Comparing investment grade bond funds (EUR)

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herpfinance
Posts: 231
Joined: Tue Nov 18, 2014 4:52 pm
Location: Denmark

Comparing investment grade bond funds (EUR)

Post by herpfinance » Tue Mar 24, 2020 2:40 pm

For taxation purposes, my country of residence is Denmark.

With corporate debt yields having risen as of lately, I am thinking of allocating 1/3 of my fixed income to a corporate bond ETF once again. As per my investment strategy, the spread between the riskless rate and investment grade bonds is now large enough to make a place for investment grade bonds in my portfolio. The remaining 2/3 will keep sitting in a government insured savings accocunt.

Previously I've used Ireland-domiciled iShares Core € Corp Bond UCITS ETF (EUN5) (0.20%) to gain exposure to this asset class while avoiding withheld dividend taxes.

However, I've noticed a couple of new offerings that are cheaper in terms of TER, in particular these:

AMUNDI PRIME EURO CORPORATES - UCITS ETF DR (D) (PR1C) (0.05%!) (Distributing & Luxembourg-domiciled)

Xtrackers EUR Corporate Bond UCITS ETF 1C (XBLC) (0.15%) (Accumulating & Luxembourg-domiciled)

I am mainly concerned about double-taxation issues and withheld dividend taxes.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

JimBeam
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Re: Comparing investment grade bond funds (EUR)

Post by JimBeam » Tue Mar 24, 2020 4:39 pm

Why not just invest in stocks? I never understood the place of corporate bonds in one's portfolio.

My point of view is this:
You want high expectated return (associated with high risk) - buy stocks. You want low risk (associated with low expected return) - buy treasury bonds. You want something in between - choose the right proportion between these two assets (asset allocation). Why complicate things with another asset (corporate bonds)?

Topic Author
herpfinance
Posts: 231
Joined: Tue Nov 18, 2014 4:52 pm
Location: Denmark

Re: Comparing investment grade bond funds (EUR)

Post by herpfinance » Tue Mar 24, 2020 4:51 pm

Well I believe that the essential lever for controlling risk is how much you want to allocate to stocks vs. bonds. Around the edges you can tilt - for instance some like to have increased exposure to small cap value, which has historically been a smart decision. In my own case I decided to hold a market cap weighted portfolio on the equity side, and hold some investment grade debt on the fixed income side.

I previously had an allocation to investment grade corporate bonds, but as the yield gap between those and government insured savings accounts narrowed to almost nothing, I decided to stick it all into savings.

My IPS calls for holding 1/3 of my fixed income as investment grade bonds, though, and with the yield gap widening, I'm lookinig to do so once again.

I don't see a role for government bonds with negative yields. Might as well stay in cash, then.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

andrew99999
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Re: Comparing investment grade bond funds (EUR)

Post by andrew99999 » Tue Mar 24, 2020 8:56 pm

herpfinance wrote:
Tue Mar 24, 2020 2:40 pm
With corporate debt yields having risen as of lately, ...
And why have they risen? Could it be because of the sharp increased in numbers of businesses that are going to default and the higher yield is needed to make up for the losses that are likely to be incurred?

There's no free lunch here. You are paying for the higher yields with higher risk and the higher the yield, the higher the risk.
JimBeam wrote:
Tue Mar 24, 2020 4:39 pm
Why not just invest in stocks? I never understood the place of corporate bonds in one's portfolio.

My point of view is this:
You want high expected return (associated with high risk) - buy stocks. You want low risk (associated with low expected return) - buy treasury bonds. You want something in between - choose the right proportion between these two assets (asset allocation). Why complicate things with another asset (corporate bonds)?
Could not agree more.

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BeBH65
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Re: Comparing investment grade bond funds (EUR)

Post by BeBH65 » Wed Mar 25, 2020 1:45 am

What is the role of your bonds/fixed income in your portfolio?
What asset classes do you consider part of your stable assets? what are the asset classes are for growth?

Where do you put investment grade corop bonds? XBLC lost more then 8% the last month. Is it part of your stable assets or part of the growth portion?
(for reference a fund like Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulation | VAGF lost about 3%)
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence). | Have a look at https://www.bogleheads.org/wiki/Outline_of_Non-US_domiciles

Topic Author
herpfinance
Posts: 231
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Location: Denmark

Re: Comparing investment grade bond funds (EUR)

Post by herpfinance » Wed Mar 25, 2020 4:42 am

andrew99999 wrote:
Tue Mar 24, 2020 8:56 pm
herpfinance wrote:
Tue Mar 24, 2020 2:40 pm
With corporate debt yields having risen as of lately, ...
And why have they risen? Could it be because of the sharp increased in numbers of businesses that are going to default and the higher yield is needed to make up for the losses that are likely to be incurred?

There's no free lunch here. You are paying for the higher yields with higher risk and the higher the yield, the higher the risk.
Investment grade bonds by definition have higher risk than riskless government bonds, of course. Yes, there's also more risk now than we had a month ago.
BeBH65 wrote:
Wed Mar 25, 2020 1:45 am
What is the role of your bonds/fixed income in your portfolio?
What asset classes do you consider part of your stable assets? what are the asset classes are for growth?

Where do you put investment grade corop bonds? XBLC lost more then 8% the last month. Is it part of your stable assets or part of the growth portion?
(for reference a fund like Vanguard Global Aggregate Bond UCITS ETF EUR Hedged Accumulation | VAGF lost about 3%)
The role of fixed income in my portfolio is for stability and capital preservation (ideally slight growth above inflation, but that's hard these days).

I put investment grade corp bonds in the risky end of stable assets. That's also why I initially limited my allocation to them as a percentage of bonds to 1/3 (my bond allocation in this case is 40%, so I would allocate ~13% to investment grade bonds).

I belive Bogle recommended keeping half of your bonds as investment grade. That's a bit too high for me, though.
"The intelligent investor is a realist who sells to optimists and buys from pessimists" - Benjamin Graham

JimBeam
Posts: 72
Joined: Wed Jan 29, 2020 3:06 am

Re: Comparing investment grade bond funds (EUR)

Post by JimBeam » Wed Mar 25, 2020 5:11 am

herpfinance wrote:
Wed Mar 25, 2020 4:42 am
I put investment grade corp bonds in the risky end of stable assets.
Why not just split portfolio into risky assets and minimal risk assets? Risky end of minimal risk assets sounds just like another name for risky assets.

I know, that there are 50 shades of grey, but keeping it simple should be an important part of investment policy. In the long term, it's just easier to follow.

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