Mustachian portfolios

There’s higher risk though, and probably more correlation between corporate bonds and equity markets.

In general the theory is that the expected return after hedging should be the same as the equivalent return in bonds denominated in the hedged currency.

So expected yield of non-sovereign USD bond after hedging should be similar to expected yield of corporate CHF bonds of similar rating (which is barely above zero?). The main advantage of global bond hedged will be some extra diversification.

edit: and need to keep in mind what your goal is, usually that’s having a less correlated asset class, so if you’re increasing the yield but increase correlation with equity that might be detrimental to the overall portfolio.

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Agree regarding the higher risk… then regarding the correlation this is the reason why I would go for US treasury bonds (VGIT or VUTY.AS) which even has a negative correlation when compared to a world equity ETF like VT. See the correlation matrix below from portfoliovisualizer where I also added global bonds ETFs such as BND/BNDX/BDNW for comparison.

So maybe for less risk one should go for a global world bond ETF such as BNDW but then the correlation is higher with VT as the correlation VT<->VGIT.

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But then US treasury bond have the same expected return as CH sovereign bonds after hedging (so pretty deeply negative). (and unhedged, it kinda defeats the purpose for people with no tie to the US due to the volatility, my understanding is that long term through interest rate parity even unhedged you’d expect same CHF return as the hedged one anyway, just with a lot more variance).

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I don’t quite understand why a US treasury bond would have the same expected return as a CH government bond? For instance the 10 year treasury interest rate is at around 1.5% (10-Year Treasury Constant Maturity Rate (DGS10) | FRED | St. Louis Fed) whereas in Switzerland it is more around 0% as far as I have heard (source missing). But I don’t have much clue about bonds, so I am asking here to understand better the differences…

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 (The case for hedging currency in global bonds | Vanguard Netherlands), 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).


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?

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

Again, why do you want to make it this difficult? Until there was a CHF Hedged (or unhedged) version available thereof; I would simply go for the IE based LifeStrategy 80%. Yes, bonds are EUR Hedged and not CHF Hedged but in the big picture, that won‘t lead to more than probably 0.1% loss p.a vs. a CHF Hedged version.

Everything else is just complicated with the required re-balancing or even introduces additional US risk…

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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

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).

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

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?

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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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.


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).


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?

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)


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…?

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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