Mustachian portfolios

Investing / Portfolios
433

That’s Interest rate parity - Wikipedia, the difference in yield should match how the currencies will evolve long term.

So long term the returns should be the same when denominated in CHF, except with a lot more volatility due to short term FX.

That’s why the recommendation is to always hedge bonds in the local currency (https://www.institutional.vanguard.ch/portal/site/institutional/nl/en/articles/research-and-commentary/portfolio-construction/the-case-for-hedging-currency-in-global-bonds), esp. since the goal of bond is to remove volatility from the portfolio.

But then when you hedge, at least the theory says you should expect the same return as the equivalent bond in the target currency (cost of hedging is the delta between the risk free rate in CHF vs. USD).

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434

So that being said I could conclude very simplistically that there is no point going for US treasury bonds I could simply go for CH gov bonds because on the long term both should result in the same “performance”. Which I would not do anyway because CH gov bonds don’t have an interesting yield, or are or may be even negative as for European gov bonds. Is this sort of correct?

If I understand correctly here the ideal case would be to get a global bond ETF such as BNDW (includes BND+BNDX) but the catch is that it is not hedged to CHF. Such a product does not seem to exist or at least not from Vanguard… Does such an global bond ETF hedged to CHF exist at all?

435

Are you employed and did you count your current and future 2 pillar in your global allocation?
I have more of my global nw in low yielding bonds than I would like due to 2P. Balances accumulate as you get older and difficult to reduce % bonds in most cases

437

https://www.ishares.com/ch/individual/en/products/295830/ishares-core-global-aggregate-bond-ucits-etf-fund

But as mentioned, my understanding is that the expected returns are likely negative or close to 0 (esp. after taking into account TER).

There are some vanguard mutal fund e.g. IE00B2RHVR18 with 0.15% TER, but the entry ticket is like 100k afaik.

edit: last time I looked seemed like entry ticket was 100k, might have gone up to 1M now

438

Vanguard LifeStrategy 80% Equity has two “flaws” from what I notice:

  1. TER is quite high at 0.25% (my combined version is about 0.20%), since it is an ETF of other Vanguard ETFs, so the commissions are accumulating.
  2. And especially the fact that it was launched only in December 2020, so it doesn’t have much accumulated capital (currently only 29 million euros).
439

Thanks for the pointer to AGGS, the TER of 0.10% is not so bad but the AUM is only around CHF 148m which seems a bit small. Nevertheless if I understand you correctly you are saying that even though AGGS is a global bond ETF including the whole world the expected returns will be negative or close to zero, how is this possible? I mean I don’t think even half of the countries of the world have negative interest rates.

But yes you must be right unfortunately because the total return (%) under the performance section mentions 0.2% for the period of march 2020 to march 2021. As you mention this could change in the future, but negative for a global world bond, is this possible? Because if yes there is really no point having bonds and I am close to giving up on bonds…

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440

So why not buy the AGGH euro version as I mentioned?

441

Aren’t they different share classes of the same fund with 4.9 billions AUM?

This is outside of my fields of proficiency, do the AUM of a share class really matter?

442

I think that if the volume on specific exchange / currency is small, the spread is bigger and in this case you might not be buying / selling at the best price.

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443

Those bonds have positive yield in their own currencies, but if you care about CHF you have to take into account hedging/fx moves. If a bond returns 10% in USD but USD depreciates by 10% against CHF you get 0% yield.

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444

depends how well market makers are doing their job, you can check the order book for that (it’s going to be a better indicator than volume which is just a proxy for spread).

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445

Aha, so in your example 0% yield in case of a hedged ETF and what about the same example but let’s say that ETF would be unhedged, would that give -10% yield?

446

If it’s unhedged it’s more volatile, so short term hard to predict. Long term interest rate parity likely applies and it becomes equivalent to CHF bonds (usd depreciates by the delta between the interest rates)

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447

Thanks again for explaining all these aspects of bonds, it is very interesting but confusing at the same time. To sum up there is currently no ideal bond ETF (global or not global, hedged or unhedged) which would bring us mustachians any added benefit over keeping cash at a bank in the actual situation right now because yield on Swiss confederation bond is still negative (e.g. yield on 10y Swiss confederation bond is at -0.2%). So we would simply need to wait that yield goes back into the positive area and hope it stays at least for some time there before considering any bonds…?

448

Precisely because it is in EUR and I earn in CHF. This means I would have to convert my CHF into EUR to buy and then back from EUR to CHF when I want the money, and this is not efficient as it incurs more transaction costs and FX costs.

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449

What if you plan to use the bonds for rebalancing? Let’s say stocks go down and in that case (historically happened, but not all the time) bonds go up. You could sell bonds high (in euro) and buy low ETFs (which are still in euro as per my portfolio).

450

Right that would work for your portfolio if you have EUR ETF stocks but my portoflio is mostly USD/CHF ETF stocks.

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451

It’s irrelevant for equity ETF, if you were to use USD or EUR or BTC or gold to buy the same stocks, you still end up with identical portfolio. So it shouldn’t (except if you’re on a platform with high conversion fees) impact your decision making.

If what you care is EUR and you track your net worth and returns in EUR it’s fine. If the currency you care about is CHF there can be some pretty wild swings short term due to fx changes (e.g. if you were holding EUR bonds in 2015, you just lost 20% of your “safe” portfolio overnight).

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452
  • If you’re having hundreds of thousands in cash or bonds, bond ETFs would reduce the risk of your bank going bankrupt.
  • You could look into riskier, lower-rated bonds, which have higher yields (emerging markets bonds, for example).

Keep in mind that rising interest rates lead to lower bond prices.

453

Good you mention, I was actually looking into VWOB… It’s yield is quite high with >4% but of course for more risk. Still the volatility of this ETF does not seem to bad or scary. Still less volatile than the usual equity ETF such as VT. Or do you have any better recommendations for an emerging market bond ETF?

Damn, you’re right again. There are so many aspects to think about with these bonds…