incorporated or listed in the US).
All this global flow of earnings is the best hedge against any currency risk.
Don’t forget that, over the long term, the valuation of an index is how much value and earnings its companies are creating. It does not matter in which currency it is expressed.
Where did you get that chart?? The best measurement I have for the Swiss market is the SXGE index - Swiss Performance Index Total Return. That’s the top 200 companies. Here’s a link to the chart.
I can tell you my case. I plan to retire in Europe. Didn’t limit myself to a single country, it helps with FIRE to be flexible. I hold 100k of VEUR at Corner Trader and I don’t intend to make any further buys all sells there. I did it because of the following reasons:
I already had money with CT prior to IB and needed to do something meaningful with it
Keeping money with CT provides some broker diversification
VEUR can be purchased with CHF, without currency exchange
VEUR is not affected by American withholding tax stories
VEUR should in some way reflect the European economy, so if it fares well and prices go up, this ETF will offset this, if the ETF does badly, then probably the economy will not do so well and the living costs will be lower
It’s a tricky problem to solve. I stick to USDs as I’m not sure yet where I’ll retire (and what currency I’ll need). But if I were sure that I’ll stay in Switzerland, I’d rather keep and increase the bond/cash portion of my portfolio in CHFs over time. I’d rather keep the equity part in USDs to not expose myself to risks and costs of home bias and/or currency hedging.
On the other hand, I’m planing to diversify the broker accounts, so I’ll keep some CHF investments at CT eventually anyway (but this rather will be global portfolio of ETFs, I don’t want to overweight Switzerland).
I was looking at Bond ETFs and if Hedged ones are better or not… But that’s not my question here.
I just don’t understand how the hedging works, or at least it doesn’t work how I imagined it to.
For example look at this 2-3 ETFs. They are all tracking the same underlying thing, but wo are hedged in USD and one in CHF.
Why is there such a big difference in performance? Epsecially considering that USD and CHF have almost been 1:1 in the last year? Does that mean the hedging to CHF itself caused 7% more internal fees? Could someone please enlighten me? Thank you.
You got me, no idea why the USD one made 32% in 5 years, and CHF less than 6%. Maybe CHF hedging is just so much more expensive. Or maybe since probably half of the stuff is in USD, then they don’t need to hedge it, so it’s cheaper.
Here the unhedged one, and all returns in USD. The hedged USD one did a much better job than unhedged. I guess if you hedge and your currency gets stronger, you win. If the hedged currency gets weaker then you lose.
AFAIK, hedging cost is the delta between the interests rates of both currencies (so like 3% for CHF/USD). That’s the main reason why bonds don’t make much sense in CHF (CHF denominated or CHF hedged), for amounts where negative interests rates are not charged, holding cash will be cheaper (or you’ll have to go into risky bond territory to get a positive expected return).
From what I understand of how forward rate works, don’t you need to plug interest rates for CHF and USD in the formula (and compound them over the period)?
Hedged stock market indexes are usually constructed to use with monthly forwards and roll the forwards every month
USDCHF 1M FWD bid -29.6900 ask -29.3400
This is in basis points and for a single month, so times 12 and at mid point means approximately 3.54% p.a. cost to hedge USD for CHF currently using hedged ETFs
They are not really predicting anything this far into the future of course, this is essentially options and the bulk of the cost you’re seeing here is option’s time value
No you don’t, because here it’s already kinda done. Here you already have the forward points, which is what the market is offering. There is a BID and an ASK.
This is how I understand forward points, if I’m wrong, someone correct me:
If you will have some future returns in CHF and you want to convert them to USD at the current spot rate, the forward points tell you how much CHF you have to pay today to be able to do it.
So you pay 338 CHF today and in 12 months you will be able to exchange 10’000 CHF to 10’000 USD (because today the rate is 1.00).
But if there is BID and ASK, then these are market prices, yes? So someone is willing to give you these rates. So, naturally, they have to be predicting what the exchange rate might be in the future, in order not to lose on that trade?
Big banks can sell you forwards, yes. Unlikely they take much risk for themselves in doing this, that’s not what banks do. There’s bond market where on one hand there are currently people willing to lock up swiss franks for 30 years at 0.2% interest and on other hand people willing to lock up dollars for 30 years for 2.9% interest, probably with some constructions these two kinds of people can meet and the banks will package it up for you as a forward contract, while taking up minimum risk for themselves in the process
I use 10’000 CHF to buy some USD bonds ETF hedged to CHF
The ETF provider converts these 10’000 CHF to USD at current fx rate
ETF buys USD bonds with these USD
They also make a forward contract for 1 month, so that when they sell the USD bonds in 1 month, they can exchange USD back to CHF at the current fx rate.
If they don’t sell the bonds in 1 month, they just make another forward contract.
Not bonds, currency forward contracts from some big banks. Securities from the original index + currency forwards is what you’re investing in with hedged ETFs.
The bank they bought forward from will do the rest of footwork to ensure buyers and sellers meet. At the end of the month when contract’s up they will settle the difference in cash: either they pay the bank or the bank pays them, and sign a new contract for next month.
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