They go up because the negative interests go even further down, I’m not sure that makes it a better idea 
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That rule has been pretty much broken since 2008. Governments and central banks have printed money to manipulate interest rates to zero and below. Stocks and bond prices have both gone up since 2008 and bond prices can’t go up much more then they already have.
If stocks go down, bond prices should go down by less than stocks, but I would not expect them to go up much
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Exactly.
“Selling the bad because even worse is coming” is not a good long term strategy. 
This is true, but the premium you get for bonds over cash it’s not been static. Bonds used to give higher returns than cash, with higher variability. Nowadays you still get the added variability, with lower expected returns than cash.
Not sure how long this is going to last but at the moment we’re arbitraging the fear of banks of losing customers if they apply negative interests on saving accounts.
A negative correlation with stocks might still give bonds some benefits in a portfolio, but then cash is also uncorrelated with stocks…at a certain point it just becomes a good alternative
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If we buy bonds in the current environment, yes we diversify into an asset not correlated to stocks, however the outcome seems highly likely to be a loss. See this article
“In fact, if you buy bonds in these countries now you will be guaranteed to have a lot less buying power in the future. Rather than get paid less than inflation why not instead buy stuff—any stuff—that will equal inflation or better? We see a lot of investments that we expect to do significantly better than inflation”
In Switzerland we actually have a cash-arb as retail investors right now.
If you want some lower volatility (hopefully negatively correlated with equities) exposure then just hold CHF.
Can hold ~CHF100k with a bank + ~CHF100k with IB and pay no interest. This is opposed to an institutional investor holding millions who would have to pay -0.76% for 2 year bonds or earn 0.138% on a 20 year bond with the SNB.
Since interest rate differentials are a thing this is somewhat equivalent to holding cash in other currencies (e.g. USD/EUR) at an arb too. Of course you have FX risk.
Makes cash slightly more appealing in this environment when asset valuations are so crazy. I am about 80/20 right now but scaling back to 100/0 with monthly adjustments over the next 1 year. Still have to be wary of sitting out the market for too long .
One thing that has not been mentioned here is that chasing a bond with 1.5% nominal yield in USD or whatever currency which is expected to give maybe zero return long term due to higher USD inflation may give negative return after taxes because the owber pays 15-40% income tax on the 1.5% which reduces the return to somewhere around 1% for most of you.
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Yes, taxation is an important aspect of bond ETFs and in the current low interest rate environment it’s typically even worse than your example as the funds mostly consist of bonds with a higher interest rate (as issued back when the rates were higher) trading at a premium.
E.g. BND has a SEC yield of 1.34%. However, the distribution yield is 2.07%. The expected gross return is close to the former (in absence of rate changes) but you pay income taxes on the latter. At a 35% marginal tax rate the expected net return would only be around 0.6% before any currency risk.
For CHF bonds the tax effect is even worse. E.g. Swiss Gov Bond 7-15 ETF has a YTM of -0.16%, which would be bad enough. However, it still has a distribution yield of 1.72% which you’re taxed on. The net return might be around -0.76% and that’s before deducting the ETF fees.
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Never worried, or thought, about it since I am not interested in bonds with negative interest rates… but, would that actually be tax deductable?
Why would it be? They are not passive interests (you don’t pay them)
The nominal interest rate of these bonds is still positive or 0%¹. They are sold at a premium (above the nominal value of the bond), which results in an overall negative yield to maturity. From the tax perspective the loss is capital loss (decrease in value) and thus, nothing that you can deduct as private investor.
Professional investors who have to pay capital gains taxes should be able to deduct such capital loss from bonds.
¹ At least that’s the typical case. I don’t know whether there are exotic bonds with negative nominal interest rates.
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Is there any other reason to chose the combination VTI + VXUS over VT except the funds being more liquid and having lower TER ?
If you replicate VT with the combination you should have the same returns I guess. I like that VT does not need rebalancing, but in case I go with VTI + VXUS I would probably rebalance every quarter or semester (how often do you do it ?).
Based on Vanguard Website if you go 57,90% VTI and 42,10% VXUS it will roughly give you the regional exposure of VT.
My Current Portfolio :
- VT
- VIAC Global 100
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That was my reason, plus that both fonds are going more in depth (capturing approx. 90-95% of the market instead of around 85% if I remember well, didn’t check the exact value), and that I wanted to underweight the US a bit.
If I would redo it today, I would stick to VT for simplicity. Most of the VTI funds is international anyway (Microsoft, Alphabet etc.) and just happen to have their HQ in the US, and the extra 5% or so of the market represents nearly nothing in the end portfolio, since the market cap of the companies are so small. Basically, it won’t make a noticeable difference in CAGR before a long time, and then, who knows which one will be better.
Personnaly, I keep both of them at around 50/50%, with no rebalancing until I reach a 5% threshold difference from the initially chosen balance.
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I wouldn’t split it unless you want to deviate from VT’s allocations.
Though then, why would you only do that for the US vs. rest of the world (and not for Emerging Markets, Europe, Japan or China)?
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Thank both of you for your answers.
Any specific reason for this ? It has lower TER and is more liquid.
You are right asking why not to do that with the other. It is for simplicity reason. I am ok to rebalance between 2 portolios, but I prefer not to do it with more. I also think in term US vs the rest of the world. I don’t mind having the EX-US grouped all in one. It is purely subjective.
There shouldn’t be any rebalancing between funds needed at all, if:
- the funds track a market cap weighted index
- you allocate precentages according to the total maket cap of the tracked indexes
- the funds are distributing (or have negligible differences in dividend yield)
- their difference in TER is negligible in absolute terms
VTI & VXUS would work
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Here is my current portfolio.
Just started in 2021 (unfortunately, way too late with age >30) with a 20+ year horizon.
My thought process/strategy:
- keeping it simple (only a few ETFs)
- keep it wide (not just US large caps)
- where possible ESG indices (ESG Leaders & ESG Enhanced fit perfectly)
- currently 100% stocks
- still quite some cash in a deposit account (I guess, I will need to move that into bonds and more stock ETFs soon)
Any opinions?
- Too much home bias?
- Too little Europe (ex Switzerland)?
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Very good! I just don’t understand why you have to consider such detailed allocation if you have only 3 ETFs.
Include your second pillar. Everything will change a lot.
Yes! Pension funds already heavily overweight Swiss stocks.
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It will be interesting to know the weight of all the other assets (cash, bond, equity).
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Not sure if MSCI Switzerland offers enough diversification. It’s only 40 constituents.
Maybe SPI would be better. Or a combination of SPI Extra and SMI.
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