Portfolio questions

Investing / Portfolios
1

hi all, i live in Switzerland and plan to invest for 10y timefreame. Couple things i am not clear about. Maybe start with the planned investment portfolio:

  1. 40% - iShares Core S&P 500 UCITS ETF
  2. 20% - iShares MSCI ACWI ex U.S. ETF
  3. 40% - bonds… (see details underneath)

P.s. I like to have not a world portfolio but a split between S&P and rest of the world.

Questions:
A. Bonds, i like to include them to my portfolio to prevent downturn volatility in case of a recession i.e. like for the period 1999 to 2010 where you had to wait for 10 years to get through the performance desert if you have invested all your funds in 1999. Are there any reasonable fixed income / bonds alternatives which do not correlate with stocks for somebody in Switzerland? I understood that bonds in other currencies are no option as CHF is so volatile.

B. Currency risk, i understood there is one in case of bonds. Is it not the same with ETF? My thought is that if i buy S&P traded in usd for chf100 i first have to do a fx (chf ->usd). If after some time i sell the index i get usd (as it is traded in this currency), afterwards i have to change usd again to chf (as i live in Switzerland). If the s&p investment example would have happened in the last 15 years i would have lost a lot on the fx (as the usd devalued a lot vs chf).

C. Why do have some people living in Switzerland a home bias. The US economy for example is more broadly diversified (s&p500 vs SMI). Is it purely emotional or are there good reasons to overveigh SMI if you live here (tax etc.)?

I appreciate your feedback very much!

2

For CHF denominated bonds I don’t think you can expect much return. Try here: https://www.justetf.com/ch-en/find-etf.html?assetClass=class-bonds&groupField=index&currency=CHF

It is. But there is trade-off. Last 5 years S&P went up 55% while SMI 14%, while USD additionally appreciated vs CHF. It’s up to you to decide if you want to take greater risk.

No tax reasons, additionally you get much better transaction costs in US. I’m investing in USD but I also have no plans to retire in CHF so I have that going for me.

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3

40% - iShares Core S&P 500 UCITS ETF

US domiciled ETF are more efficient here for US equities due to tax treaties

A. Bonds, i like to include them to my portfolio to prevent downturn volatility in case of a recession i.e. like for the period 1999 to 2010 where you had to wait for 10 years to get through the performance desert if you have invested all your funds in 1999.

With current bond yields you can just as well simply invest less.

Are there any reasonable fixed income / bonds alternatives which do not correlate with stocks for somebody in Switzerland?

Pillar 2/3 if you want to stay in CHF. About 1% yield plus some tax savings

I understood that bonds in other currencies are no option as CHF is so volatile.

Only if you want to stay in CHF. But why should you? You plan to die of old age here? Most expats are just here for work. If on the other hand you’re more of a global person, USD is not bad for your portfolio as world’s reserve currency and with much better yields at the moment.

My thought is that if i buy S&P traded in usd for chf100 i first have to do a fx (chf ->usd)

We discussed this on this forum numerous times already. currency of the instrument doesn’t matter. IB offers you intrabank rates at insane commissions, round trip will cost you just a few bucks, so you don’t have to worry about fx. Much more important is what’s inside the instrument. About half of S&P 500 revenues come from abroad. For SMI, more like 80-90% if not more. It’s largely a USD index.

C. Why do have some people living in Switzerland a home bias

Same reason that if you slap a swiss flag on some shit, you can move it at a higher price here without any further changes… Lots of ignorant people that can’t be bothered to think will pay for the label. And banks and day traders will trade anything as long as it moves up and down.

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4

Thx for the link. I see there are several CH gov bonds etfs. For example the fact sheet of the “iShares Swiss Domestic Government Bond 3-7 ETF (CH)” states a distribution yield of 1.96%. That sounds not bad, but i understood from newspaper articles that CH bonds interest is negative, so why is there 1.96% stated?

5

That’s because you’re looking at the wrong number, distribution yield is mostly irrelevant for bonds, it only affects taxation. Sure, they pay you 2% but the price drops by same amount and then some. Yield to maturity is the number you want to pay most attention to

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6

First of all, thank you both for your feedback.

At the moment i think about the following approach, to invest a stack of cash over 2 years towards following target allocation:

  • 70% stocks: S&P500 ETF & ACWI ex U.S. ETF, weighing of the two ETF will be after market cap so approx. 60/40. The two ETF seem like enough market/country/industry diversification.
  • 20% cash: EUR10k & CHF10k, two currencies to reduce the currency risk
  • 10% gold: include in portfolio as it had a negative correlation to stocks in high inflation period (1970-1980) and during recessions (1930-1940 & 2000-2010).

I understod in the long term stocks grow the most but its possible that i need in 5-10 years to sell part of the stocks as i need liquidity. Therefore i need something to smoothen the impact of recessions on my portfolio as i dont want to sell the stocks when they are down 40%. Thats the reason i determined 30% of the portfolio to be cash and gold so portfolio volatility is decreased.

Can you guys see improvement potential regarding above approach?

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7

@hedgehog
Thanks for the feedback. I understood US domiciled fund would be cheaper for S&P but it seems there is more paperwork included with tax authorities and that it takes a lot time until you get the taxes back, so i thought i rather stay with Ireland domiciled.

I had another thought on the portfiolio and came up with this:

  1. 50% - Vanguard FTSE All-World UCITS ETF distrib. (ISIN IE00B3RBWM25)
  2. 20% - Vanguard S&P 500 UCITS ETF disctrib. (ISIN IE00B3XXRP09)
  3. 20% - cash (half EUR half CHF)
  4. 10% - Gold

Date to start with withdrawal around 4%/year: 3y-10y (3y if stocks grow fantastic, 10y if there is a recession/flat growth). US is overweighted with the second S&P500 etf as i believe that it has a better “capitalistic system” than other develped countries and will grow more in the long run.

Note, my broker is Credit Suisse and i cant switch to another one.

8

Not quite. Not for US stocks anyway.

If you hold an Irish ETF then 15% is sent to the IRS before paying you any dividend. Then you’re taxable in CH for that dividend you received. That 15% is lost forever.

On the other hand if you hold the US ETF then the whole dividend is sent to you and 15% is withheld (or 30% if no W8-BEN, and/or HR or your RM have messed up, check with them). Then, when you file your tax return here in CH you declare the whole dividend but say “hey, already paid 15% for that, please take it into account”. And they will substract that from the taxes you have to pay.

So it’s not a matter of getting the money later rather than sooner. It’s just a matter of getting the money back or not at all. And on top of that the TER is lower. For me it’s a no-brainer.

Employee then, I’m guessing. You’ll pay higher fees but there is also one advantage to that: since it’s a Swiss broker they can give you a document that you can just send to the tax authority as is where all the calculations and valuations, including US tax, are done for you. This document is expensive to get (several 100s) but I’m guessing that you can get it for free as an employee.

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9

To a first approximation yes. But if you’re a low earner or have high debt (mortgage etc) the calculations are way more involved and you might not get full 15% back after all. Also at least in ZH they don’t subtract, but just refund you directly by wire in a few weeks after filing.

The paperwork overhead is minimal: you just move a part of your holdings from Wertschriftenverzeichnis to DA-1 form, it’s fot the same format as WV, draw number 15% there and send it to a separate tax division responsible for processing it.

Always got the money back within about 6-8 weeks after filing

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10

Good to know. Here in Vaud I file everything together, the software even produces the DA-1 for you and the amount declared gets subtracted from the tax amount to pay. If that was a negative number, then they would wire the difference back, but as part of the whole taxation process, not just DA-1.

11

Ok, understood. For the Vanguard FTSE All-World UCITS ETF would be US fund domicile also be cheaper than Ireland?

12

US is about half of world indexes by weight and withholds more money than everyone else on average, so yes.

For non-US holdings tax difference is small, but IE funds are not US situs assets on one hand and much more expensive to trade on the other.

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13

ok i see, US domiciled etf are not that complicated to get the tax back and the performance is a little bit better at the end.

By the way did somebody instead of picking for example the VT etf decide to have several individual etf? Because otherwise it seems a three fund portfolio is not really necessary for a swiss investor (if i leave the bonds away and VT has already huge diversification of int.- & US stocks i just need one etf)

14

Yes, many people on this forum have, for various reasons.
Check the thread Mustachian portfolios for examples (e.g. one being VTI+VEA+VWO).