Regarding stocks, insofar that the US dollar is one of the most predominantly used currency in the world, there might be some risk, in that the companies we buy shares of are exposed to the USD as many/most of them have liabilities and/or revenues in USD (and other currencies).
The hedging required to reduce that risk should happen on the company level and the only things we can do about it is choosing companies with a hedging policy we like or less exposure to the currencies we want to protect ourselves against (not an easy task for a Swiss investor) and/or voting for it when we do have voting rights (we don’t with ETFs and our vote would be utterly negligible anyway).
The kind of hedging we can do is mostly a gamble on forex variations. As @Barto exposed, the value of the companies we buy can be expressed in different currencies, but the value we can actually cash out is the one expressed in our own currency.
Currency hedging makes a lot of sense with bonds, though. Bonds (of a selected duration and quality) are also what I would use to reduce my exposure to a wide variety of risks during the withdrawal phase.
I may be wrong but these discussions about hedging stock funds seem to me to come from the assumption that we are invested 100% in stocks (and potentially other risk assets). If I were worried about the behavior of my stocks in regards to FX variations, 100% stocks isn’t the place where I would want to be (as, if I can’t take the risk of FX variations, I should also not be able to take the risk coming from the higher variations that come with stocks). That is to say, I would first question my allocation before considering the usefulness for me to hedge my stocks.
Good point. That’s exactly why I’m skeptical of holding 100% equity in drawdown/decumulation for retirement. In your decumulation phase, you’ll actually have to buy your groceries in CHF and cannot wait for FX variations to even out. In accumulation phase however, FX swings shouldn’t matter much in the long run.
Accumulation math seems to be somewhat different from decumulation/retirement math, it’s a conundrum I haven’t solved yet.
So if choose not to be 100% in equity fir retirement, the question remains what other asset(s) I should allocate to. I don’t like CH treasuries due to concentration and inflation/term risk (none of which I have with VT). If Switzerland had TIPS, inflation would at least be (somewhat) off the table.
Yes, that’s why it’s important in the withdrawal phase to have (and build ahead of it) a cash and bond cushion exposed to the currency of expenses (CHF for us) and worth 5 to 7 years of expenses at least.
My comment was on the equity part, in which it is very difficult to assess currency exposure because companies are not necessarily exposed to the same currencies as the trading currency of their stocks: many US companies have international exposure. It was discussed a lot on this forum in the context of hedging.
Prof. Cederburg has advocated 100% equity for retirement/withdrawal (50% intl., 50% domestic). Apparently it has worked better than any mixed allocation to stocks and bonds, at least historically…
In the accumulation phase the focus is on return and risk (standard deviation and fluctuations) but in the withdrawal phase it shifts to the worst case scenario.
One issue I see with 100% equity is the tail risk, it probably works better on average, but once in a while the savings can get wiped out in a financial downturn. When this happens, it doesn’t help much to know that it works for most people most of the time on average when sitting on an empty account. Even going down a bit to 95% or 90% already significantly diminishes that tail risk.
Another issue is that 100% on equity works for some people who have high risk tolerance, but this allocation is not suitable for everybody because people can panic sell in a crash:
The optimal allocation range goes down to 35% domestic. I think no one would be comfortable with 50% swiss stocks
Again, I see a lot of merit in having some significant CHF exposure either through home stocks or partially hedged or both. And I find it frankly a bit annoying how much this opinion is dismissed by a few people here, when there is tons and tons of reputable funds/companies/finance professionals incorporating such strategies with sound reasoning. Which I provided links to as well.
Many pilar 3a funds do partial hedging as well. Avadis does lots of hedhing. You cannot reasonably say that they are all wrong.
The assumption of having a home bias or hedging is plausible. And it’s right if you want to reduce risk to reach a certain number within 10 years or so.
To me it sound more like selling an insurance. It might make sense to the client, even thought they might overestimate the benefit and hence overpay.
Just because everybody’s doing it, does not make it right automatically for everyone. The main reason why companies offer something is “the customer wants it.” If that meets the “the customer needs it criterion”, you’ve got a winner.
Don’t forget this is a FIRE forum. FIRE people are famously cheap. If you go for FIRE, you’ll only pay for insurance that you actually need. Anything else is going to cost you money that delays your path to FIRE. That’s where this dismissal probably comes from.
In my answer here, I provide a number of possible stocks that would introduce a home bias to a portfolio:
Also, if you want to read further, @thepoorswiss has nice blog articles about it:
This is a graph comparing the performance of the SPI and the S&P 500 since 1926 until today, showing that the S&P has slightly outperformed the SPI also on CHF basis.
I was going to say “And what about the dividends?”, but I see Mr Brot is not only comparing the two indices in the same currency, but he is also comparing SPI (which is by definition a Total Return Index (i.e. incl. dividends)) to S&P500 TR (i.e. also Total Return).
Nice comparison.
Impressive Zinseszins effect where an outperformance of “only 0.8% p.a.” leads to over double the outcome after 100 years ( 284k:139k ).
@thepoorswiss has some really great articles. However in this case it is not clear to me how home bias using Swiss indexes reduces foreign currency exposure
Most Swiss listed companies have more expenses denominated in CHF than income. Unless I am missing something (which is quite possible) then owning them increases exposure to foreign currency. The opposite of the desired effect.
I think the articles about benefit of home country bias we can find online in the context of FX might be applicable to countries like the US - but Switzerland seems different
I guess there are other advantages of home bias investing in Swiss indexes aside from FX (Investing in what you are familiar with, Participation in national economy)
I would be interested if anyone know the rationale behind the Fedlex referenced above
Doing a bit of research, my guess is that it’s part protectionism (favor local companies), part risk management from 70s/80s (where the equity investment landscape was very different, no cheap index, etc.).
I was initially scared when looking at the numbers I see on my account (in ETFs traded in CHF) vs the numbers I see in google or justETF (both default to USD) because they look exactly like what’s in your table!
Then I noticed that eg justETF defaults to USD, and when switching to CHF it turns out they are accurate. What I care about is not matching the news headlines, but that my investment in my account is accurately reflecting what’s going on. You can rightly say “are you stupid enough to think BlackRock/Vanguard’s funds would cheat you out of 10%?”. Forgive me, only been in this since recently and 2022 was such a clustercoitus that I simply wasn’t looking.
Can a kind person please help me understand: my current and foreseeable spending is in CHF, and I also buy ETFs traded in CHF. I am not Swiss and do not intend to retire in CH, my plan is to return to the eurozone but keep a good portion of my investments here for my kids, who will (hopefully) make their lives here as Swiss citizens. Ahead of the time for retirement I’d be looking to build a passive income position. Clearly can’t predict the future, but I remain optimistic for CH as a country and CHF as a currency. Essentially I am hoping that my CHF will continue to buy more EUR going forward. I don’t care that much about buying anything in or with USD as I don’t have any plans to move there, or any affiliation with the US. I wonder if buying ETFs in CHF entails a risk of not being able to sell in 20 years from now, but I put myself to sleep saying “I will not be selling BIG orders anyway, just what I need” and “I anticipate much more ETF trading happening in 20 years, so should be fine anyway, the person buying what I am selling will be me, just 20 years later.”. Is any of the above bullscheisse?
The USD has had absurd devaluation vs either CHF or EUR, so I don’t want to go forward in a situation where I am growing my investment in USD while every year this buys me less in CHF or EUR which are my current and future spending currencies, or hope that this will reverse in the future. Finally, I do not understand how currency hedging is done - I read it’s done using options and futures, neither of which I like much at all to be involved in.
Well, not really. By focusing on Swiss oriented companies instead of international ones, you get more CHF in your portfolio. Not as much as one might think, but still.
My problem with the Swiss stocks is that there is little empirical basis to say if they outperform in dimensions such as risk-adjusted returns or not.
Yeah I’ve seen many like it but don’t want to bet on it
Edit: I am not sure I am interpreting your response correctly, do you suggest it’s stabilising?
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