Euro government bond ETFs vs cash, accumulating REIT ETFs?

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finvestor
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Joined: Thu Apr 20, 2017 1:22 pm

Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby finvestor » Thu Apr 20, 2017 1:51 pm

Hello,

I'm building a long-term buy&hold portfolio of approx. 300k€. My home currency is €, and I live in a country where accumulating ETFs are the best option to minimize tax drag. In terms of asset allocation, I'm aiming for 70% stocks and 30% bonds, and am planning to rebalance regularly. I think I have decided the contents (ETFs) of the stock part: mostly iShares MSCI World (EUNL), and some developing markets as well as some small cap value. All of these are accumulating ETFs rather than distributing due to tax efficiency.

The problem is the bond part: In principle I would like to just pick a low cost Euro govt bond ETF (there seems to be an accumulating one from DB X-Trackers with a low enough TER), but the yields of those are currently close to zero. Thus, I'm having hard time trying to figure out if it makes sense to take interest rate risk if the expected reward for taking that risk is close to zero, or if it would
be better to just stick with 30% cash for now, and move to bonds if/when the interest rates would get a bit higher. Any advice or opinions on this issue would be appreciated :)

The second point I'm contemplating is if I should include a REIT ETF as a part of my stock portfolio (maybe 10-15%). There, the main issue is that I could not really find any accumulating REIT ETFs. If you know of any, it would be great if you could let me know as well! :)

Thanks in advance!

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Valuethinker » Thu Apr 20, 2017 4:13 pm

finvestor wrote:Hello,

I'm building a long-term buy&hold portfolio of approx. 300k€. My home currency is €, and I live in a country where accumulating ETFs are the best option to minimize tax drag. In terms of asset allocation, I'm aiming for 70% stocks and 30% bonds, and am planning to rebalance regularly. I think I have decided the contents (ETFs) of the stock part: mostly iShares MSCI World (EUNL), and some developing markets as well as some small cap value. All of these are accumulating ETFs rather than distributing due to tax efficiency.

The problem is the bond part: In principle I would like to just pick a low cost Euro govt bond ETF (there seems to be an accumulating one from DB X-Trackers with a low enough TER), but the yields of those are currently close to zero. Thus, I'm having hard time trying to figure out if it makes sense to take interest rate risk if the expected reward for taking that risk is close to zero, or if it would
be better to just stick with 30% cash for now, and move to bonds if/when the interest rates would get a bit higher. Any advice or opinions on this issue would be appreciated :)

The second point I'm contemplating is if I should include a REIT ETF as a part of my stock portfolio (maybe 10-15%). There, the main issue is that I could not really find any accumulating REIT ETFs. If you know of any, it would be great if you could let me know as well! :)

Thanks in advance!


In truth I wouldn't bother with REITs. A global equity index fund would already hold REITs, and there are very few countries that use the REIT structure. You wind up with a lot in USA, bit in Japan, Hong Kong, Australia, UK etc.

I hold a short term government bond ETF (sterling GBP) but Euros the interest rates are even lower. Zero interest rate in your bank account is probably all you can do. However banks are not risk free in the Eurozone-- stay within the 100k EU insurance limit per bank. If I lived in Greece, I wouldn't hold much money in Greek banks. On a similar basis one would therefore wish to be wary of Portugal, and I am really not sure what to do about Italy.

Note that some countries Euro bank accounts now pay a negative interest rate, I believe.

Tyler Aspect
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Tyler Aspect » Thu Apr 20, 2017 9:52 pm

How about "iShares Core € Corp Bond UCITS ETF"? Its yield is around 3%, with a duration of 5.3 years. This is a corporate bond ETF, not government bond though.

imperia
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby imperia » Fri Apr 21, 2017 1:59 am

db x-trackers FTSE EPRA/NAREIT Developed Europe Real Estate UCITS ETF DR - 1C (D5BK)-ACC
Amundi Index FTSE EPRA NAREIT Global - UCITS ETF DR (EPRA)-ACC

finvestor
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Joined: Thu Apr 20, 2017 1:22 pm

Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby finvestor » Fri Apr 21, 2017 5:22 am

Thank you for your replies!

Indeed I have somehow missed the REIT ETFs suggested by imperia. The Amundi one seems to be particularly suitable, the only problem is that it seems to be listed only in Paris, which is a bit tricky for me... The X-trackers one I could buy easily, but focusing on Europe alone is of course not ideal for diversification. But the fact that it is accumulating is of course very nice.

Valuethinker: The reason I would like to include some REITs in my portfolio is that I remember seeing some studies which show that historically one has obtained a better risk-adjusted return by doing so. Past performance is of course not as such an indication of future returns, but...

Tyler Aspect: The iShares Core Corp Bond ETF you suggest seems to be distributing, and thus not ideal for me. Moreover, correct me if I'm wrong, but my impression is that corporate bonds (unlike government bonds) contain some equity-like risk, and thus would not be ideal to form the "safe" component of the portfolio, as they may suffer during stock market downturns.

Fabio
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Location: Italy

Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Fabio » Fri Apr 21, 2017 10:47 am

finvestor wrote:Indeed I have somehow missed the REIT ETFs suggested by imperia. The Amundi one seems to be particularly suitable, the only problem is that it seems to be listed only in Paris, which is a bit tricky for me...


It's quite new, it was listed just a few days ago on the italian exchange so I guess it's a matter of time before it will be listed on other european exchanges as well. On the Amundi web site you can find the list of countries where it is authorized: Spain, Netherlands, Finland, Sweden, Germany, France, Luxemburg, UK, Austria, Italy, Ireland, Belgium, Switzerland.

For the bond fund have you considered the db x-trackers Global Government Bond ETF (DR) 1C (EUR hedged)? It follows the Citi World Government Bond Index Developed Markets, so you would have a broad exposure to government bonds.

There is even a broader bond fund, the AMUNDI INDEX BARCLAYS GLOBAL AGG 500M ETF (also a new ETF) which follows the Bloomberg Barclays Global Aggregate (500 Million) total return index, that is global investment grade debt, developed and emerging, unhedged.

* edited to correct typos
Last edited by Fabio on Fri Apr 21, 2017 11:26 am, edited 1 time in total.

Tyler Aspect
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Tyler Aspect » Fri Apr 21, 2017 11:17 am

iShares Core MSCI World UCITS ETF USD (Acc)

I think it is traded as "EUNL" in the Euro currency. This is a world-wide corporate bond ETF.

(incorrect information removed)
Last edited by Tyler Aspect on Fri Apr 21, 2017 12:03 pm, edited 1 time in total.

imperia
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby imperia » Fri Apr 21, 2017 11:37 am

IWDA is listed as EUNL in Germany(Xetra), and it is not bond ETF.

Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Valuethinker » Fri Apr 21, 2017 11:40 am

finvestor wrote:
Valuethinker: The reason I would like to include some REITs in my portfolio is that I remember seeing some studies which show that historically one has obtained a better risk-adjusted return by doing so. Past performance is of course not as such an indication of future returns, but...


viewtopic.php?f=1&t=213792&newpost=3337281&start=50

more discussion. In the long run you may be right. In the interests of simplicity I wouldn't chase it, though.

Tyler Aspect: The iShares Core Corp Bond ETF you suggest seems to be distributing, and thus not ideal for me. Moreover, correct me if I'm wrong, but my impression is that corporate bonds (unlike government bonds) contain some equity-like risk, and thus would not be ideal to form the "safe" component of the portfolio, as they may suffer during stock market downturns.


Yes, even investment grade corporate bonds suffer from equity risk. Look at some of the corporate bond funds 2008-09, how far they dropped relative to safe government bonds.

Problem in Eurozone with government bonds is that the safe ones have even negative yields. You will actually lose money investing in them (in nominal terms, if inflation is low enough, you will make money in real terms).

finvestor
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby finvestor » Sat Apr 22, 2017 3:29 pm

Fabio wrote:For the bond fund have you considered the db x-trackers Global Government Bond ETF (DR) 1C (EUR hedged)? It follows the Citi World Government Bond Index Developed Markets, so you would have a broad exposure to government bonds.


That's an interesting ETF, to get a broader exposure. However, as far as I undestand, it does not really help in getting a higher yield, assuming that covered interest rate parity holds, implying that the cost of the currency hedge should kill any higher yields offered in foreign currencies. Indeed the YTM of the global ETF seems to be similar to those of euro govt bond ETFs. But, maybe it would nevertheless be useful to diversify the credit risk a bit more than what is possible within the eurozone.

finvestor
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby finvestor » Sat Apr 22, 2017 3:35 pm

Fabio wrote:It's quite new, it was listed just a few days ago on the italian exchange so I guess it's a matter of time before it will be listed on other european exchanges as well. On the Amundi web site you can find the list of countries where it is authorized: Spain, Netherlands, Finland, Sweden, Germany, France, Luxemburg, UK, Austria, Italy, Ireland, Belgium, Switzerland.


Cool, thanks for this info. Then I guess I'll just wait a bit to see if it appears soonish, e.g., on the German exchange where I normally buy ETFs...

alpine_boglehead
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby alpine_boglehead » Sat Apr 22, 2017 3:45 pm

You might consider CDs as part for your fixed income portion ... e.g. in Germany you can get 1.25% for four years at several banks (will still be below the ECB's target inflation rate of 2%), likely even more if you shop around for the best rates in the Eurozone. As Valuethinker already pointed out, stay below the 100k insurance limit (which you would be anyway with your fixed income portion being 90k) and be wary of the really troubled countries. I'm staying below 20k per bank, because in a large-scale meltdown the 100k insurance might not hold (my personal opinion only).

Fabio
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Fabio » Sun Apr 23, 2017 9:18 am

finvestor wrote:
Fabio wrote:For the bond fund have you considered the db x-trackers Global Government Bond ETF (DR) 1C (EUR hedged)? It follows the Citi World Government Bond Index Developed Markets, so you would have a broad exposure to government bonds.


That's an interesting ETF, to get a broader exposure. However, as far as I undestand, it does not really help in getting a higher yield, assuming that covered interest rate parity holds, implying that the cost of the currency hedge should kill any higher yields offered in foreign currencies. Indeed the YTM of the global ETF seems to be similar to those of euro govt bond ETFs. But, maybe it would nevertheless be useful to diversify the credit risk a bit more than what is possible within the eurozone.


Yes, a global fixed income allocation (hedged) should provide better diversification and risk reduction. From the Vanguard paper Going global with bonds: Considerations for euro area investors:

Global bonds allow euro zone investors to diversify their fixed income portfolio through exposure to interest rate movements influenced by a variety of international risk factors. We have shown that the currency exposure of un-hedged global bonds adds volatility to a portfolio and, without aggressive assumptions regarding unexpected currency return, is unlikely to benefit investors over the long-term. With currency risk hedged back to euro, the global fixed income market can fulfil the traditional role of bonds by providing risk-reduction and diversification benefits. While differences in performance characteristics between euro zone bonds and the global market have been modest over our sample, we ask the question: Why not go global?With a potentially low-cost hurdle to exposure and no negative impact over the sample, there is little reason for total return investors not to expand their investment set. Indeed, without a prior view on which bond markets will produce superior performance, the global market can be considered the neutral forward-looking portfolio. With the euro zone bond market representing a relatively small portion of the world’s fixed income securities, we would encourage investors to consider how a global bond allocation may help them meet their broad investment objectives in a strategic asset allocation.


The paper is really interesting and worth reading.

finvestor
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Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby finvestor » Tue Apr 25, 2017 7:24 am

Fabio wrote:
finvestor wrote:
Fabio wrote:For the bond fund have you considered the db x-trackers Global Government Bond ETF (DR) 1C (EUR hedged)? It follows the Citi World Government Bond Index Developed Markets, so you would have a broad exposure to government bonds.


That's an interesting ETF, to get a broader exposure. However, as far as I undestand, it does not really help in getting a higher yield, assuming that covered interest rate parity holds, implying that the cost of the currency hedge should kill any higher yields offered in foreign currencies. Indeed the YTM of the global ETF seems to be similar to those of euro govt bond ETFs. But, maybe it would nevertheless be useful to diversify the credit risk a bit more than what is possible within the eurozone.


Yes, a global fixed income allocation (hedged) should provide better diversification and risk reduction. From the Vanguard paper Going global with bonds: Considerations for euro area investors:

The paper is really interesting and worth reading.


Thanks, read it, indeed quite interesting. As an aside, it is funny how its says "For professional investors only. Not to be given to retail investors." Does Vanguard think that retail investors should not be informed about such things? :) :shock:

Anyway, the ETF you suggest is interesting, and I'm seriously considering adding it into my portfolio as the "core" fixed income instrument. Then again, I have read from somewhere that ETFs do not work very well for bonds, given that bonds are not as liquid as stocks. Apparently this could create some problems regarding, e.g., the correct pricing of the bond ETF. How do you see this issue from the point of view of a long-term buy&hold investor? Would it be better to go for a mutual fund instead (even if that would have a somewhat higher TER)?

Fabio
Posts: 59
Joined: Tue Mar 29, 2016 11:54 am
Location: Italy

Re: Euro government bond ETFs vs cash, accumulating REIT ETFs?

Postby Fabio » Tue Apr 25, 2017 2:33 pm

finvestor wrote:Thanks, read it, indeed quite interesting. As an aside, it is funny how its says "For professional investors only. Not to be given to retail investors." Does Vanguard think that retail investors should not be informed about such things? :) :shock:


I noticed that :) BTW Vanguard published a very similar paper for US investors, which does not have that note.

finvestor wrote:Anyway, the ETF you suggest is interesting, and I'm seriously considering adding it into my portfolio as the "core" fixed income instrument. Then again, I have read from somewhere that ETFs do not work very well for bonds, given that bonds are not as liquid as stocks. Apparently this could create some problems regarding, e.g., the correct pricing of the bond ETF. How do you see this issue from the point of view of a long-term buy&hold investor? Would it be better to go for a mutual fund instead (even if that would have a somewhat higher TER)?


Yes, there are some drawbacks in using ETF for fixed income, but personally I don't think they matter much for a long-term buy and hold investor. Besides in many european countries mutual funds have much higher expense ratios than ETFs so much so that they are not a viable option.

To quote William Bernstein about bond ETFs:

There are certain circumstances where the chosen wrapper does make a difference, the most important area being bonds. I highly recommend that you avoid all ETF bond funds. To understand why, I’ll need to explain some of the trading mechanics involved. An ETF, unlike an open-end fund, trades throughout the day at a discount or premium relative to the net asset value (NAV) of the underlying shares. In most cases, the spread between the two is minimal because shares are both created and liquidated by independent agents: “authorized participants” (AP) who buy up the securities underlying the funds and bundle them into ETF shares that are then delivered to the fund company. The same process also works in reverse to liquidate ETF shares. Were a significant spread to open up between the market price and NAV, the AP, in theory, should simply arbitrage that away at a profit.

This mechanism works well with stocks, which are highly liquid, but not with bonds, which are not. There is, for example, only one commonly traded class of Ford Motor Company stock. By contrast, Ford has a range of bonds of varying issue dates, coupons, and maturities. Since there are so many more individual bonds than stocks, the bonds can be highly illiquid. During a financial disturbance, when liquidity becomes even thinner and most corporate bonds trade only “by appointment,” the AP mechanism fails, often at considerable disadvantage to the shareholder. The open-end fund holder, who can always buy and sell at the 4 p.m. (eastern standard time) NAV, has no such problem.


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