Best NRA non US tax treaty Accumulating Bond ETF?

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brXrfeu
Posts: 16
Joined: Sat Sep 17, 2016 2:15 pm

Best NRA non US tax treaty Accumulating Bond ETF?

Post by brXrfeu » Sun Apr 16, 2017 9:31 pm

Hello Bogleheads!

iShares has just launched an accumulating version of the US Aggregate Bond fund domiciled in Ireland with an expense ratio of 0.25%.
IUAA : https://www.ishares.com/uk/individual/en/products/287339/ishares-us-aggregate-bond-ucits-etf-usd-(acc)-fund

Being a resident of a country with no tax treaty with the US and one that taxes dividends/interests, I have been invested in 100% accumulating equities since I started investing earlier this year - especially due to lack of a good accumulating bond fund. I believe IUAA offers me the best fixed income security for a simple 3 fund portfolio (IWDA+EIMI+IUAA) and am very much interested in learning what other NRAs in the same situation as me make of this?

Thank you!

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BeBH65
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Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by BeBH65 » Mon Apr 17, 2017 1:01 am

Hello brXrfeu,

The Bogleheads philosophy uses bonds for "protection"; an asset that would not loose a lot of value in any circumstances. It is generally considered good to 'link' this protection to your "home" country/currency, as this is where your liabilities lie.

I believe that the fund that you mention is USD oriented, and USA (90%) oriented.
If your home country is Us oriented then the fund might be good. Otherwise you might want to look for a fund that is oriented to the currency that is most important to your home country or has a more global diversification to avoid currency risk between your currency and the USD.

If you provide more info then we can help you better.

Regards,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

brXrfeu
Posts: 16
Joined: Sat Sep 17, 2016 2:15 pm

Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by brXrfeu » Fri Apr 21, 2017 7:35 am

Hey BeBH65 - Thank you for your response.

Ive detailed my story here in this post - https://www.bogleheads.org/forum/viewtopic.php?f=1&t=199713&p=3056411#p3056411
And would love to hear your thoughts on my overall strategy.

To briefly summarize, I am a Brazilian resident who earns in BRL and wishes to invest globally.
Since Brazil
- Doesn't have a TAX treaty with the US
- Taxes foreign income [dividends and Interests] in progressive rates
Irish domiciled accumulating ETFs are my best bet. That way the only tax I owe is on capital gains when I sell, which I don't intend to until retirement.

As a 30 year old, my asset allocation is Stocks 85% + Bonds 10% + 5%Cash. I plan to increase the bond allocation every 10 years. As you mentioned earlier, I intend to use bonds as a protection measure.Since I am unable to buy Irish domiciled accumulating securities in BRL and Brazilian banks use USD for all foreign exchange related activities, I use USD as my only investing currency.

Based on this do you agree IUAA is a good fund for me to consider?

I have one other question, Currently the interest rates in Brazil are really high (13%), so is inflation (7%). This still gives a real return of about 6% after taxes on governmen bonds. Even so, I decided not to invest in these as part of my bond allocation, as I read somewhere in this forum that one's bond allocation needs to be in the same currency as your stock allocation. Is that right?

Thanks,

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BeBH65
Posts: 817
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Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by BeBH65 » Sat Apr 22, 2017 12:59 pm

Hello brXffeu,

brXrfeu wrote:Hey BeBH65 - Thank you for your response.

Ive detailed my story here in this post - https://www.bogleheads.org/forum/viewtopic.php?f=1&t=199713&p=3056411#p3056411
And would love to hear your thoughts on my overall strategy.
what is the goal of your investments? It is important to makea distinction between long-term goals like retirement and medium term goals like buying a house in 5-10 years. Different goals require different savings/investment strategies. Do you have an emergency fund?

To briefly summarize, I am a Brazilian resident who earns in BRL and wishes to invest globally.
Diversification is one of the bogleheads principles. Spreading your equity investment globally is an excellent practice

Since Brazil
- Doesn't have a TAX treaty with the US
- Taxes foreign income [dividends and Interests] in progressive rates
Irish domiciled accumulating ETFs are my best bet.
That way the only tax I owe is on capital gains when I sell, which I don't intend to until retirement.
I can follow you in this. Using accumulating funds allows the compounding to work before the taxation.

As a 30 year old, my asset allocation is Stocks 85% + Bonds 10% + 5%Cash. I plan to increase the bond allocation every 10 years. As you mentioned earlier, I intend to use bonds as a protection measure. This Asset Allocation is in the middle of the range often advised for a person of your age. Remember that equity can drop 50% in a year and stay there for several years. Will you be able to adhere to your AA in such case. What is your rebalancing strategy when your AA deviates from the above? Also, you might want to consider augmenting your bonds% quicker. the above AA for a 40 your old would be on the aggressive side. It is a good idea to document your ideas in an Investment Policy Statement.
Since I am unable to buy Irish domiciled accumulating securities in BRL and Brazilian banks use USD for all foreign exchange related activities, I use USD as my only investing currency. You will incur some conversion cost BRL-USD, but as the Brazilian economy seems to be USD oriented, this seems reasonable. Actually the currency of the fund is only important in the buying/selling actions. The currencies of the underlying assets will be more important.

Based on this do you agree IUAA is a good fund for me to consider? It is often said that equities are for growth, and bonds for protection. From what I read I understand that IUAA is the accumulating version of IUAG/SEUG (Ishares US aggregate bonds UCITS ETF), this USD denonimated bonds fund is often advised on this forum. As Brazil is US/USD oriented one could expect that this will provide you "protection" of your money.
I have one other question, Currently the interest rates in Brazil are really high (13%), so is inflation (7%). This still gives a real return of about 6% after taxes on governmen bonds.
Where will you invest your cash? If the interest rates in BRL are high it might be an idea to invest it there. This would provide some protection in your home currency, protecting some of your buying power against a possible change in the exchange rates USD-BRL
Even so, I decided not to invest in these as part of my bond allocation, as I read somewhere in this forum that one's bond allocation needs to be in the same currency as your stock allocation. Is that right? I am not sure I follow this. if you invest in a world fund, you will invest roughly 50% in USD assets, maybe 10% in JPY and GBP each, 20% in EURO, etc.... . In my thought process it is important to have your protection in the currency that you will need it in; for you BRL and USD. (For me this is Euro. So while I invest my equity world wide, my protection component in bonds and savings is only EURO

Thanks,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

brXrfeu
Posts: 16
Joined: Sat Sep 17, 2016 2:15 pm

Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by brXrfeu » Sun Apr 23, 2017 7:34 pm

@BeBH65,

Thank you for taking time to analyze my situation and asking very pertinent questions. My responses below.

BeBH65 wrote:Ive detailed my story here in this post - viewtopic.php?f=1&t=199713&p=3056411#p3056411
And would love to hear your thoughts on my overall strategy.
what is the goal of your investments? It is important to make a distinction between long-term goals like retirement and medium term goals like buying a house in 5-10 years. Different goals require different savings/investment strategies. Do you have an emergency fund?


Emergency fund: Yes I do. I have 5 months living expenses as emergency fund in a savings account that earns 10 percent interest. In addition to this, per Brazilian laws, 8% of my gross salary is deducted as contribution to a severance fund, which as of today has about 10 months worth living expense money.

Goal: The goal of this investment is for retirement purpose. I intend to accumulate and stay the course for the next 35 years.

BeBH65 wrote:As a 30 year old, my asset allocation is Stocks 85% + Bonds 10% + 5%Cash. I plan to increase the bond allocation every 10 years. As you mentioned earlier, I intend to use bonds as a protection measure. This Asset Allocation is in the middle of the range often advised for a person of your age. Remember that equity can drop 50% in a year and stay there for several years. Will you be able to adhere to your AA in such case. What is your rebalancing strategy when your AA deviates from the above? Also, you might want to consider augmenting your bonds% quicker. the above AA for a 40 your old would be on the aggressive side. It is a good idea to document your ideas in an Investment Policy Statement.


Yes - I believe I will be able to withstand a severe market drop. Reading some of the literature recommended on this site, its abundantly clear to me that this is easier said than done - even for the most ardent investors. Reading common mistakes people make during market crashes and visualizing 50-60% drop does make me believe I will stay the course. Fingers crossed :]

Rebalancing:
My rebalancing strategy is to buy more assets via periodic contributions and not selling the over performing security. I plan to follow through this strategy with one exception - severe market downturn. In the event of a 2008 type market crash, I plan to use my cash and bond part of the portfolio to buy cheap equities. Even though I might owe some capital gains on selling the bond fund, I believe doing so to buy equities on sale will boost my portfolio performance over the long run. I might also give up on some luxuries like vacation to increase my annual contributions in such an event.
Do you see a loophole with this strategy?

Sure, I will create an IPS. Also, I am open to increasing by bond allocation % sooner. As you will read below, this part of my portfolio needs some more thought.

BeBH65 wrote:Based on this do you agree IUAA is a good fund for me to consider? It is often said that equities are for growth, and bonds for protection. From what I read I understand that IUAA is the accumulating version of IUAG/SEUG (Ishares US aggregate bonds UCITS ETF), this USD denonimated bonds fund is often advised on this forum. As Brazil is US/USD oriented one could expect that this will provide you "protection" of your money.


BeBH65 wrote:I have one other question, Currently the interest rates in Brazil are really high (13%), so is inflation (7%). This still gives a real return of about 6% after taxes on governmen bonds.
Where will you invest your cash? If the interest rates in BRL are high it might be an idea to invest it there. This would provide some protection in your home currency, protecting some of your buying power against a possible change in the exchange rates USD-BRL


BeBH65 wrote:Even so, I decided not to invest in these as part of my bond allocation, as I read somewhere in this forum that one's bond allocation needs to be in the same currency as your stock allocation. Is that right? I am not sure I follow this. if you invest in a world fund, you will invest roughly 50% in USD assets, maybe 10% in JPY and GBP each, 20% in EURO, etc.... . In my thought process it is important to have your protection in the currency that you will need it in; for you BRL and USD. (For me this is Euro. So while I invest my equity world wide, my protection component in bonds and savings is only EURO


Fixed Income part of my portfolio:
To be completely honest, the fixed income part of my portfolio is not well thought out. I have been flirting with the idea of investing in high return Brazilian individual bonds verses low return but safer global bond fund. Ultimately, I chose IUAA for the following two reasons:

1. I read somewhere on this site that its tactical to own a bond fund with the same underlying currency as the one which overweights the equity part of the portfolio - USD in my case. This is because the negative correlation in this case is greater than when equities and bonds have different underlying currencies. Can you confirm this?

2. While I agree with you that the bond part of portfolio should be in a currency that one plans on using to pay future bills with, I am not sure if BRL is that for me. I do not see myself, at-least for the moment, settling down or having any investment ambitions in Brazil. Also, I am also not sure where I might end up retiring. This is the reason I have so far avoided to invest in the high paying Brazilian bonds and prefer to have a very global portfolio.

Do you see any reason I should diversify the bond part of my portfolio with both IUAA and Brazilian bonds?

Thanks,

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BeBH65
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Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by BeBH65 » Fri Apr 28, 2017 8:40 am

brXrfeu wrote:@BeBH65,

Thank you for taking time to analyze my situation and asking very pertinent questions.
one of the goals of my questions is to make you reflect and ot ensure that you are not missing something. You seem to be doing good.


[...]


Fixed Income part of my portfolio:
To be completely honest, the fixed income part of my portfolio is not well thought out. I have been flirting with the idea of investing in high return Brazilian individual bonds verses low return but safer global bond fund. Ultimately, I chose IUAA for the following two reasons:

1. I read somewhere on this site that its tactical to own a bond fund with the same underlying currency as the one which overweights the equity part of the portfolio - USD in my case. This is because the negative correlation in this case is greater than when equities and bonds have different underlying currencies. Can you confirm this? I am not aware of this, but I am only an amateur anyway.

2. While I agree with you that the bond part of portfolio should be in a currency that one plans on using to pay future bills with, I am not sure if BRL is that for me. I do not see myself, at-least for the moment, settling down or having any investment ambitions in Brazil. Also, I am also not sure where I might end up retiring. This is the reason I have so far avoided to invest in the high paying Brazilian bonds and prefer to have a very global portfolio.

Do you see any reason I should diversify the bond part of my portfolio with both IUAA and Brazilian bonds?

Thanks,
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

brXrfeu
Posts: 16
Joined: Sat Sep 17, 2016 2:15 pm

Re: Best NRA non US tax treaty Accumulating Bond ETF?

Post by brXrfeu » Sat Apr 29, 2017 7:39 am

BeBH65 wrote:
brXrfeu wrote:@BeBH65,
Thank you for taking time to analyze my situation and asking very pertinent questions.
one of the goals of my questions is to make you reflect and ot ensure that you are not missing something. You seem to be doing good.


Thanks @BeBH65. Its reassuring :sharebeer

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