Sanity Check : Arbrage using SPICHA and Margin loan?

Investing / Portfolios
1

Hi there,

I recently transfered from Degiro to IBKR I see that :

  • Margin Loan at IBKR in CHF = 1.5%
  • SPICHA has a long term historical growth ~8-10%
  • SPICHA can hold my investment in CHF.
  • SPICHA has an historical dividend yield ~2.4%
  • SPICHA TER is only 0.09%

Assuming that I trust Switzerland will continue its long term economic growth, I see this margin loan investment as a free meal, an arbitrage where dividend > loan rate + a decent yearly capital gain as a bonus.

I understand that there is no free meal so… What I am missing ?

Thank you for your support!

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2

There’s this concept of efficient frontier: Efficient frontier - Wikipedia

Normally you look at risk adjusted returns, not just returns.

3

SPICHA std dev on the last 10 years is ~12% so 3% lower than VT.

Which risk factor am I not compounding to adjust expected return ?

4

First non-free meal: cash accounts have better protections than margin accounts.

Second non-free meal: volatility.

The margin loan is short term. Its interests move with adjustments to the SNB target rate, which can happen with no notice (though bigger upside moves would probably be gradual).

Expected longer term returns on SPICHA are longer term. In the mean time, it can fluctuate wildly. The loan won’t. Your collateral must fit the loan criteria on the short term no matter how they’ll behave on the longer run.

From a dividends perspective: if the dividend yield of SPICHA falls, or if the interests on the margin loan rise, you may want to reduce your leverage or pay off the loan entirely as conditions have changed. If stocks are down at that point in time, you would be selling low. The options would be:

  • sell low and take the loss.
    OR
  • pay continuous increased interests that are no more covered by the dividends and may well be way more than your potentially negative returns on the short and medium term.

You’d be arbitraging time horizons. If you can successfully manage it, it has chances to be profitable. That involves knowledge of the risks involved, low level of leverage, consistency and peace of mind while investing no matter the circumstances, etc.

If you can’t successfully manage it, it can generate a loss. Psychological effects can generate bad decisions that can turn that into a disaster.

As always: know yourself, know the instruments you use, decide accordingly, follow the plan.

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