Americans typically invest in VTI, VXUS and BND. What alternatives do we have in Switzerland for the bond part? I‘m just wondering if I would retire today and aim for a 70/30 allocation, how would I do it.
The AAA-BBB bond ETFs from UBS and CS have a YTM of around 1.5%. The iShares Global Aggregate Bond UCITS ETF (CHF Hedged) invests also in Investment Grade Bonds (over half of it in government bonds), just globally. It has a YTM of 4.0%.
How would you guys approach this?
Before retirement, I put into pillar 1.
After retirement, I think a mix of bond ETFs, cash, gold, commodities, maybe some foreign bonds (taking FX risk).
You could also go for equity with certain characteristics e.g. utilities, REITs have hold some of those as a kind of ersatz bond.
In case that’s not clear, that YTM is before hedging.
My goal is to have a bond duration around 1 when measured over my complete portfolio (not just bonds). I.e., the portfolio value should change by 1% if the underlying interest rates change by 1 percentage point. So I accept some volatility but want to limit it as I want bonds to be the stabilizing part of my portfolio.
For this I invest 5% in the global AGGS (duration 6.5) and 5% in CSIF SBI AAA-AA (duration 7.9 but high credit quality) for some diversification of longer term bonds. And the rest of the bond allocation I fill up with the shorter term CSIF SBI AAA-BBB 1-5 (duration 2.9).
Over a few years, hedged global bonds and swiss bonds have pretty much the same return. The difference is mainly introduced by hedging. Hedged bonds win if the CHF gains more in value than justified by the interest rate delta, and they lose if the CHF loses vs. the interest rate delta. Over the long run - these effects should equal itself out.
In my view, this is a classic case for the “if in doubt with investing, split things 50/50”. I would personally put 50% into SBI AAA-BBB and 50% into Global Aggregate, whereas I would hedge 50% of the global aggregate and leave the remaining 50% unhedged.
The only thing we need to consider here is that such investment has a bit a long duration… it would probably make sense to replace some of the SBI AAA-BBB with an SBI AAA-BBB 1-5. So if you want to go down into this complexity, I would propose:
And if you want to go to the next level (aka if we talk about material amounts of money, I would further try to break the exposure to both USD and Government Bonds a bit and introduce a EUR Corporate Bond ETF. That setup was then:
What’s the problem with long duration? As a balancing asset to a stock portfolio, I would have thought that long duration would be desirable.
Long duration = higher impact on value when interest rates change. Bonds with long durations had a bigger decline in 2022 than stocks.
think I somewhere saw research, but I can’t quote it. The point is that with about 3-5 years duration, you already get 80% of return of long duration bonds - but this with significantly lower interest rate sensitivity. Or in other words - unless you speculate for reducing interest rates, it is simply not efficient to invest into too long durations.
The big problem with bonds is that there is no one-stop shop like with Shares. The fact that 50% of bonds are Governmental bonds is a problem to me. There, we are deep in the territory of financial repression and I think that market cap weighting was great for shares but dangerous for bonds.
Ah. Maybe I’m just looking at it from a different perspective. I was thinking of holding long duration bonds as a bet on falling interest rates, maybe even high convexity zero bonds if rates head towards zero again.
While normally stocks also rise with falling interest rates, you might hedge against the scenario of falling interest rates as a result of a recession during which stocks typically fall.
Of course, this could go wrong in a number of ways.
There is a Credit Suisse index fund for corporate bonds CH0281860343 & also an ishare ETF (CHCORP is ticker). They also have equivalents using Government bonds only.
The mix fund is CH0230260413.
If you want international hedged diversification, there are also options. If it’s not a huge part of portfolio, maybe sticking to Switzerland would be fine. BND is also only US bonds as far as I know.
If you want overview of alternatives, look under the portfolio strategy for finpension invest option. There are more options.
i currently use both CS Index Funds (corporate Bonds and the SBI AAA-BBB one). However, I would caution anyone to invest more. At the moment, I am not clear what UBS does with Credit Suisse’s Index Fund Portfolio. There is a risk that they close them. Had asked UBS already but didn’t receive any response at all - compared to CS who had great customer service on their Index Funds offering, the UBS Index Team to be honest simply sucks.
For the financial savvy folks here.
Does anyone understand what this video is trying to say? It seems like the person is saying that Japan 10 year bonds returned 2% per annum while the actual yield was mostly below 1%
This is due to phenomenon called Roll Down. I watched this video twice. But I am kind of confused.
Let’s take an example
I buy a Swiss 5 year bond with 1% YTM. Assuming that we are maintain an upwards sloping yield curve, does it mean if I sell this bond after 1 year, I would actually have a return which is higher than 1% ?
In addition -: is this phenomenon inherent in Bond ETFs or one needs to buy a special ETF that does this trick.
Say you buy a bond with a 10 year maturity and 3% yield. After a year, it becomes a 9 year bond. In a upward sloping curve, yields rise with maturity, so now the bond may yield 2.9%.
Since bond prices are inverse to the yield, the price of the bond has increased. This is the roll-down gain.
Let’s use this example
Option 1 -: buy a 10 yr bond with 3% yield and hold for 10 years. Investor would achieve 3% CAGR
Option 2 -: buy 10 yr bond with 3% yield and sell it every year and buy new one. If one does it for 10 years consecutively, the overall CAGR would be higher than 3% assuming transaction costs are not taking over all the extra gains
Is this right?
Yes, basically you’re taking more risk.
The longer the duration, the higher the risk (interest rate risk, in practice it’s unlikely that the yield for a 10y bond will stay the same one year later, and that will have a lot more impact on the return).
Thanks