I'm Polish - should I hedge bond ETF to EUR?

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atenty
Posts: 2
Joined: Tue Sep 15, 2020 5:13 pm

I'm Polish - should I hedge bond ETF to EUR?

Post by atenty »

Hello everyone! I've learned a lot reading both the forum and the wiki, but I remain undecided when it comes to the fixed income part of my portfolio.

Issue: there are no PLN hedged ETFs at all.

I have three options in my mind:
  1. Choose an unhedged global aggregate bond ETF - better diversification and lower cost but currency risk
  2. Choose a EUR hedged global aggregate bond ETF - better diversification and no USD-EUR currency risk but still EUR-PLN currency risk and higher cost
  3. Choose 10 year Polish TIPS (PLN) - no diversification but no currency risk and zero cost
I tend to choose option 2 for the following reasons:
  • Poland is part of EU
  • Poland is obliged to adopt the euro under the terms of the Treaty of Accession 2003, although without a specific target date
  • EU is Poland's biggest trading partner: 69% of import comes from EU, 80% of export goes to EU (note: not all EU members are in euro zone)
  • EUR/PLN exchange seems stable to me
Image

I know I can't predict what the politicians will do, just like I can't predict where the market is heading, but maybe I am missing something (or overthinking). So, thinking mid to long term, what would be your advice?
glorat
Posts: 720
Joined: Thu Apr 18, 2019 2:17 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by glorat »

There's a long recent relevant thread on this topic at viewtopic.php?f=22&t=325141

I concur with Valuethinker's final conclusion

Code: Select all

 The theoretical best answer is to match the currency of your {bond} assets to the currency of your (future) consumption
In decades to come, will you be buying Made In EUR? Made in USD? Made in PLN?

The answer will of course be some combination. If you EUR is the majority controlling currency, then a plausible strategy is go 50% unhedged global bonds and 50% EUR hedged global bonds, or one third of unhedged/EUR hedged/PLN local

At the end of the day, there are things that will make bigger differences than this decision.. Like making a plan and sticking to it and avoiding behavioural traps. Make a choice you think you can stick to for decades to come.
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Stanczyk
Posts: 140
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Re: I'm Polish - should I hedge bond ETF to EUR?

Post by Stanczyk »

Buy an apartment in Pl and rent it out. Perhaps wait a while - 6 months to a year just to see where Corona will take us. Real estate prices in Pl seem high, but so is inflation.

I live in and invest in the US. Had multiple apartments in Pl and sold all. Then, I purchased in the US. Now I am thinking of buying in Pl again - the rate of return is better than in the US.

I really do not see why anyone would purchase bonds these days. And, by the way, Pl market seems quite cheap compared to major market indexes.
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galeno
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Re: I'm Polish - should I hedge bond ETF to EUR?

Post by galeno »

Your plan makes sense to me.

"I tend to choose option 2 for the following reasons:
Poland is part of EU
Poland is obliged to adopt the euro under the terms of the Treaty of Accession 2003, although without a specific target date
EU is Poland's biggest trading partner: 69% of import comes from EU, 80% of export goes to EU (note: not all EU members are in euro zone)
EUR/PLN exchange seems stable to me"
KISS & STC.
mrekvy491
Posts: 25
Joined: Wed Jul 29, 2020 10:43 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by mrekvy491 »

I am in Czechia, and would get AGGH if I have to choose a bond. But I prefer local investment property much more.

RE provides protection against inflation, passive income, and leverage. I like the idea of getting cheap leverage that would help me protect a chunk of my assets against 3% inflation, when I am relatively young.

Moreover, the government provides a lot of benefits like tax deductions, some sort of support to help the RE market since most middle class families sit on the home equities.

I don't like going all in with RE, but it doesn't feel so bad as a bond alternative. Especially when your home currency is not a AAA currency.
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galeno
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Re: I'm Polish - should I hedge bond ETF to EUR?

Post by galeno »

I think you are absolutely on to something.

Two weeks ago I would have rejected the idea of using local real estate as a substitute for bonds.

A young man called "the nomad capitalist" appeared on my YouTube feed.

He goes around the world and finds and invests in local residential RE around the world.
mrekvy491 wrote: Fri Sep 18, 2020 5:06 am I am in Czechia, and would get AGGH if I have to choose a bond. But I prefer local investment property much more.

RE provides protection against inflation, passive income, and leverage. I like the idea of getting cheap leverage that would help me protect a chunk of my assets against 3% inflation, when I am relatively young.

Moreover, the government provides a lot of benefits like tax deductions, some sort of support to help the RE market since most middle class families sit on the home equities.

I don't like going all in with RE, but it doesn't feel so bad as a bond alternative. Especially when your home currency is not a AAA currency.
KISS & STC.
Rosales
Posts: 93
Joined: Thu Apr 30, 2020 8:43 pm

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by Rosales »

mrekvy491 wrote: Fri Sep 18, 2020 5:06 am I am in Czechia, and would get AGGH if I have to choose a bond. But I prefer local investment property much more.

RE provides protection against inflation, passive income, and leverage. I like the idea of getting cheap leverage that would help me protect a chunk of my assets against 3% inflation, when I am relatively young.

Moreover, the government provides a lot of benefits like tax deductions, some sort of support to help the RE market since most middle class families sit on the home equities.

I don't like going all in with RE, but it doesn't feel so bad as a bond alternative. Especially when your home currency is not a AAA currency.
I don't think investment in a single property, or many properties in one country is good in terms of diversification.

Could you explain, how does cheap leverage help you protect your assets against inflation?
VWRA & chill | Retired @28 y.o.
mrekvy491
Posts: 25
Joined: Wed Jul 29, 2020 10:43 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by mrekvy491 »

Rosales wrote: Fri Sep 18, 2020 11:49 am
mrekvy491 wrote: Fri Sep 18, 2020 5:06 am I am in Czechia, and would get AGGH if I have to choose a bond. But I prefer local investment property much more.

RE provides protection against inflation, passive income, and leverage. I like the idea of getting cheap leverage that would help me protect a chunk of my assets against 3% inflation, when I am relatively young.

Moreover, the government provides a lot of benefits like tax deductions, some sort of support to help the RE market since most middle class families sit on the home equities.

I don't like going all in with RE, but it doesn't feel so bad as a bond alternative. Especially when your home currency is not a AAA currency.
I don't think investment in a single property, or many properties in one country is good in terms of diversification.

Could you explain, how does cheap leverage help you protect your assets against inflation?

Sorry, I don't think I put it clearly. I did not mean that leverage itself can protect against inflation.

I wanted to say these things:

1. Local real estates do generally well against inflation, because rents adjust to the level of income in the area. The price may fluctuate, but if you get a RE in the area you want to retire this does provide you with a stable inflation adjusted income. Once you become mortgage free, you don't have to worry too much about interest rate fluctuations.

2. No currency risk. Provides partial protection against currency risk of the whole portfolio if currency hedging is not an option (for bonds or equities)

3. Mortgage loans are generally cheap and easy debts to take on, as the government usually provides benefits and supports. They need to answer to the calls of middle class voters who want affordable housings. Hence they support tax breaks, cheap refinancing etc. Where I live, many people can get up to 90% mortgage. People probably won't be able to get margin account at this level of leverage. There is a risk of defaulting on the interest payment, but this risk is much lower than the risk of getting margins calls. You also probably will have the government supporting you to certain level.

Makes even more sense if you have a small fully paid primary residence and an investment RE. In this case you can have your tenant pay back the mortgage slowing increasing your monthly income so you can start snowballing. This is what I am doing - having a small and economic primary residence in the city I live, and buying a property in an area that has a relatively high demand for rent. Could have bought a single, nice family sized property with mortgage, but never wanted this.

4. Your children can benefit from the property. You may have them as tenants and offer discounted rents etc. This provides an insurance against rapid RE appreciations that would make your children's lives a lot harder. i.e. London, New York, Seoul, Beijing etc.

I am not saying that RE is the answer to everything, but depending on the local market and your situation could make sense. Things are quite stable in Czechia, but in places like Brazil where the inflation and currency swings can be higher RE may provide some advantages. Some countries do not offer easy/cheap access to the financial instruments either. Maybe in places like India this is true?

I come from South Korea, and REs in certain local markets did do better than stocks in the long term, because the growth was really fast and dramatic. And if you consider that there were not efficient equity investment instruments such as world cap weighted ETFs or mutual funds available during the rapid economic growth, it is not so difficult to understand why Koreans are so obsessed with REs, especially those in Seoul. It may look weird to Americans, but still.

RE may not be ideal for accumulation I know. But if you want it for certain purposes in certain places it could be a good option. Not every market is like the US, UK.
Last edited by mrekvy491 on Fri Sep 18, 2020 3:51 pm, edited 1 time in total.
mrekvy491
Posts: 25
Joined: Wed Jul 29, 2020 10:43 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by mrekvy491 »

galeno wrote: Fri Sep 18, 2020 9:29 am I think you are absolutely on to something.

Two weeks ago I would have rejected the idea of using local real estate as a substitute for bonds.

A young man called "the nomad capitalist" appeared on my YouTube feed.

He goes around the world and finds and invests in local residential RE around the world.
mrekvy491 wrote: Fri Sep 18, 2020 5:06 am I am in Czechia, and would get AGGH if I have to choose a bond. But I prefer local investment property much more.

RE provides protection against inflation, passive income, and leverage. I like the idea of getting cheap leverage that would help me protect a chunk of my assets against 3% inflation, when I am relatively young.

Moreover, the government provides a lot of benefits like tax deductions, some sort of support to help the RE market since most middle class families sit on the home equities.

I don't like going all in with RE, but it doesn't feel so bad as a bond alternative. Especially when your home currency is not a AAA currency.
Thanks for letting me know! I have not heard of him, but I will take a look at the YouTube videos :)
Valuethinker
Posts: 41395
Joined: Fri May 11, 2007 11:07 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by Valuethinker »

atenty wrote: Tue Sep 15, 2020 6:08 pm Hello everyone! I've learned a lot reading both the forum and the wiki, but I remain undecided when it comes to the fixed income part of my portfolio.

Issue: there are no PLN hedged ETFs at all.

I have three options in my mind:
  1. Choose an unhedged global aggregate bond ETF - better diversification and lower cost but currency risk
  2. Choose a EUR hedged global aggregate bond ETF - better diversification and no USD-EUR currency risk but still EUR-PLN currency risk and higher cost
  3. Choose 10 year Polish TIPS (PLN) - no diversification but no currency risk and zero cost
I tend to choose option 2 for the following reasons:
  • Poland is part of EU
  • Poland is obliged to adopt the euro under the terms of the Treaty of Accession 2003, although without a specific target date
  • EU is Poland's biggest trading partner: 69% of import comes from EU, 80% of export goes to EU (note: not all EU members are in euro zone)
  • EUR/PLN exchange seems stable to me
Image

I know I can't predict what the politicians will do, just like I can't predict where the market is heading, but maybe I am missing something (or overthinking). So, thinking mid to long term, what would be your advice?
I would hedge to Euro.

Alternatives are deposits in Zloty w Polish banks, Polish govt bonds, or indeed a rentable property in Poland.

Your Polish state pension is also a Zloty currency hedge.

Polish govt bonds linked to inflation are the theoretically perfect hedge, albeit you take on the credit risk of the Polish govt. Depreciation of the Zloty relative to EUR and USD will lead to higher consumer price inflation in Poland and this protects against this.
brrio
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Location: Brazil

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by brrio »

galeno wrote: Fri Sep 18, 2020 9:29 am
A young man called "the nomad capitalist" appeared on my YouTube feed.

He goes around the world and finds and invests in local residential RE around the world.
Hi Galeno,

I've bought his book based on your recommendation.

He mentions San Juan Del Sur as a place where real state had a great increase in price.

Could you confirm this?
Valuethinker
Posts: 41395
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Re: I'm Polish - should I hedge bond ETF to EUR?

Post by Valuethinker »

brrio wrote: Mon Oct 19, 2020 8:53 pm
galeno wrote: Fri Sep 18, 2020 9:29 am
A young man called "the nomad capitalist" appeared on my YouTube feed.

He goes around the world and finds and invests in local residential RE around the world.
Hi Galeno,

I've bought his book based on your recommendation.

He mentions San Juan Del Sur as a place where real state had a great increase in price.

Could you confirm this?
I can't imagine managing a property thousands of miles from where I lived. And not in the same country.

Having lived through (at least 2) housing price crashes, it seems to me you would need a large portfolio to be fully diversified.
tertre
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Location: France

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by tertre »

FWIW you get some real estate yields (gross ?) in several european cities here (p.6).

https://www2.deloitte.com/content/dam/D ... n-2017.PDF

They are high in Poland.

The new editions don't give these numbers, alas. And it was before Covid.
Valuethinker
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Joined: Fri May 11, 2007 11:07 am

Re: I'm Polish - should I hedge bond ETF to EUR?

Post by Valuethinker »

tertre wrote: Tue Oct 20, 2020 8:44 am FWIW you get some real estate yields (gross ?) in several european cities here (p.6).

https://www2.deloitte.com/content/dam/D ... n-2017.PDF

They are high in Poland.

The new editions don't give these numbers, alas. And it was before Covid.
Covid appears to have killed off the Air BnB market?

And so in London, say, there are many more flats available to rent (and rents have fallen at least 10%, the first fall in many years) as Air BnB investors scramble to lease out their flats to long term tenants (usual tenancy here is 12 months).
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