EXPAT: Strategy when invested in USA and spending in EUROS

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Tue Apr 17, 2018 5:20 am

Thanks FATCA!

If you look at some euro ETFs (like FXE), I see std is 8-10%. Thus, it would seem stupid trying to use invest in something with more volatility than that ( like BND)

I still want to use bonds to balance my portfolio. What is the best strategy? My thoughts:

- Hedge my whole portfolio (or at least the bond part) to Euros. Are there any instrument for doing this? If I buy 100k FXE, I'm just hedging 100k of US dollars (cash) into EUROS. I want to hedge my portfolio and its returns

- Try to get some unhedged European bond fund in my USA broker? Any recommendations

- Just forget the whole bond part of the portfolio (except perhaps some long term) and look for an European bank that offers CDs (hopefully rates will increase one day)

I'm sure I'm not the first person faced with this problem.

TIA

German Expat
Posts: 596
Joined: Fri Oct 16, 2009 10:49 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by German Expat » Tue Apr 17, 2018 6:00 am

I am also a bit curious what others are doing. We are in Switzerland but keep holding all our savings in the US (1/3 in bonds). The assumption is that we probably will return to the US when we retire (who knows though) and therefore do not mind currency fluctuations too much. Also in the US the returns are better (at least compared to Switzerland) and this should offset some of the currency risk.

User avatar
BeBH65
Posts: 1002
Joined: Sat Jul 04, 2015 7:28 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by BeBH65 » Tue Apr 17, 2018 10:05 am

Euro (government) bonds have currently a very low return, and do carry risk related to some countries.
De to this, Euro investors are often advised on guys forum to invest in global bonds hedged to the Euro (addicts affect through diversification) or in government insured savings accounts (this adding safety and maybe some return).
Is the latter is available to US expats in Europe trough your day-to-day bank in Europe?
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

German Expat
Posts: 596
Joined: Fri Oct 16, 2009 10:49 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by German Expat » Tue Apr 17, 2018 10:55 am

BeBH65 wrote:
Tue Apr 17, 2018 10:05 am
Euro (government) bonds have currently a very low return, and do carry risk related to some countries.
De to this, Euro investors are often advised on guys forum to invest in global bonds hedged to the Euro (addicts affect through diversification) or in government insured savings accounts (this adding safety and maybe some return).
Is the latter is available to US expats in Europe trough your day-to-day bank in Europe?
The interest in savings accounts in the euro zone is very low (at least in Germany where I still have an account). The best you can currently find for 1 month fixed is approx. 0.5%, if you go up to 1 year then its still only around 1% and even 3 years is not better.
I am with a large German bank still and their offering are even worse but the hassle of opening another bank account as a US citizen is not worth it at least for me.
In Switzerland the interest situation is even worse and I am happy that they don't charge me money yet for my bank account (negative interest rates).

avlfutbol
Posts: 16
Joined: Fri Apr 17, 2015 11:44 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by avlfutbol » Tue Apr 17, 2018 1:40 pm

Struggling with this as well. Have 75% of assets in the US. 80/20 stock/bond. Earning in host country currency.

The 25% of assets in host country are tied up in CDs (at 5.5%) and a monthly payment on a property that will most likely be delivered in 2020 at 0%.

I have been thinking recently to put 100% of US assets in equities and put all assets in host country in CDs and serve as the bond portion. The end game would be to pay the property in cash from CD savings upon delivery and then continue to build CDs in the host country.

I have no plans to return to the US but who knows. Host country is up 8% to the dollar this year. Expat life has pros and cons.

jminv
Posts: 283
Joined: Tue Jan 02, 2018 10:58 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by jminv » Tue Apr 17, 2018 2:01 pm

I spend in Euros and have all of my assets in dollars save for my local bank account which I keep under 10k. I don't hedge against exchange rate risk. If I was going to do so, I would use FX forward contracts.

HongKonger
Posts: 991
Joined: Tue Jun 21, 2011 10:35 am
Location: Deep in the Balkans

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by HongKonger » Tue Apr 17, 2018 3:42 pm

I don't bother with bonds - either too low return or too little turnover.. 3 yr USD term deposit where I am is 1%. Same as 1yr Euro deposit. Lets hope it goes back up!

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Tue Apr 17, 2018 3:53 pm

The expected yield (in €) of a bonds fund with a dollar denominated portfolio after currency hedging is the expected yield in dollars, minus the short term rate differential (which could be negative), minus hedging cost (which instead is always positive).

If your personal economy is euro-denominated, you want bonds denominated in euro in your portfolio. It is true that their present yield is lower than the equivalent US bonds, but if you hedge for currency then the difference will be a lot less. If you don't hedge, you'll get the higher yield and also the higher volatility and then you might want to reconsider the role of bonds in your portfolio.

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Tue Apr 17, 2018 6:14 pm

BeBH65 wrote:
Tue Apr 17, 2018 10:05 am
Euro (government) bonds have currently a very low return, and do carry risk related to some countries.
De to this, Euro investors are often advised on guys forum to invest in global bonds hedged to the Euro (addicts affect through diversification) or in government insured savings accounts (this adding safety and maybe some return).
Is the latter is available to US expats in Europe trough your day-to-day bank in Europe?
Not today.. thanks to FATCA. Maybe in a few years this will change

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Tue Apr 17, 2018 6:15 pm

jminv wrote:
Tue Apr 17, 2018 2:01 pm
I spend in Euros and have all of my assets in dollars save for my local bank account which I keep under 10k. I don't hedge against exchange rate risk. If I was going to do so, I would use FX forward contracts.
This sounds more complicated than a simple BH like me would do . Do you have any pointers on how to do it?

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Tue Apr 17, 2018 6:32 pm

Thesaints wrote:
Tue Apr 17, 2018 3:53 pm
If your personal economy is euro-denominated, you want bonds denominated in euro in your portfolio. It is true that their present yield is lower than the equivalent US bonds, but if you hedge for currency then the difference will be a lot less. If you don't hedge, you'll get the higher yield and also the higher volatility and then you might want to reconsider the role of bonds in your portfolio.
Right.. if I get bonds with a high volatility (in euros) and low return, I may as well just invest in stocks

But going to the practical matters.. any fund investing bonds in euros? From portfolio visualizer, I see PIGLX with a std of ~7% (%3.5 more than the unhedged version PGBIX), but only a few are bonds from the euro-zone.

User avatar
whodidntante
Posts: 3301
Joined: Thu Jan 21, 2016 11:11 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by whodidntante » Tue Apr 17, 2018 6:42 pm

I don't hedge currency but I do believe in diversifying across currencies, partly because I might retire outside the USA. But if everything I had was invested in USD, and I'm spending in Euros, then I might. I would use futures at IB to hedge. It's very cheap. Each time you need to roll the contracts, trim or expand exposure depending on what your portfolio did. Hedging currencies doesn't really have anything to do with bonds.

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Tue Apr 17, 2018 7:13 pm

There is a Vanguard research report of a couple years back showing how currency hedging is not too important for stocks, but it is for bonds.

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 10:24 am

whodidntante wrote:
Tue Apr 17, 2018 6:42 pm
I would use futures at IB to hedge.
Do you have any pointers?

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 10:38 am

Another thought:

When you add 2 different funds (let's say one for stocks and one for bonds), you are averaging random variables. The stdev is something in the middle (or a little less if they are not correlated)

When you have a portfolio in $ but you cash it in another currency, you are multiplying random variables. The stdev gets added. So let's say you have a bond fund with stdev=5%, and euro/dollar conversion has a stdev=10%. It's equivalent of having stdev=15%

That would seem too high, so there is something wrong in the model. If it was so, we would have to hedge when we buy stocks in foreign countires

So I'm wondering if somebody has a better model or empirical tables

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Wed Apr 18, 2018 12:21 pm

They don’t strictly add; it is the square root of the sum of their squares.
And that is only valid if their correlation is zero.

For unhedged bonds, a large fraction of total return variance would depend on exchange rates, while that is not true for unhedged stocks. Not only because stock prices have a built in hedge against currency fluctuations (at least to some degrees), but also because stocks volatility is a lot larger to begin with and when you combine it with the generally smaller currency markets volatility the effect is not so dramatic (remember: square root of the sum of the squares).
Vicecersa, bonds have lower volatilities and currency volatility on top of them makes a big difference.

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Wed Apr 18, 2018 12:23 pm

avlfutbol wrote:
Tue Apr 17, 2018 1:40 pm
Struggling with this as well. Have 75% of assets in the US. 80/20 stock/bond. Earning in host country currency.

The 25% of assets in host country are tied up in CDs (at 5.5%) and a monthly payment on a property that will most likely be delivered in 2020 at 0%.

I have been thinking recently to put 100% of US assets in equities and put all assets in host country in CDs and serve as the bond portion. The end game would be to pay the property in cash from CD savings upon delivery and then continue to build CDs in the host country.

I have no plans to return to the US but who knows. Host country is up 8% to the dollar this year. Expat life has pros and cons.
That's the way to do it - at least to avoid PFIC rules on foreign ETFs & funds.

Hold global equities in your US account and keep your Euros in local CDs, within 100k limit per institution.

I stress that latter because Bank of Cyprus depositors were diluted 60% above 100k EUR. You cannot rely on a full bailout of a Eurozone financial institution, without pain being taken by bondholders and large depositors.

If I were in Greece I'd be wary of keeping anything with a local financial institution. I really cannot speak to Portugal, Slovenia etc but the Greek situation underlines the risks.

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Wed Apr 18, 2018 12:29 pm

international001 wrote:
Tue Apr 17, 2018 5:20 am
Thanks FATCA!

If you look at some euro ETFs (like FXE), I see std is 8-10%. Thus, it would seem stupid trying to use invest in something with more volatility than that ( like BND)

I still want to use bonds to balance my portfolio. What is the best strategy? My thoughts:

- Hedge my whole portfolio (or at least the bond part) to Euros. Are there any instrument for doing this? If I buy 100k FXE, I'm just hedging 100k of US dollars (cash) into EUROS. I want to hedge my portfolio and its returns
It appears from another poster you can hedge w Interactive Brokers.

If you hedge the principal amount of your bonds, then the risk is just on the interest. OR you match the maturity of the futures contracts to the amount of principal + interest.

Thus say w 100k in US Treasury bonds. You could in principle hedge all the future cash flows from that, back into Euros - a synthetic Eurozone bond portfolio. In practice that might be too messy and who wants to hedge out 8 years (portfolios duration) or 30+ years (full matching of cash flows). So why not simply hedge one year out -- say $102,500 (1 year + 1 year interest?). You are hedged on the movement in principal, and you can simply keep rolling the hedge.
- Try to get some unhedged European bond fund in my USA broker? Any recommendations
Is there an ETF? The problem is the PFIC rules-- you need an SEC registered fund, as I understand it.
- Just forget the whole bond part of the portfolio (except perhaps some long term) and look for an European bank that offers CDs (hopefully rates will increase one day)
That is the simplest thing to do. Stay within the 100 EUR per financial institution Eurozone deposit insurance limit.

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Wed Apr 18, 2018 12:32 pm

German Expat wrote:
Tue Apr 17, 2018 10:55 am
BeBH65 wrote:
Tue Apr 17, 2018 10:05 am
Euro (government) bonds have currently a very low return, and do carry risk related to some countries.
De to this, Euro investors are often advised on guys forum to invest in global bonds hedged to the Euro (addicts affect through diversification) or in government insured savings accounts (this adding safety and maybe some return).
Is the latter is available to US expats in Europe trough your day-to-day bank in Europe?
The interest in savings accounts in the euro zone is very low (at least in Germany where I still have an account). The best you can currently find for 1 month fixed is approx. 0.5%, if you go up to 1 year then its still only around 1% and even 3 years is not better.
I am with a large German bank still and their offering are even worse but the hassle of opening another bank account as a US citizen is not worth it at least for me.
In Switzerland the interest situation is even worse and I am happy that they don't charge me money yet for my bank account (negative interest rates).
1% is pretty good given where Eurozone govt bond yields are (some German bunds are yielding negative nominal yields).

Good news. CHF rises, your holidays and anything imported gets cheaper - gasoline etc. Bad news- housing and health insurance and any other big bills get more expensive (relative to your USD assets). If you really are thinking about retiring in Switzerland (I am told that's not easy to do for a non Swiss citizen, even resident there while working?) then you should think about having more CHF assets.

German Expat
Posts: 596
Joined: Fri Oct 16, 2009 10:49 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by German Expat » Wed Apr 18, 2018 1:03 pm

Valuethinker wrote:
Wed Apr 18, 2018 12:32 pm
1% is pretty good given where Eurozone govt bond yields are (some German bunds are yielding negative nominal yields).

Good news. CHF rises, your holidays and anything imported gets cheaper - gasoline etc. Bad news- housing and health insurance and any other big bills get more expensive (relative to your USD assets). If you really are thinking about retiring in Switzerland (I am told that's not easy to do for a non Swiss citizen, even resident there while working?) then you should think about having more CHF assets.
Swiss Franc recently declined quite a lot to the Euro. It is almost back to the 1.20 when the Swiss National bank stopped defending the exchange rate. To the USD it stayed relative constant. Health insurance in Switzerland is cheaper than the US and much better regulated so this is not a big worry. Housing is a different story though especially in the larger cities like Zurich.
Currently currency is not a problem for us since both of our salaries are in Swiss Francs but we still move excess money to the US into our after tax savings accounts there. Retirement is a trickier issue though if most of your money is USD denominated. In case we stay (no plans at the moment yet) we would buy and pay off an apartment to at least lock in the housing costs.
Retiring in Switzerland is not a problem if you have a C permit (green card) or enough money (with a B permit you have to proof it). Also getting Swiss citizenship is not too hard (assuming you pass the test at the local level) after 10 years with a C permit.
Retirement for me is only a couple years off (would like to retire a bit early) but my wife plans to work longer (another 15-20 years) and therefore with at least 1 salary exchange rates are not too big a deal (yet).

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 1:23 pm

Thesaints wrote:
Wed Apr 18, 2018 12:21 pm
They don’t strictly add; it is the square root of the sum of their squares.
And that is only valid if their correlation is zero.

For unhedged bonds, a large fraction of total return variance would depend on exchange rates, while that is not true for unhedged stocks. Not only because stock prices have a built in hedge against currency fluctuations (at least to some degrees), but also because stocks volatility is a lot larger to begin with and when you combine it with the generally smaller currency markets volatility the effect is not so dramatic (remember: square root of the sum of the squares).
Vicecersa, bonds have lower volatilities and currency volatility on top of them makes a big difference.

I'm talking multiplication (independent variables)

http://www.odelama.com/data-analysis/Co ... -Formulas/

So VAR(X*Y) = VAR(X)*VAR(Y) + VAR(X)*(E(Y))**2 + VAR(Y)*(E(X))**2

Assume X = bond fund . Return 3%, stdev = 5%; Y = exchange rate, return 0%, stdev = 10%

VAR(X*Y) = 0.05**2 * 0.1**2 + 0.05**2 * 1 + 0.1**2 * 1.03**2

STEDV(X*Y) = SQRT(VAR(X*Y) = 11%

If you have a stock fund with 10% returns and 20% standard deviation, then the resulting standard deviation increases to 23%

So basically the higher stdev has predominance

Not sure how well this model reflects reality.

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Wed Apr 18, 2018 4:06 pm

Yes, so you see that currency fluctuations on top of "natural" bonds volatility increase it more than twofold in your example (from 5% to 11%)
Whereas, it only increases it marginally on top of stocks (from 20% to 23%).

Bonds in a portfolio are there to bring down the total volatility (while trying not bringing down the expected return too much).
If for a US investor a 60/40 allocation produces acceptable parameters by using world stocks and usd denominated bonds, that is not necessarily true for a eur based investor: the more volatile bonds component (usd denominated) at 40% won't be enough to reduce total volatility as much.

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 4:36 pm

Yes..

Now we just have to find real world examples. i'd be interesting in knowing if the volatility theory holds up. And how it's correlated with the long term trend (e.g. maximum drops). I guess it wouldn't be too difficult to get a rough graph on a spreadsheet

In the meantime, I guess I can do:

1) US portfolios with total volatility of > 10%. I can use stocks and US denominated bonds
2) US portfolio with stocks and bank deposits denominated in euros

I'd guess that 2) is better (in terms of efficient frontier) than 1

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Wed Apr 18, 2018 4:38 pm

international001 wrote:
Wed Apr 18, 2018 4:36 pm
Yes..

Now we just have to find real world examples. i'd be interesting in knowing if the volatility theory holds up. And how it's correlated with the long term trend (e.g. maximum drops). I guess it wouldn't be too difficult to get a rough graph on a spreadsheet

In the meantime, I guess I can do:

1) US portfolios with total volatility of > 10%. I can use stocks and US denominated bonds
2) US portfolio with stocks and bank deposits denominated in euros

I'd guess that 2) is better (in terms of efficient frontier) than 1
It does. Research on vanguard: they have a report going over this exact topic from a couple of years ago.

I'm not totally sure why 1) or 2) would be preferable to World stocks + euro bonds. Bank deposits in euro have zero volatility, but also zero return.
US stocks alone for you have slightly higher volatility than world stocks (and same ER) and US bonds have a lot higher volatility (and again about same ER in real terms).

User avatar
whodidntante
Posts: 3301
Joined: Thu Jan 21, 2016 11:11 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by whodidntante » Wed Apr 18, 2018 5:46 pm

international001 wrote:
Wed Apr 18, 2018 10:24 am
whodidntante wrote:
Tue Apr 17, 2018 6:42 pm
I would use futures at IB to hedge.
Do you have any pointers?
Just to be clear since I don't want to be out of context, what I would do is what I do. And that is: diversify across currencies. Take half of your US equities, and plop it straight into foreign equities. I wouldn't hedge currency directly. This approach is good enough for me.

But to learn how to hedge currency, first put the training wheels on. IB and TD Ameritrade offer simulated trading accounts that will allow you to learn the mechanics of buying and rolling futures contracts. It's just like the real thing but with "dollar points" instead of dollars. But one cannot live in a simulation. Once you think you understand it, put it into practice with a single contract. Once you have experience and confidence, build up the exposure you want.

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 5:51 pm

I guess you meant: https://personal.vanguard.com/pdf/icrifi.pdf

I agree that US bonds (or any bonds hedged to dollar) have too much volatility for a EUR portfolio

But my original question remains. Where do I find a EUR bond fund (for US broker)?

-J

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Wed Apr 18, 2018 5:57 pm

whodidntante wrote:
Wed Apr 18, 2018 5:46 pm
international001 wrote:
Wed Apr 18, 2018 10:24 am
whodidntante wrote:
Tue Apr 17, 2018 6:42 pm
I would use futures at IB to hedge.
Do you have any pointers?
Just to be clear since I don't want to be out of context, what I would do is what I do. And that is: diversify across currencies. Take half of your US equities, and plop it straight into foreign equities. I wouldn't hedge currency directly. This approach is good enough for me.

But to learn how to hedge currency, first put the training wheels on. IB and TD Ameritrade offer simulated trading accounts that will allow you to learn the mechanics of buying and rolling futures contracts. It's just like the real thing but with "dollar points" instead of dollars. But one cannot live in a simulation. Once you think you understand it, put it into practice with a single contract. Once you have experience and confidence, build up the exposure you want.
I don't care about the equities part. Enough volatility there already so currency volatility doesn't make a difference.

But I guess you mean if I have 12k in dollars and today this is 10k in euros, some sort of future contract that would allow me to buy 10k euros in the future at 12k + commission. This is more sophistication that what I want, but I guess I can look into it.

User avatar
whodidntante
Posts: 3301
Joined: Thu Jan 21, 2016 11:11 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by whodidntante » Wed Apr 18, 2018 7:17 pm

international001 wrote:
Wed Apr 18, 2018 5:57 pm
whodidntante wrote:
Wed Apr 18, 2018 5:46 pm
international001 wrote:
Wed Apr 18, 2018 10:24 am
whodidntante wrote:
Tue Apr 17, 2018 6:42 pm
I would use futures at IB to hedge.
Do you have any pointers?
Just to be clear since I don't want to be out of context, what I would do is what I do. And that is: diversify across currencies. Take half of your US equities, and plop it straight into foreign equities. I wouldn't hedge currency directly. This approach is good enough for me.

But to learn how to hedge currency, first put the training wheels on. IB and TD Ameritrade offer simulated trading accounts that will allow you to learn the mechanics of buying and rolling futures contracts. It's just like the real thing but with "dollar points" instead of dollars. But one cannot live in a simulation. Once you think you understand it, put it into practice with a single contract. Once you have experience and confidence, build up the exposure you want.
I don't care about the equities part. Enough volatility there already so currency volatility doesn't make a difference.

But I guess you mean if I have 12k in dollars and today this is 10k in euros, some sort of future contract that would allow me to buy 10k euros in the future at 12k + commission. This is more sophistication that what I want, but I guess I can look into it.
Right. You have USD but you want exposure to Euros.

The Euro appreciates 10% against the USD. Your contracts become 10% more valuable, so you have the same amount of Euros.
The USD appreciates 10% against the Euro. Your contracts become 10% less valuable, so you have the same amount of Euros.

It's exactly what you want. And unlike a forward contract, you can realistically buy futures, and you won't get killed on fees. They are standardized contacts available to the masses.

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Thu Apr 19, 2018 1:32 am

international001 wrote:
Wed Apr 18, 2018 5:51 pm
I guess you meant: https://personal.vanguard.com/pdf/icrifi.pdf

I agree that US bonds (or any bonds hedged to dollar) have too much volatility for a EUR portfolio

But my original question remains. Where do I find a EUR bond fund (for US broker)?

-J
That one, yes. I also think there is another one, slightly more recent, which also covers the basics of currency hedging.
Not sure I understand, you are in Europe, but you use a US broker ?
Regardless, I'm sure there are plenty of euro bonds ETF's out there.

TedSwippet
Posts: 1622
Joined: Mon Jun 04, 2007 4:19 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by TedSwippet » Thu Apr 19, 2018 4:13 am

Thesaints wrote:
Thu Apr 19, 2018 1:32 am
Not sure I understand, you are in Europe, but you use a US broker ?
A direct result of FATCA is that many EU brokers now refuse to deal with any US citizens.

Any EU brokers or platforms that do still provide accounts for US citizens will be unable to offer US domiciled ETFs because of EU regulation. US citizens are trapped into using only US domiciled ETFs by the US's punitive PFIC tax regime.

txranger
Posts: 87
Joined: Sun Jun 11, 2017 9:14 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by txranger » Thu Apr 19, 2018 6:48 am

What about hedging to Thai baht? Would like to retire in Thailand. After some thought I dunno if there s anything better than lifestrategy moderate growth fund seems diversified across everything? Though to beat at 13 basis points. Even in taxable account it’s about 20bp tax cost more expensive than tax managed balanced fund and takes care of all the rebalancing. Thoughts?

silverex
Posts: 35
Joined: Sun Jan 07, 2018 1:05 pm
Location: Vilnius, Lithuania

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by silverex » Thu Apr 19, 2018 6:52 am

There is a version of Vanguard research paper specific to euro investors:
https://www.vanguardfrance.fr/documents ... -tlisg.pdf

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Thu Apr 19, 2018 11:21 am

Thesaints wrote:
Wed Apr 18, 2018 4:38 pm
international001 wrote:
Wed Apr 18, 2018 4:36 pm
Yes..

Now we just have to find real world examples. i'd be interesting in knowing if the volatility theory holds up. And how it's correlated with the long term trend (e.g. maximum drops). I guess it wouldn't be too difficult to get a rough graph on a spreadsheet

In the meantime, I guess I can do:

1) US portfolios with total volatility of > 10%. I can use stocks and US denominated bonds
2) US portfolio with stocks and bank deposits denominated in euros

I'd guess that 2) is better (in terms of efficient frontier) than 1
It does. Research on vanguard: they have a report going over this exact topic from a couple of years ago.

I'm not totally sure why 1) or 2) would be preferable to World stocks + euro bonds. Bank deposits in euro have zero volatility, but also zero return.
US stocks alone for you have slightly higher volatility than world stocks (and same ER) and US bonds have a lot higher volatility (and again about same ER in real terms).
Re Euro bonds.

If they are credit risk free (ie German bunds) then your return is more or less zero nominal. Some bunds have negative nominal yields. Given that the market imputes a positive yield to bonds of the same currency issued by Italy (the largest)/ France/ Spain, I would suggest that the market does not see those as risk free and *that* really would be a nightmare for an investor, say if Italy restructured its debt and exited the Euro. The fact that it is low probability does not mean it is zero probability.

It's better to lose no money in a bank deposit, than to lose some money in a bond fund (due to rising rates). Bank deposit interest rates are higher than the rates on (short term) risk free government bonds.

The analogy in the USA has been CDs have been paying higher rates than Treasury Bond funds for a number of years (not still the case?).

txranger
Posts: 87
Joined: Sun Jun 11, 2017 9:14 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by txranger » Thu Apr 19, 2018 11:35 am

Just read the entire paper from all the vanguard PhDs — their conclusions, lower returns for next decade and diversify across everything smth similar to lifestrategy mod growth. Returns on cash approaches returns on most bonds too. And yea their most important conclusion — save more. Duh!

Personally, I m thinking of keeping like 4-5 yrs of living expenses in Tbills, etc and investing excess to that in lifestrategy mod growth. I just can’t come up w anything better than that. Also I don’t know what to think of gold in my portfolio. I just know that crash is coming and whatever I do, I don’t want to sell at the bottom of the market. I think the tax ineff of the balanced fund is less important that behavioral finance side of things, just want to protect myself from myself so to speak.

Also, another option is to keep a large cash position like 15% and invest rest in VT — global stocks. I think the importance of behavioral finance is overlooked on this forum. The real risk of investing is permanent loss of capital which in many cases come from freakin out and selling at the bottom. Thoughts?

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Thu Apr 19, 2018 11:42 am

Valuethinker wrote:
Thu Apr 19, 2018 11:21 am
Thesaints wrote:
Wed Apr 18, 2018 4:38 pm
international001 wrote:
Wed Apr 18, 2018 4:36 pm
Yes..

Now we just have to find real world examples. i'd be interesting in knowing if the volatility theory holds up. And how it's correlated with the long term trend (e.g. maximum drops). I guess it wouldn't be too difficult to get a rough graph on a spreadsheet

In the meantime, I guess I can do:

1) US portfolios with total volatility of > 10%. I can use stocks and US denominated bonds
2) US portfolio with stocks and bank deposits denominated in euros

I'd guess that 2) is better (in terms of efficient frontier) than 1
It does. Research on vanguard: they have a report going over this exact topic from a couple of years ago.

I'm not totally sure why 1) or 2) would be preferable to World stocks + euro bonds. Bank deposits in euro have zero volatility, but also zero return.
US stocks alone for you have slightly higher volatility than world stocks (and same ER) and US bonds have a lot higher volatility (and again about same ER in real terms).
Re Euro bonds.

If they are credit risk free (ie German bunds) then your return is more or less zero nominal. Some bunds have negative nominal yields. Given that the market imputes a positive yield to bonds of the same currency issued by Italy (the largest)/ France/ Spain, I would suggest that the market does not see those as risk free and *that* really would be a nightmare for an investor, say if Italy restructured its debt and exited the Euro. The fact that it is low probability does not mean it is zero probability.

It's better to lose no money in a bank deposit, than to lose some money in a bond fund (due to rising rates). Bank deposit interest rates are higher than the rates on (short term) risk free government bonds.

The analogy in the USA has been CDs have been paying higher rates than Treasury Bond funds for a number of years (not still the case?).
One can certainly tune the average duration of his bond component to his taste/needs.

zuma
Posts: 345
Joined: Thu Dec 29, 2016 12:15 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by zuma » Fri Apr 20, 2018 4:23 am

I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Fri Apr 20, 2018 6:05 pm

Thesaints wrote:
Thu Apr 19, 2018 1:32 am
Not sure I understand, you are in Europe, but you use a US broker ?
Regardless, I'm sure there are plenty of euro bonds ETF's out there.
Yes, I'm in Europe most of the time, but I'm a US person and I cannot buy funds on an European broker
Tell me just one euro bond ETF (in euros) that I can get in a US broker

I would not think it's that difficult. As I mentioned, PIGLX uses a basket of coins. I just want something in euros

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Sat Apr 21, 2018 7:40 am

international001 wrote:
Fri Apr 20, 2018 6:05 pm
Thesaints wrote:
Thu Apr 19, 2018 1:32 am
Not sure I understand, you are in Europe, but you use a US broker ?
Regardless, I'm sure there are plenty of euro bonds ETF's out there.
Yes, I'm in Europe most of the time, but I'm a US person and I cannot buy funds on an European broker
Tell me just one euro bond ETF (in euros) that I can get in a US broker

I would not think it's that difficult. As I mentioned, PIGLX uses a basket of coins. I just want something in euros
https://www.blackrock.com/investing/pro ... y-bond-etf

does not hedge currency exposure. So NAV will fluctuate w USD movement against other currencies. You could combine this with a US Treasuries fund.

You have to dig into the descriptions a bit (make sure the benchmark is not currency hedged), and check Risk factors in the (abbreviated) Prospectus.

zuma
Posts: 345
Joined: Thu Dec 29, 2016 12:15 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by zuma » Sun Apr 22, 2018 6:56 am

zuma wrote:
Fri Apr 20, 2018 4:23 am
I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.
So perhaps adding IGOV (as Valuethinker mentioned) would be a reasonable option for me? Again, I'm living in the EU but invested with a US broker and I'd like to mitigate against the case of a weakening USD relative to the Euro.

I'm currently invested in:

45% Total US Stock Market
15% Total International Stock Market
20% Total US Bond Market
20% TIPS

and thinking about moving to:

30% Total US Stock Market
30% Total International Stock Market
13.3% Total US Bond Market
13.3% TIPS
13.3% Unhedged International Treasury Bond (IGOV)

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Sun Apr 22, 2018 8:32 am

zuma wrote:
Sun Apr 22, 2018 6:56 am
zuma wrote:
Fri Apr 20, 2018 4:23 am
I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.
So perhaps adding IGOV (as Valuethinker mentioned) would be a reasonable option for me? Again, I'm living in the EU but invested with a US broker and I'd like to mitigate against the case of a weakening USD relative to the Euro.

I'm currently invested in:

45% Total US Stock Market
15% Total International Stock Market
20% Total US Bond Market
20% TIPS

and thinking about moving to:

30% Total US Stock Market
30% Total International Stock Market
I like this because it is closer to global weightings for the relevant markets.
13.3% Total US Bond Market
13.3% TIPS
13.3% Unhedged International Treasury Bond (IGOV)
In practice, there's unlikely to be a large difference in performance from your previous outcome. You've also made rebalancing more complicated.

Thus, do not do this if:

- it leads to more taxable events - besides low costs, avoiding taxable events is one of the few "pure wins" in finance (diversification into less correlated assets is the other). By this I mean:
- avoiding paying more income tax on interest income than you have to;
-avoiding realizing capital gains earlier than you have to.

- it leads to significantly higher costs (the margin of significance is unfortunately not prescriptive)

Otherwise, since it is more diversified, you should do this.

zuma
Posts: 345
Joined: Thu Dec 29, 2016 12:15 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by zuma » Sun Apr 22, 2018 8:45 am

Valuethinker wrote:
Sun Apr 22, 2018 8:32 am
13.3% Total US Bond Market
13.3% TIPS
13.3% Unhedged International Treasury Bond (IGOV)
In practice, there's unlikely to be a large difference in performance from your previous outcome. You've also made rebalancing more complicated.

Thus, do not do this if:

- it leads to more taxable events - besides low costs, avoiding taxable events is one of the few "pure wins" in finance (diversification into less correlated assets is the other). By this I mean:
- avoiding paying more income tax on interest income than you have to;
-avoiding realizing capital gains earlier than you have to.

- it leads to significantly higher costs (the margin of significance is unfortunately not prescriptive)

Otherwise, since it is more diversified, you should do this.
Thanks for the feedback.

I could make this change within my tax-advantaged accounts, so I suppose the main concerns are 1) adding rebalancing complexity and 2) increasing overall costs (IGOV is 0.35% ER).

Valuethinker
Posts: 34677
Joined: Fri May 11, 2007 11:07 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker » Sun Apr 22, 2018 11:32 am

zuma wrote:
Sun Apr 22, 2018 8:45 am
Valuethinker wrote:
Sun Apr 22, 2018 8:32 am
13.3% Total US Bond Market
13.3% TIPS
13.3% Unhedged International Treasury Bond (IGOV)
In practice, there's unlikely to be a large difference in performance from your previous outcome. You've also made rebalancing more complicated.

Thus, do not do this if:

- it leads to more taxable events - besides low costs, avoiding taxable events is one of the few "pure wins" in finance (diversification into less correlated assets is the other). By this I mean:
- avoiding paying more income tax on interest income than you have to;
-avoiding realizing capital gains earlier than you have to.

- it leads to significantly higher costs (the margin of significance is unfortunately not prescriptive)

Otherwise, since it is more diversified, you should do this.
Thanks for the feedback.

I could make this change within my tax-advantaged accounts, so I suppose the main concerns are 1) adding rebalancing complexity and 2) increasing overall costs (IGOV is 0.35% ER).
That doesn't sound too bad to me but UK fund costs are far, far higher.

TedSwippet
Posts: 1622
Joined: Mon Jun 04, 2007 4:19 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by TedSwippet » Sun Apr 22, 2018 3:41 pm

Valuethinker wrote:
Sun Apr 22, 2018 11:32 am
zuma wrote:
Sun Apr 22, 2018 8:45 am
... increasing overall costs (IGOV is 0.35% ER).
That doesn't sound too bad to me but UK fund costs are far, far higher.
Not universally. While that may be true on average, there are plenty of funds and ETFs widely available in the UK with entirely satisfactory skimpy charges.

For example -- since international bonds are the current theme -- the iShares Global Govt Bond UCITS ETF has a 0.2% TER.

airelleofmusic
Posts: 74
Joined: Mon May 01, 2017 8:54 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by airelleofmusic » Sun Apr 22, 2018 4:23 pm

I was born in France (still living there) and I can tell you that the euro is bound to explode. Greece and Italy (and many other countries) can't live forever with the German currency. So in years to come the euro will disappear and eu countries will be back to their local currencies. Keep it in mine when investing.
LBYM and enjoy life ! Thanks BH !

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Mon Apr 23, 2018 12:53 pm

zuma wrote:
Sun Apr 22, 2018 8:45 am
I could make this change within my tax-advantaged accounts, so I suppose the main concerns are 1) adding rebalancing complexity and 2) increasing overall costs (IGOV is 0.35% ER).
Thanks. Still, it seems only about 50% may be hold in Euros. So I would get the risk of other currencies. Is there something like this only for Euro area bonds?

international001
Posts: 135
Joined: Thu Feb 15, 2018 7:31 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 » Mon Apr 23, 2018 12:55 pm

TedSwippet wrote:
Sun Apr 22, 2018 3:41 pm
For example -- since international bonds are the current theme -- the iShares Global Govt Bond UCITS ETF has a 0.2% TER.
Can you get anything with an ISIN in a US broker ??

Thesaints
Posts: 1390
Joined: Tue Jun 20, 2017 12:25 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Thesaints » Mon Apr 23, 2018 3:38 pm

airelleofmusic wrote:
Sun Apr 22, 2018 4:23 pm
I was born in France (still living there) and I can tell you that the euro is bound to explode. Greece and Italy (and many other countries) can't live forever with the German currency. So in years to come the euro will disappear and eu countries will be back to their local currencies. Keep it in mine when investing.
Yes, but who's gonna win the NBA ?

airelleofmusic
Posts: 74
Joined: Mon May 01, 2017 8:54 am

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by airelleofmusic » Mon Apr 23, 2018 4:36 pm

Thesaints wrote:
Mon Apr 23, 2018 3:38 pm
airelleofmusic wrote:
Sun Apr 22, 2018 4:23 pm
I was born in France (still living there) and I can tell you that the euro is bound to explode. Greece and Italy (and many other countries) can't live forever with the German currency. So in years to come the euro will disappear and eu countries will be back to their local currencies. Keep it in mine when investing.
Yes, but who's gonna win the NBA ?
Good sense of repartee ! ahah
LBYM and enjoy life ! Thanks BH !

TedSwippet
Posts: 1622
Joined: Mon Jun 04, 2007 4:19 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by TedSwippet » Mon Apr 23, 2018 5:52 pm

international001 wrote:
Mon Apr 23, 2018 12:55 pm
TedSwippet wrote:
Sun Apr 22, 2018 3:41 pm
For example -- since international bonds are the current theme -- the iShares Global Govt Bond UCITS ETF has a 0.2% TER.
Can you get anything with an ISIN in a US broker ??
I am not sure I follow you?

If you are asking if you yourself could buy this particular UCITS ETF in a US broker, the answer is that you perhaps could if you choose the right broker (that might be Interactive Brokers?), but you definitely should not if you are a US citizen or any other form of US taxable person. If you hold this ETF while inside the US's vice-like tax grip, the PFIC tax regime will make you envy the dead at tax time.

It's a decent choice for non-US persons, though. I just picked it out in response to an earlier comment about general higher TERs in the EU and UK, as a random example of a case where the TER of an EU domiciled fund is lower than that of a comparable US domiciled one.

zuma
Posts: 345
Joined: Thu Dec 29, 2016 12:15 pm

Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by zuma » Tue Apr 24, 2018 2:58 am

international001 wrote:
Mon Apr 23, 2018 12:53 pm
zuma wrote:
Sun Apr 22, 2018 8:45 am
I could make this change within my tax-advantaged accounts, so I suppose the main concerns are 1) adding rebalancing complexity and 2) increasing overall costs (IGOV is 0.35% ER).
Thanks. Still, it seems only about 50% may be hold in Euros. So I would get the risk of other currencies. Is there something like this only for Euro area bonds?
Not that I'm aware of. But maybe there is one? I would also prefer that.

Post Reply