Looking for EUR holy grail bond strategy

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toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Thu Jun 14, 2018 8:25 am

Thanks heaps everyone for all input, I learned a lot. Although it has little volume and high spread, I'm still going for Xtrackers II Global Government Bond UCITS ETF 1C - EUR Hedged (EUR) | DBZB (25% of AA, remaining 75% global all caps equity). Long term this would seem the optimal strategy where I use equity for profit and bond for risk reduction (I always assumed there would be a rebalance premium, but learned from other posts here that does not exist).

NickG
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Re: Looking for EUR holy grail bond strategy

Post by NickG » Tue Jun 19, 2018 9:00 am

I have been struggling with choosing a bond ETF recently and this discussion was extremely helpful. Thank you, everyone!

As a European citizen, I will likely choose the Euro hedged version of iShares Global Aggregate Bond ETF. According to the iShares UK website, it is listed on the London Stock Exchange, SIX Swiss Exchange and Xetra with the same ticker - AGGH.

However, it's only available on LSE through Interactive Brokers at the moment. This will become a problem for me once the UK leaves the European Union (additional taxes). I would prefer to purchase it on Xetra (or Euronext if it gets listed there) if I can.

Does anyone else have the same problem? Are you able to purchase this fund anywhere except on LSE?

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Tue Jun 19, 2018 9:32 am

NickG wrote:
Tue Jun 19, 2018 9:00 am
Does anyone else have the same problem? Are you able to purchase this fund anywhere except on LSE?
I also find AGGH only on LSE from my broker (emailed them to ask why). I am still considering allocating 50% DBZB (as I want to minimize exposure to corporate) and 50% AGGH (or Vanguard Global Bond Index Fund EUR hedged which follows Bloomberg Barclays Global Aggregate Float Adjusted Bond Index Hedged). I couldn't find any source suggesting Brexit may negatively impact traders on LSE though.

NickG
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Re: Looking for EUR holy grail bond strategy

Post by NickG » Tue Jun 19, 2018 4:26 pm

I found another thread where AGGH was recommended. Apparently it is available on Xetra through DEGIRO:
silverex wrote:
Fri Jun 15, 2018 8:12 am
1) Open Degiro.ie account, as there is no Degiro for Bulgaria. Don't worry about ".ie" bit, as it's still a Dutch company with NL IBAN bank account. You'll get English interface this way, and ability to use SEPA to transfer money from your account to Degiro and back. Choose Custody account type.
....
2) A simple portfolio could be:
XX% IWDA (IE00B4L5Y983) iShares Core MSCI World UCITS ETF USD (Acc) - 0.20% TER; on Amsterdam Exchange
XX% AGGH (IE00BDBRDM35) iShares Global Aggregate Bond UCITS ETF EUR Hedged - 0.10% TER; on Xetra Exchange
Hopefully, it will soon be possible to buy it there through Interactive Brokers. I cannot open an account at DEGIRO. :(

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Wed Jun 20, 2018 1:12 am

My broker indicated LSE has better liquidity for AGGH and Brexit won't impact LSE trading.

As alternative to AGGH (I still think DBZB is best choice) there is also a Vanguard fund IE00BGCZ0933 which has significant more holdings and acceptable TER of 0.20% (there is a minimum deposit).

silverex
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Location: Vilnius, Lithuania

Re: Looking for EUR holy grail bond strategy

Post by silverex » Wed Jun 20, 2018 3:20 am

NickG wrote:
Tue Jun 19, 2018 4:26 pm
Hopefully, it will soon be possible to buy it there through Interactive Brokers. I cannot open an account at DEGIRO. :(
Why can't you open Degiro account?

I have also contacted Lynx broker (reseller of Interactive Brokers) asking why AGGH is not available for purchase on Xetra a couple months ago, they promised to add this into backend if possible.

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Wed Jun 20, 2018 3:46 am

NickG wrote:
Tue Jun 19, 2018 9:00 am
I have been struggling with choosing a bond ETF recently and this discussion was extremely helpful. Thank you, everyone!

As a European citizen, I will likely choose the Euro hedged version of iShares Global Aggregate Bond ETF. According to the iShares UK website, it is listed on the London Stock Exchange, SIX Swiss Exchange and Xetra with the same ticker - AGGH.

However, it's only available on LSE through Interactive Brokers at the moment. This will become a problem for me once the UK leaves the European Union (additional taxes). I would prefer to purchase it on Xetra (or Euronext if it gets listed there) if I can.
Hi.

Can you explain in more detail that tax problem? I don't see why, leaving the EU, specifically causes a problem or a change from present practice?
Does anyone else have the same problem? Are you able to purchase this fund anywhere except on LSE?
As above. I don't understand why it is a problem?

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Wed Jun 20, 2018 4:54 am

I'm changing my mind again, and now plan to end up with 50% DBZB (Xetra) and 50% AGGH (LSE). Adding AGGH lowers my TER and increases my diversification (whilst DBZB reduces my exposure to corporate). Long-term it should provide slightly better return. The Vanguard fund alternative (IE00BGCZ0933) to AGGH seems like a more responsible choice (many more holdings, float adjusted). Going ETF-only at lowest TER somehow feels better.

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Wed Jun 20, 2018 5:29 am

toine wrote:
Wed Jun 20, 2018 4:54 am
I'm changing my mind again, and now plan to end up with 50% DBZB (Xetra) and 50% AGGH (LSE). Adding AGGH lowers my TER and increases my diversification (whilst DBZB reduces my exposure to corporate). Long-term it should provide slightly better return. The Vanguard fund alternative (IE00BGCZ0933) to AGGH seems like a more responsible choice (many more holdings, float adjusted). Going ETF-only at lowest TER somehow feels better.
At this point, it will make almost no difference to your final returns. 12.5% in bond fund has a very small impact on the total portfolio.

It is simply a question of minimizing dealing charges (and any taxes) and fund expense ratios. Note that 0.1% on $100k is $100 p.a. Compounded over time at say 1% (current return on bonds) it's not a big amount of money.

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Wed Jun 20, 2018 6:22 am

Valuethinker wrote:
Wed Jun 20, 2018 5:29 am
At this point, it will make almost no difference to your final returns. 12.5% in bond fund has a very small impact on the total portfolio.
Agreed, the benefit is mainly psychological (e.g. both of them may be green, or one if e.g. treasury has a problem). Also if X-Trackers would mess up somehow, I have at least my iShares ETF still (or other way around).
Valuethinker wrote:
Wed Jun 20, 2018 5:29 am
It is simply a question of minimizing dealing charges (and any taxes) and fund expense ratios. Note that 0.1% on $100k is $100 p.a. Compounded over time at say 1% (current return on bonds) it's not a big amount of money.
AGGH has a YTM 0.5% higher than DBZB and 0.15% lower TER, so over 30 years that should give me EUR20k extra on each EUR 100k investment. Of course with that logic I should go 100% equity again, so I guess it doesn't hold. :wink:

bayview
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Re: Looking for EUR holy grail bond strategy

Post by bayview » Wed Jun 20, 2018 6:44 am

toine wrote:
Sun Jun 10, 2018 9:29 am
Valuethinker wrote:
Sun Jun 10, 2018 7:31 am
It's shrug time.
Except that apparently for US investors the "Bogle way" is aggregate (BND), why would that be different for Europeans?
US investor here - many of us use non-aggregate fixed income, including Treasury funds, individual Treasuries, and CDs. I do this so that I can increase our exposure to equities ("take your risk on the equities side.") I really don't want any corporate bonds or mortgage-related bonds.

As a result, I bump up our equity allocation by about 5%. That's not much, but my husband gets very twitchy at anything more than money market funds and CDs. He trusts me to not go crazy, and in return, I dial back equities out of respect for his feelings.
The continuous execution of a sound strategy gives you the benefit of the strategy. That's what it's all about. --Rick Ferri

NickG
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Re: Looking for EUR holy grail bond strategy

Post by NickG » Wed Jun 20, 2018 7:04 am

silverex wrote:
Wed Jun 20, 2018 3:20 am
Why can't you open Degiro account?
Hi, Silverex.
I am located in Bulgaria and Degiro don't seem to work with bulgarian citizens. I read that there is a workaround, but I don't feel comfortable with it.

I intend to sign up with Interactive Brokers through a local introducing broker. In this case, the monthly inactivity fee is just 1$ (instead of 10$), which in my case is a big advantage. I will also be able to get support from the local broker.
Valuethinker wrote:
Wed Jun 20, 2018 3:46 am
Can you explain in more detail that tax problem? I don't see why, leaving the EU, specifically causes a problem or a change from present practice?
Does anyone else have the same problem? Are you able to purchase this fund anywhere except on LSE?
As above. I don't understand why it is a problem?
Hello, Valuethinker.
About the tax problem - I emailed the introducing broker and they told me that once the UK leaves the EU, I will owe capital gains taxes. As far as I know, the capital gains tax in Bulgaria is 10% of the realised profit. I don't have more detailed information at the moment.

A minor problem with buying the fund on LSE is that the commission is 12 pounds, instead of 6 euro on Xetra or Euronext.

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Wed Jun 20, 2018 7:57 am

toine wrote:
Wed Jun 20, 2018 6:22 am
Valuethinker wrote:
Wed Jun 20, 2018 5:29 am
At this point, it will make almost no difference to your final returns. 12.5% in bond fund has a very small impact on the total portfolio.
Agreed, the benefit is mainly psychological (e.g. both of them may be green, or one if e.g. treasury has a problem). Also if X-Trackers would mess up somehow, I have at least my iShares ETF still (or other way around).
Valuethinker wrote:
Wed Jun 20, 2018 5:29 am
It is simply a question of minimizing dealing charges (and any taxes) and fund expense ratios. Note that 0.1% on $100k is $100 p.a. Compounded over time at say 1% (current return on bonds) it's not a big amount of money.
AGGH has a YTM 0.5% higher than DBZB and 0.15% lower TER, so over 30 years that should give me EUR20k extra on each EUR 100k investment. Of course with that logic I should go 100% equity again, so I guess it doesn't hold. :wink:
I don't think it is like-for-like to throw in historic outperformance w diff MERs. The MER point is certain (assuming expense ratios are fixed for the whole holding period) but the other factor is not predictable.

Historic out and underperformance is about the market's view of credit quality - the reward for taking on credit risk. Historically (US data) that has not been rewarded over straight US Treasuries. It's impossible to forecast that.

Also there's the issue of correlation with equities in a portfolio. Investment grade corporate bonds when I was in school had a Beta of about 0.3 (US data, again). That's significantly higher than around 0 for US Treasury bonds (against US equities).

You've reduced your portfolio's diversification. Again, it's pretty marginal given the low percentages.

silverex
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Re: Looking for EUR holy grail bond strategy

Post by silverex » Wed Jun 20, 2018 2:26 pm

NickG wrote:
Wed Jun 20, 2018 7:04 am
I am located in Bulgaria and Degiro don't seem to work with bulgarian citizens. I read that there is a workaround, but I don't feel comfortable with it.
A small correction: it works with Bulgarian citizens, but not with Bulgarian bank accounts (IBAN starting with BG).

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Thu Jun 21, 2018 3:43 am

Valuethinker wrote:
Wed Jun 20, 2018 7:57 am
You've reduced your portfolio's diversification. Again, it's pretty marginal given the low percentages.
You're right. It's hard to resist the temptation of more yield. So back to DBZB. I'm wondering if I should shorten the duration (7.89) by adding Eurozone 1-5 or AAA/Germany 1-5 bonds (accepting the negative yield).

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Thu Jun 21, 2018 4:06 am

toine wrote:
Thu Jun 21, 2018 3:43 am
Valuethinker wrote:
Wed Jun 20, 2018 7:57 am
You've reduced your portfolio's diversification. Again, it's pretty marginal given the low percentages.
You're right. It's hard to resist the temptation of more yield. So back to DBZB. I'm wondering if I should shorten the duration (7.89) by adding Eurozone 1-5 or AAA/Germany 1-5 bonds (accepting the negative yield).
Probably not. At least, I do, but that is an alternative to holding cash. Cash funds are more or less obsolete for a sterling investor. And I would rather be invested in ST UK govt paper (essentially no credit risk) than in Money Markets (which froze, catastrophically, during the Great Financial Crisis).

(my main issue is currency risk - the funds I can access are limited and tend to be GBP sterling funds. A "hard Brexit" (no agreed deal, or a bad one) or a Labour government, (or both, which is quite possible), would probably be quite bad for the currency.)

In the long run, by going for short term bonds, you hurt yourself given that the yield curve is normally upward sloping. That 1% p.a. say (it can be 2-3%) compounded over 30 years is a *lot* of money to leave on the table.

At say 8 years, the duration of govt bond markets (global, investment grade) is not so excessive that one is taking huge risk. And having 2 funds complicates things.

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Thu Jun 21, 2018 4:13 am

galeno wrote:
Mon Jun 11, 2018 9:56 am
Use CASH to shorten the duration
I have a cash allocation, so that indeed would reduce duration.
Valuethinker wrote:
Thu Jun 21, 2018 4:06 am
in the long run, by going for short term bonds, you hurt yourself given that the yield curve is normally upward sloping.
Fair enough. So if everyone in this topic can hold off buying DBZB as their EUR bond allocation, driving up global government bond market, until end of next week .. I should have my remaining IEAC converted :sharebeer

toine
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Re: Looking for EUR holy grail bond strategy

Post by toine » Thu Jun 21, 2018 4:25 am

Valuethinker wrote:
Thu Jun 21, 2018 4:06 am
(my main issue is currency risk - the funds I can access are limited and tend to be GBP sterling funds.
DBZB exists as GBP hedged as well.

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Thu Jun 21, 2018 4:51 am

toine wrote:
Thu Jun 21, 2018 4:25 am
Valuethinker wrote:
Thu Jun 21, 2018 4:06 am
(my main issue is currency risk - the funds I can access are limited and tend to be GBP sterling funds.
DBZB exists as GBP hedged as well.
The funds I can access in my corporate pensions are limited.

The Barclays ST gilt ETF is actually in a separate account, and that's only a small proportion of my savings.

ignition
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Re: Looking for EUR holy grail bond strategy

Post by ignition » Sat Jul 14, 2018 4:10 am

What do you guys think about global inflation linked bond ETFs? (eg https://www.justetf.com/en/etf-profile. ... 0290357929)

Would it be useful for a European to include this into his portfolio to protect against inflation?

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Sat Jul 14, 2018 5:06 am

ignition wrote:
Sat Jul 14, 2018 4:10 am
What do you guys think about global inflation linked bond ETFs? (eg https://www.justetf.com/en/etf-profile. ... 0290357929)

Would it be useful for a European to include this into his portfolio to protect against inflation?
David Swensen takes you through the reasons why buying inflation linked bonds in other currencies than your home one is a bad idea

If the fund hedges into Euros then your return will be roughly the risk free real rate in the eurozone. I.e. negative. Otherwise you assume currency volatility which is large.

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galeno
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Re: Looking for EUR holy grail bond strategy

Post by galeno » Sun Jul 15, 2018 12:59 pm

15% of our 40/60 port (25% of FI) is in one USD TIPS ETF (ITPS).

We use it to protect 1/4th of our FI allocation against UNEXPECTED inflation.

No TIPS necessary with equity allocations greater than 50%.

It's a good idea to keep all or most of your bonds in the major currency of your region.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.13%. Term = 34 yr. FI Duration = 6.2 yr. Portfolio survival probability = 95%.

ignition
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Re: Looking for EUR holy grail bond strategy

Post by ignition » Tue Jul 17, 2018 7:15 am

Valuethinker wrote:
Sat Jul 14, 2018 5:06 am
ignition wrote:
Sat Jul 14, 2018 4:10 am
What do you guys think about global inflation linked bond ETFs? (eg https://www.justetf.com/en/etf-profile. ... 0290357929)

Would it be useful for a European to include this into his portfolio to protect against inflation?
David Swensen takes you through the reasons why buying inflation linked bonds in other currencies than your home one is a bad idea

If the fund hedges into Euros then your return will be roughly the risk free real rate in the eurozone. I.e. negative. Otherwise you assume currency volatility which is large.
Do you have a link to David Swensen's reasoning? I tried googling but didn't find anything.

Also if you buy nominal hedged bonds, won't their real return also be negative? The yield was only 1.4% last I looked. Surely inflation will be higher?

Valuethinker
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Re: Looking for EUR holy grail bond strategy

Post by Valuethinker » Tue Jul 17, 2018 9:28 am

ignition wrote:
Tue Jul 17, 2018 7:15 am
Valuethinker wrote:
Sat Jul 14, 2018 5:06 am
ignition wrote:
Sat Jul 14, 2018 4:10 am
What do you guys think about global inflation linked bond ETFs? (eg https://www.justetf.com/en/etf-profile. ... 0290357929)

Would it be useful for a European to include this into his portfolio to protect against inflation?
David Swensen takes you through the reasons why buying inflation linked bonds in other currencies than your home one is a bad idea

If the fund hedges into Euros then your return will be roughly the risk free real rate in the eurozone. I.e. negative. Otherwise you assume currency volatility which is large.
Do you have a link to David Swensen's reasoning? I tried googling but didn't find anything.
I think it is in his personal investing book, rather than his institutional investment one. Basically you are buying inflation protection against someone else's inflation, rather than your own.

Don't know if Vanguard also wrote a paper?
Also if you buy nominal hedged bonds, won't their real return also be negative? The yield was only 1.4% last I looked. Surely inflation will be higher?
You don't know that the nominal return will be negative. If inflation is less than expected it might not be. Since I don't think we have a German inflation linked bond (just French and Italian?) we don't know what is credit risk and what is inflation expectations. The yield on the Inflation Indexed Bond gives you an estimate of what inflation will be.

Currency hedging in effect cancels out the difference in *nominal* yields between 2 bonds of different currencies *if they are of the same credit risk* (and coupon and liquidity and maturity).

My rough guess is that if you currency hedge a US TIPS or Canadian RRB into EUR, you will get around the risk free inflation linked bond yield in the Eurozone. Since we don't have a German inflation linked bond, you will get what such a bond might yield - which would be less than minus 1.0% p.a. This is only rough though because Covered Interest Parity holds for *nominal* interest rates-- AFAIK it doesn't hold for real interest rates.

CIP just means that the cost of hedging offsets the difference in interest rates between 2 currencies - what you win on one you give up on the other.

If you took an ordinary Canadian govt bond, 10 year, and hedged it back into EUR, you would get around the return of a German 10 year bond - ie barely positive (negative for some of the shorter maturities last I checked). Any yield pick up you do is because of credit & liquidity risk.

(the matching of the hedging is seldom exact, but usually very close -- you'd have to sell forward each CDN dollar coupon into Euros, a series of FX forward contracts stretching out 10 years).

ignition
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Re: Looking for EUR holy grail bond strategy

Post by ignition » Tue Jul 24, 2018 5:15 am

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ignition
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Re: Looking for EUR holy grail bond strategy

Post by ignition » Tue Jul 24, 2018 5:15 am

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ignition
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Re: Looking for EUR holy grail bond strategy

Post by ignition » Tue Jul 24, 2018 5:16 am

Valuethinker wrote:
Tue Jul 17, 2018 9:28 am
ignition wrote:
Tue Jul 17, 2018 7:15 am
Valuethinker wrote:
Sat Jul 14, 2018 5:06 am


David Swensen takes you through the reasons why buying inflation linked bonds in other currencies than your home one is a bad idea

If the fund hedges into Euros then your return will be roughly the risk free real rate in the eurozone. I.e. negative. Otherwise you assume currency volatility which is large.
Do you have a link to David Swensen's reasoning? I tried googling but didn't find anything.
I think it is in his personal investing book, rather than his institutional investment one. Basically you are buying inflation protection against someone else's inflation, rather than your own.

Don't know if Vanguard also wrote a paper?
How would you protect from inflation as a European? Buy a piece of real estate? Keep a high enough stock allocation?

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