Swiss government bonds, bond funds

Investing / Portfolios
189

Have quite a lot of cash holdings recently due to delivering on written covered call options this December. Started reading most threads on (CHF) bonds as I wanted to reduce risk (in case of a market drop) and keep powder dry to take advantage of such a drop, while getting some income.

Having reflected on this all… I’ve stepped away from the idea:

  • CHF bonds = very secure but very low yield
  • And in general (beyond just CHF) with current low interest rates, the odds of bonds declining in the future is more likely than not

This has triggered me to look further for stable high yield ETFs (or stocks). I already for instance hold a sizeable position in Invesco Morningstar US Energy Infrastructure MLP UCITS ETF (Dist): 8%+ yield with in principle steady underlying revenue/cashflow streams (from long term contracts with customers, often with inflation clause built in) to back-up the yield.

So I started looking for more similar ETFs *but wanted to avoid US REITS and BDC’s for various reasons) - incl. ideally with a more European profile - and came to these two:

  • Global X U.S. Preferred ETF (PFFD) => 6%+ yield, paid monthly… but had to strike if off the list due to being US domiciled (same for it’s multiple variants, I really liked the PFXF which excludes financials thus reducing interest rate sensitivity)
  • Invesco EURO STOXX High Dividend Low Volatility UCITS ETF => roughly 5% yield, paid quarterly, TER of 0.3%

A looked for additional options vs. the second one (e.g. Invesco Preferred Shares UCITS ETF (PRFD) (IE00BDVJF675); Invesco Variable Rate Preferred Shares UCITS ETF (Dist) (IE00BG21M733)) but they were US stock focused (which I did not want) and while slightly better yield also had 0.2% higher TER.

All in all, I concluded that bonds are not right for me and I’m better off with somewhat bond-like ETFs. If my portfolio has space for it I may after all also take a position in Invesco Variable Rate Preferred Shares UCITS ETF as it blends preferred seniority with variable coupon structure, giving income + comparatively low value swings versus equity.

Anybody else reached the “no (CHF) bonds after all” conclusion? or anybody who fundamentally disagrees with this and has a strong case for (CHF) bond allocation?

190

I also stick with small durations like SBI AAA-BBB 1-5. I try to buy them when interests are not too low. With this small duration I am not worried about increasing rates because it does not take much time to amortize as the fund continuously reinvests at market rates.

And when they are going into the negative I step out a bit but still careful not too have too much cash in case the bank goes bankrupt.

192

Had a look at Swiss RE funds and boy the yields are low there. Not sure I’d want such low yields while having the high TER and interest rate sensitivity.

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194

2%+ for CHF tax free given current risk free rate doesn’t seem that low, no?

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195

Which fund is that? Is that also with the fees subtracted? Are you counting pure cash distribution yield?

196

Yes only counting distribution yield, many of them are in that range.

And rent is fairly stable so while mark to market will change, the actual absolute yield should stay somewhat stable (you can see it similar to long term bond).

197

You want somewhat return, but you neither want Interest Change Risk nor Market Beta. Yet, you want a return above the CHF Risk Free Rate (roughly zero). This leaves you with only few alternatives. Namely:

  • CoCo‘s if you belief that Banking as an industry would survive for the next few cemturies (which I do); would recommend the European CoCo ETF There
  • High Yield Bonds, they don‘t have a lot of interest rate risk yet they do experience some market risk upon downers
  • Insurance Linked Securities, with the caveat that they don‘t really offer a lot of risk adjusted return any more (everyone has gone there). I left that asset class aboit 8-9 years ago as I think the opportunity was gone

There‘s not much else, unless you want to take on long-tail risk like hedge funds or managed future strategies.

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198

WHat makes you prefer such a product vs. RE stocks which (with your assumption or rents remaining stable; and presumably a sizeable part of their interest rates fixed) can pay substantially higher dividend yields?

199

Do you have examples of those? Main difference between something like PSP and this: tax benefit, and for me I want increased exposure to residential RE in urban centers for other reasons (I got the impressions companies were usually more into commercial RE).

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200

Good you mention that alternative, I was going to mention that on to the OP. So I have a small % of bonds allocated into this “junk” bonds ETF (along with some VGSH but that’s al) since around 1y:

SPDR Bloomberg Euro High Yield Bond UCITS ETF EUR Unhedged (Dist)

So far so good (or at least until the next financial EU crisis), relative low volatility for a “junk” bond and the dividend of ~5.5% is paid out twice a year in EUR.

201

Checking SRFCHA I saw the yield is around 1% and as you say that’s really low… It used to be around 2%. Is this the direct consequence of interest rates falling?

202

SRECHA>SRFCHA imho since the first one has more residential exposure.

Both are funds (ETF) of RE funds.

You can trade RE funds individually to target your exposure (region, residential, nav/agio, yield, direct or indirect ownership with tax implications).

The UBS ETFs have the advantage to spread the risk.

Of course they are exposed to interest rates variation, a bit like bonds. That’s (partially) why some funds have a large agio, i.e. they trade with a large premium compared to their NAV (actual value of the RE), if the RE yields a lot above bank interest rate.

But it does not match the latter though, since there is more risk.

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203

Yep, its never wrong to hold 2-3% in a Euro high yield ETF. The only caveat here is that I would hold a LUX ETF like the one from DB here. With bonds, you can at no cost move from IE to LUX - so you should take this opportunity to diversify ETF jurisdictions. iE is a nightmare, from a risk point of view…

204

A few which I had in mind have seen div yields drop but Vonovia is a decent exception (although I admit the focus is on the German market, not Swiss).