Hi everyone,
I am writing to ask for advice on how to invest for expected / foreseeable expenses in 3 to 5 years.
What do you think of a mix of US and EU bonds with a mixed maturity of 3-5 years?
Too dangerous for currency risk?
Thanks everyone for the ideas
If the expense is in CHF absolutely do not take any currency risk in fixed income/bonds.
If 3 years, basically only CHF fixed income is reasonable. If 5 years, you could think about something like a 40/60 stocks/bonds split. The stock portion likely as a hedged version being as well a good idea, over that timeframe.
Thank you
What kind of bonds and stocks would you recommend?
No single stocks of course, only index funds
Iâd probably do something like that for a 5 year timeframe:
25% ACWIS (world stock market index fund CHF hedged)
15% SLICHA (swiss SLI index fund)
30% IBTC 1-3 year US treasuries CHF hedged
30% GLAC total bond market CHF hedged
rebalanced every quarter
On a horizon of 8-10 years instead?
Would you keep the same allocation or increase equity?
For sure increase equity. You could also do a glidepath then.
At 10 years 100% equities at 8 years 80/20, at 6: 60/40, 4: 40/60, 2/ 20/80
Just as an example.
At 10 years you can also do less equity hedging, say 50/50 and add VT.
Thank you
excellent analysis
It depends what happens if you canât meet those expenses (or loose money to meet them) and how willing you are to face the consequences of it.
Many things can happen in 3-5 years that canât reach recovery in that timeframe. I would play it safe with 3 years Cembra medium term notes (I think they still have the best yield out there) with an interest rate of 1.6% currently, then move the money into enough savings accounts that I can readily access it when Iâll need it after the 3 years have passed.
If more than 100k, Iâd diversify credit risk and pick the second best, then third, then nth best medium term notes option.
Donât you think that using US and global bond ETFs with currency hedging as recommended by Tony leads to better returns than 1.6%?
I am under assumption, that Equities would be a bit higher volatility for 3-5 year horizon and you are basically considering fixed income options. You have different options
Swiss govt bonds
Swiss corporate bonds
International govt bonds (hedged)
International corp bonds (hedged)
Bond ETF for Swiss bonds
Bond ETF for international bonds (hedged)
Everything has a pro and cons. Individual corporate bonds comes with company specific risks.
Government bonds have highest level of security. But international currency ones comes with currency risk as well.
Bond ETFs help diversify the risk but then you need to ensure you choose bond ETFs with duration of 50% time compared to your investment horizon. For example if you want to hold for min 5 years, then I wouldnât recommend bond ETF modified duration of more than 2.5-3 years. Remember that bond ETFs never mature like bonds and hence itâs important to keep their dynamics in mind. Their value changes with change in interest rates. Some reading material
In addition, keep in mind the yield to maturity for hedged ETF is not the same as yield to maturity mentioned on Factsheets because cost of currency hedging is on top. And in ideal world Swiss government bond ETF and US Govt Bond ETF hedged should give similar return for same duration. But sometimes this doesnât happen because of higher costs of TER , fees , interest rate disparity etc
Following could be an option
IE00BK7XZ629 (US treasury bond ETF , CHF hedged) - duration is about 2 years. So if you hold for atleast 4 years, there is a very high chance that your initial yield would be locked (minus hedging costs)
Last points -:
I donât know what is the use case after 3-5 years. But if it is real estate to live in, then perhaps you can also consider buy into your pension fund and save on taxes which can be good return as well.
You will be taxed on bank interest, coupon payments , ETF dividends , so keep in consideration these things. So if you have a low coupon but higher yield (due to capital appreciation) then after tax return would be better.
10 years swiss government bonds have 0.76% yield currently according to the SNB: Current interest rates and exchange rates
I doubt 3 years is much higher: the SNB policy rate is at 1.50% and people expect it to go down in the future. The expected result of currency hedging on bonds is to negate currency fluctuations but by doing so, bringing the expected returns to the same level as bonds of similar credit risk in the currency it is hedged into (here, risk free swiss government bonds).
That being said, if you can find 3 years individual CHF denominated or hedged bonds with more baked in returns than 1.6%, by all means, go for it.
The vast majority of revenue of SLI companies is in foreign currencies. While SLI companies might do some currency hedging on their own, Swiss stock indices tend to move similarly to foreign stock indices (when measured in CHF) on fluctuations in currency exchange rates. I.e., I would expect SLI to provide less protection against currency volatility than a CHF-hedged world index.
That said, my bigger concern would be stock market crashes, however, it depends on what exactly the plan would be after the 3-5 years
For bonds I would also consider SBI AAA-BBB 1-5.
Another aspect to consider is how much it is with respect to your total liquid wealth. If it is 5-10%, you can also consider to take for example a margin loan at IB if the things are not moving exactly how you have expected.
If you want to earn something extra while waiting and making sure that the whole principal will be available when you need it, I donât see anything better than mid term notes in a Swiss bank up to the insured limit.
I hope no offense @Abs_max , but can you substantiate, what would the expected return be % p.a. for this, if the initial yield would be locked in?
For this ETF I see a return of -10% in the last 3 years (-3% p.a.) in CHF, so that unfortunately didnât work out well in the past. Also the Benchmark trashes the ETF in the comparison on the iShares website, not very convincing at all for this ETF.
I recommend simple solutions that one can understand, no hedging, no sampling, no middle-men pocketing fees, see medium term notes direct from Cembra, like recommended by @Wolverine for example. You buy (for free), you get your interest , 3 years later you get the initial money back.
That has more to do with the general bond market the last years. Also CHF has lost a lot against USD in the last months.
Now you always need to assess going forward, looking back does not tell you much in this case. Right now 2 year treasuries have a yield of 5% and the etf certainly had enough time to be majority bonds with roughly that yield in it.
For current yield in CHF you need to substract hedging cost obviously, which would give you an expected yield of ~1% on the coupon payments. But thatâs just a snapshot and will quickly change once the US starts lowering rates.
And thatâs fine and all, but youâll get a meager 1-2% total return. Which is basically nothing.
Playing super safe only gets you super safe returns.
Having a little flexibility timeline wise opens up a lot more return possibilities, that are still not unsafe.
Of course if you have a strict 3 year timeline, what you propose is the reasonable approach.
No offense.
If you look at my comment, I started with Swiss bonds. That is easiest and safest. I just elaborated that if someone wants an ETF (because there was a question around this as well By OP), then it is important to understand how they work and do not assume that they will behave like bonds.
When i said this ETF could be good solution, it was not to say this is best solution out of all options. I meant this is best solution if one seeks international govt bond hedged ETF for holding period around 3-5 years.
Regarding what is simple and what is complex, it depends on what investors are comfortable with. Our role is to present our view. For example, I am not comfortable with a bank which gives higher interest versus others because its obvious they also take higher risk versus others. So credit risk also matters. However, if those bonds are secured against esuisse guarantee then its another thing and should be considered.
Now to answer your questions
My estimate of annual yield of this bond ETF from ishares (IE00BK7XZ629) would be similar to current Swiss 2 yr bond yield, which is approx. 1%. Reason being hedged govt bond etfs should return similar yield as local Govt bonds in normal conditions. However, this can change slightly if hedging costs do not follow very well the interest ratesâŠ
However, regarding your comment on back testing. I just want to clarify what I mean. To make it easier, it would be best to use SHY (unhedged) as example because there is no hedging involved, so we can clearly see the impact. I think ishares website for hedged ETF is comparing against unhedged benchmark, so it is expected that it does not track it. This is not fair comparison.
If you look at SHY return from 1 Apr 2020 to 31 Mar 2024 -: it is 0.3% annualized as per Portfolio visualizer. Now i donât have factsheet of SHY from 31 Mar 2020, but if I look at US 2 year bond yield around that time as a proxy it was between 0.25%-0.32%. This basically shows that if you held the ETF for 4 years, your original yield at time of buying is more or less guaranteed.
Similarly if you buy SHY today and hold it for minimum 4 years, I am pretty sure, you will get yield of 4.96% - 0.1% (TER) = 4.86% (in USD terms) which is current yield as per SHY fund facts. This will happen irrespective of what happens to interest rates. You can also end up get a better yield but i do not think your yield would go lower in most cases. You can simulate this using bankeronwheels calculator
But thatâs all but certain: the money will be there when needed (in nominal terms). I find it pretty good for very safe capital preservation. Truth be known, I donât think we know enough about @Zardackâs situation to provide better advice than âhere are the safest options; with more returns there comes more risk; here are a variety of riskier optionsâ.
Weâd need to know, for example:
how certain that expense happening is?
how important is it to meet it? Is it a life altering make or break event or can it be skipped without overbearing arm if needed?
can it be partially met? (For example, planning a holiday and if thereâs less money available, the holiday still happens but some activities must get cut.)
can it be postponed or smoothened out?
will there be income generated in-between now and the planned expense occurring and how reliable could that income be considered?
how high that expense is in regards to the size of the existing porfolio/assets? (A 10k expense for a 10M portfolio is a drop in the water, you could be 100% in stocks and not have to worry one bit but a 100k expense for a 120k portfolio is a different matter.)
There are a wild range of reasons that can make taking some risks and flexibility with a 3-5 years future expense worth it, if done with the conscious understanding that the money may not be there (in full or at all) when the time to spend it occurs (which, I believe, is something we have a hard time getting a good grasp of; we think we have that understanding but may discover otherwise when it happens). There are also circumstances that make missing the goalpost by one frank or one day a devastating event, especially if other people are involved.
hi wolverine, consider that there will be about a 50% probability that this expense will occur and in any case it is not serious if it is not met. The expense would be around 40% of the portfolio.
There are some ETFs where are a bit more bond like e.g. iShares iBonds. Thought Iâm not sure if they have CHF denominated.
And how much exactly is the absolute amount and the term?
What is your ânormalâ investment strategy?
Are you ready to withdraw from the fixed income part of your portfolio?
And from stocks?