I have a T-reg margin account and after this sizeable drop in US markets I would like to use a smaller leveraged position 10-20% of my total ETF account, but I am not sure what would be the best way to do it. I would take on a CHF margin with 1.6% annual interest, but now my options are:
1, invest it in the US markets like my main portfolio -I think it’s a more favorable margin % in terms of liquidation due to different regulations of markets. I personally think this is higher expected future return, specially after a 20% drop.
2, invest it in SMI to avoid currency risk on the underlying -tho both the SMI and SPY have quite a sizeable % of revenue all around the world, so maybe this is not relevant at all- While the SMI is barely down YTD compared to SPY, it has a higher div yield, which would cover the loan interest + some more, and then I can afford to wait it out long term for the stock appreciation for ‘free’ profit. This would make my only risk the margin call, which is quite unlikely with a 10-15% margin.
Any thoughts? Advice is appreciated from those who used margin in their long term portfolios.
You can borrow CHF to convert to USD by taking a FX position. However, that means being exposed to a macro/currency risk on top of the equity market risk (the market could still fall 80% from here, in the next month or over the next 5 years, potentially much longer). Would you be able to withstand it?
It’s just a loan in CHF (that you use to buy equity), depending on your asset allocation (e.g. you have illiquid relatively safe assets) it can make sense (but you’re adding more risk).
for me personally the currency risk does not matter because my income is in chf. so either way i‘m exposed to usd by bying vt.
But how can i take a CHF loan? i don‘t see an option to „take a loan“. I have 1.- as an example in my chf account and nothing in usd. Should i just convert 10‘000 chf in usd so i would have usd and the loan therefore in chf? Or what would the correct way to get the loan if i want to buy VT with margin and CHF loan?
Yes, that’s exactly how you’d do it. Or you could also first invest in USD and then convert CHF to USD to cover the negative USD balance (that’s how I do it).
I don’t think you understand how currencies work. Taking a CHF loan to invest in USD is long USD/CHF, which is the opposite of the current trend and forecast
Yes i know, thank you. I thought because i‘m investing long term in VT. Taking a margin and paying back in chf would benefit me so i can buy lower. I would buy either way. Of course there is a cirrency risk but it would be higher if i would have the loan in usd instead of ~1.5% in chf.
i‘m not sure, never tracked it. But my idea was that i would have the money in 2-3 months and would have invested it either way. And because it „crashed“ now and it is below my DCA. In older posts i read about 2% 2 years ago and so on. So i think its a good rate.
You’re missing the point. If you believe the USD will weaken — as many do — and you earn in CHF, you’d be better off taking a USD loan to buy a USD-denominated ETF rather than borrowing in CHF. This assumes you’re investing in an unhedged ETF and understand that, regardless of the loan currency, you’ll still face interest rate and margin liquidation risks.
Sorry, but I disagree here. If your main currency is CHF (you earn and spend in CHF), I really wouldn’t borrow in other currencies.
Long term it’s a wash as interest rate parity at least somewhat applies (USD weakens, long term term this weakening somewhat matches the interest rate difference), but short term you’ll have a lot of fluctuation, so why risk it?
(One argument is that you can deduct more with a USD loan, but I still wouldn’t risk it)
I took out a first small margin loan in CHF last week and bought some chspi.
Now: the div yield is higher than the interest rate paid - it seems to me also attractive to keep that margin position long term - my max leverage ratio would be 1.1 or maybe 1.2 - just testing the waters for now.
What are your thoughts on this?
Has anyone successfully used this strategy longterm?
One could even think of more conservative dividend stocks in USD, since one can take a loan in CHF, convert it to USD and buy stuff (I am aware of the currency exposure risk).
Also - I always have like 10% in cash (not on IB) - would you advise to still use margin and keep that cash? Not sure its a good idea
Yes! You probably should keep some cash buffer in your main payments account (connected to eBill etc), although opinions vary. But your emergency fund should be available within days even if there is a global financial or infrastructure disruption, because that is exactly when you might need it. So, keeping most of it in Fintech accounts is most probably okay, but a part should be available from a physical bank, where you can pass by and pick up some cash physically. Can be combined with the cash buffer.
It might sound like mental accounting, but it is not, because the emergency fund is at the safety level of your needs (hello Maslow), which comes before investment.
Yes, CHF will very likely keep appreciating against the USD, but very unlikely that it will be more than ~4% a year (difference between CHF and USD loan). Especially after such a sharp run-up the past month.
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