How would you replicate the US Total Bond Market in South Korea?

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Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

How would you replicate the US Total Bond Market in South Korea?

Post by justanordinary »

Hello friends? Hope you all are having a merry day.

Thanks again for your kind and insightful advices on my previous posting. But please indulge me for a moment as I seek your guidance on a related matter.


How would you replicate the US Total Bond Market in South Korea?(in order to emulate 60/40 or Three Fund Portfolio)

The easy answer would be to purchase BND in the US market, but my goal is to track the US Total Bond Market in my South Korean Individual Retirement Pension(IRP) account, which does not provide access to US or any foreign domiciled ETFs.

South Koreans invest in IRP accounts for tax breaks and deferrals, but the account's lack of asset classes makes it very difficult to apply even the most basic asset allocation strategies. While Global equities, South Korean bonds, US treasury bills, US corporate bonds, Japanese treasuries, and REITs are available, We cannot invest in US long term bonds, emerging market bonds, inflation linked bonds, gold, commodity, and so on. (It is quite painstaking to set up a portfolio within these constraints that I am seriously considering abandoning the tax benefits altogether and investing in other markets.)

As of now, my plan is to rely on either 1) 60/40 strategy, or 2) the Three Fund Portfolio. The US Total Bond Market plays an integral role in both strategies, but as mentioned, this IRP account does not allow investments in US long term bonds. Hence, I am looking into a partial replication of the US Total Bond Market using South Korean bonds and US treasury bills. I am unsure if South Korean treasuries would strongly correlate with US bonds and whether they would provide a useful hedge against a slowdown in the US stock market, but I was not able to find an alternative.


The objective is to emulate the function of bonds, which would provide hedge against market downturns. Of course I am well aware of the bond market risk in the ensuing inflation, but i) this pension account does not offer access to most inflation hedge assets, ii) I am looking into a 25+ year long term investment.

If I seek 40% of my fund to replicate the US Total Bond Market(the other 60% would be invested in global equities), what would be a viable option? I am now considering the following distribution:

1) 10% US treasury bills
2) 15% 10-year South Korean treasuries
3) 15% South Korean composite bond market index(average duration: 4.3 years)

I may change each proportion, or even include Japanese bonds if they could play a role in this portfolio.


I would very much welcome any guidance and advices. Thank you.
User avatar
galeno
Posts: 2316
Joined: Fri Dec 21, 2007 12:06 pm

Re: How would you replicate the US Total Bond Market in South Korea?

Post by galeno »

60% VWRD + 40% SUAG*

*SUAG is the UCITS equivalent of BND a/o AGG. But it costs 0.25%.

Better is 60% VWRD + 20% VDTY + 20% VDCP.

50% VDTY + 50% VDCP costs 0.08%. And NO MBS.
KISS & STC.
Topic Author
justanordinary
Posts: 6
Joined: Mon May 17, 2021 3:40 am

Re: How would you replicate the US Total Bond Market in South Korea?

Post by justanordinary »

galeno wrote: Tue May 18, 2021 8:08 am 60% VWRD + 40% SUAG*

*SUAG is the UCITS equivalent of BND a/o AGG. But it costs 0.25%.

Better is 60% VWRD + 20% VDTY + 20% VDCP.

50% VDTY + 50% VDCP costs 0.08%. And NO MBS.
Thanks for the advice!!!
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