global bond etf - "eur hedged" if you don't trust the euro ?

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Topic Author
ibmkahm2
Posts: 2
Joined: Mon Jul 08, 2019 1:17 pm

global bond etf - "eur hedged" if you don't trust the euro ?

Post by ibmkahm2 » Mon Jul 08, 2019 2:07 pm

Hi,

i'm an investor from germany and plan to setup a conservative etf portfolio that contains:
30% global stocks etf, 70% global bonds etf

i know that it is usually recommended to choose a hedged version of a global bond etf, in my case it would be "Euro hedged" (e.g. Vanguard Global Aggregate Bond- IE00BG47KH54).

But for several reasons (would take too long to describe here in detail) i don't trust that the Euro curreny will remain in the long-term, especially when i retire in maybe 20-30years. At least i trust the us dollar a lot more, so i would consider an unhedged or even USD hedged version of the etf (Vanguard Global Aggregate Bond USD Hedged - IE00BG47KJ78 or iShares Core Global Aggregate Bond unhedged - IE00B3F81409)

Therefore my questions to you are:

1) if you don't trust the Euro currency in the long term, would you still buy an "Euro hedged" bond etf, if you lived in an Euro currency country, because of the advantages of currency hedging?

2) what exactly would happen with an "Euro hedged" bond etf (like ) in the case the euro crashes? The etf would loose of course, but how much does the overall etf performance depended on the currency? notice: the global bond etfs i consider contain ~42% US market allocation

Thanks!

DJN
Posts: 356
Joined: Mon Nov 20, 2017 12:30 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by DJN » Mon Jul 08, 2019 10:32 pm

Hi,
no one knows what will happen to the Euro or any other currency for that matter. If you are nervous about that you could do what I do and keep some of your investments in dollars and some in Euros. I spread them out (not equally) over dollars, euros and sterling. This is a very high level type of hedging, but for me it is founded on multiple locations for other reasons. You know that you can of course reinvest in another currency later on if you want to. More important in my view to get invested.
In regards to hedging to the Euro I think that this is ok for the fixed income side as I want this to stay as steady as possible into the future.
DJN
Yah shure

Schlabba
Posts: 52
Joined: Sat May 11, 2019 9:14 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by Schlabba » Tue Jul 09, 2019 1:43 am

ibmkahm2 wrote:
Mon Jul 08, 2019 2:07 pm
Hi,

i'm an investor from germany and plan to setup a conservative etf portfolio that contains:
30% global stocks etf, 70% global bonds etf

i know that it is usually recommended to choose a hedged version of a global bond etf, in my case it would be "Euro hedged" (e.g. Vanguard Global Aggregate Bond- IE00BG47KH54).

But for several reasons (would take too long to describe here in detail) i don't trust that the Euro curreny will remain in the long-term, especially when i retire in maybe 20-30years. At least i trust the us dollar a lot more, so i would consider an unhedged or even USD hedged version of the etf (Vanguard Global Aggregate Bond USD Hedged - IE00BG47KJ78 or iShares Core Global Aggregate Bond unhedged - IE00B3F81409)

Therefore my questions to you are:

1) if you don't trust the Euro currency in the long term, would you still buy an "Euro hedged" bond etf, if you lived in an Euro currency country, because of the advantages of currency hedging?

2) what exactly would happen with an "Euro hedged" bond etf (like ) in the case the euro crashes? The etf would loose of course, but how much does the overall etf performance depended on the currency? notice: the global bond etfs i consider contain ~42% US market allocation

Thanks!
If the euro would disappear, there would be a different currency to replace it. If you worry about the euro becoming totally worthless, you are actually worrying about high inflation.

Maybe you could look into inflation protection instead?

On question 2: if the euro crashes with a hedge you still have exactly as much money as you had before. Because both your cost of living and your net worth crash at the same time. Unhedged would have left you rich in that scenario.
However, if the USD crashes and you are unhedged, the same story applies but then the other way around.

Valuethinker
Posts: 38167
Joined: Fri May 11, 2007 11:07 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by Valuethinker » Tue Jul 09, 2019 10:25 am

ibmkahm2 wrote:
Mon Jul 08, 2019 2:07 pm
Hi,

i'm an investor from germany and plan to setup a conservative etf portfolio that contains:
30% global stocks etf, 70% global bonds etf

i know that it is usually recommended to choose a hedged version of a global bond etf, in my case it would be "Euro hedged" (e.g. Vanguard Global Aggregate Bond- IE00BG47KH54).

But for several reasons (would take too long to describe here in detail) i don't trust that the Euro curreny will remain in the long-term, especially when i retire in maybe 20-30years. At least i trust the us dollar a lot more, so i would consider an unhedged or even USD hedged version of the etf (Vanguard Global Aggregate Bond USD Hedged - IE00BG47KJ78 or iShares Core Global Aggregate Bond unhedged - IE00B3F81409)

Therefore my questions to you are:

1) if you don't trust the Euro currency in the long term, would you still buy an "Euro hedged" bond etf, if you lived in an Euro currency country, because of the advantages of currency hedging?
You have to presume the thing splits into subsidiary currencies. New Lira new DM etc. My guess is NL DE FIN at least go with a new DM. All your currency holdings would be redenominated into the new currency. If that happens to be the new DM it probably then rises against other currencies.

The main risk to my mind is a restructuring/ default of a southern tier country. Italy is the big risk because that is c 45 per cent of the entire Eurozone govt bond market. That's why I suggest holding a global bond fund not a Eurozone one.
2) what exactly would happen with an "Euro hedged" bond etf (like ) in the case the euro crashes? The etf would loose of course, but how much does the overall etf performance depended on the currency? notice: the global bond etfs i consider contain ~42% US market allocation

Thanks!
I don't know if there is any provision in the fund prospectus. My guess is holders would be cashed out at the then prevailing values. The chaos on the way would be a rough ride though. A lot if volatility as the market tried to position itself. There was that 2 minute period when CHF tise against EUR by 20 per cent ... that kind of volatility in currencies if not bonds.

If you hedge to your home currency you get roughly the return in your home currency. The risk free rate , the 10 year German govt bond currently yields negative so that would be the return. You pick up a little because some countries have lower credit ratings and higher yields (e.g. Italy about 2 per cent) and because of different interest rate cycles (the cost of hedging does not fully offset that the US 10 year is trading at 2.0% vs German Bund at say -0.6%).

If you are truly worried about the Euro then put half your bonds in EUR hedged and half in USD hedged.

Topic Author
ibmkahm2
Posts: 2
Joined: Mon Jul 08, 2019 1:17 pm

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by ibmkahm2 » Tue Jul 09, 2019 10:40 am

thanks a lot for all the helpful answers!

LHRAdam
Posts: 12
Joined: Thu Jul 26, 2018 7:58 pm

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by LHRAdam » Wed Jul 10, 2019 2:42 pm

If I’ve understood the detailed and insightful posts on BH across the forum, the point of hedging isn’t so much the stability of the currency as an entity in itself, but more that we hedge into the currency used in the country in which we need to spend the money. In my case I hedge to GBP because I live in the UK and nearly all my spending is in GBP. Hedging reduces portfolio volatility (which is much more important on the bond side) by removing foreign exchange fluctuation from the equation altogether.

Valuethinker
Posts: 38167
Joined: Fri May 11, 2007 11:07 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by Valuethinker » Fri Jul 12, 2019 2:41 am

LHRAdam wrote:
Wed Jul 10, 2019 2:42 pm
If I’ve understood the detailed and insightful posts on BH across the forum, the point of hedging isn’t so much the stability of the currency as an entity in itself, but more that we hedge into the currency used in the country in which we need to spend the money. In my case I hedge to GBP because I live in the UK and nearly all my spending is in GBP. Hedging reduces portfolio volatility (which is much more important on the bond side) by removing foreign exchange fluctuation from the equation altogether.
This is true. Currency volatility is held to be a source of risk which is not compensated by return.

Since you liabilities are in GBP you want your assets to be in GBP.

We assume that currency volatility in the long run is ironed out for the equity investor- rises in currency are matched by falls in stock prices and vice versa. This is only true in the very long run and may not be true at all meaning in the 10 years

[Edit: meaning that in the 10 years before retirement you have to consider increasing your home currency weighting quite considerably]

However OP has a structural worry about the Euro so holding some percentage of fixed income assets in USD is reasonable.

It is OPs hedge against Euro breakup.
Last edited by Valuethinker on Sat Jul 13, 2019 7:35 am, edited 2 times in total.

msk
Posts: 1226
Joined: Mon Aug 15, 2016 10:40 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by msk » Fri Jul 12, 2019 3:10 am

Hedging a bond fund long term seems riddled with high risks. Any currency can collapse extremely rapidly because its government has allowed inflation to run too high and into catastrophe. Low to moderate inflation is attractive to any government because it allows it to appease its citizens with the extra couple percent (the inflation rate) worth of unbacked/unjustified free currency. But any government may misjudge and allow that "moderate" inflation to get so large that confidence is lost and the currency drops into the abyss of hyperinflation; and if you happen to have all your bonds hedged into this hyperinflated currency, you have lost massively. That's perhaps why there are people who still invest in gold. When an individual contemplates a 30+ year investment horizon, many would urge a low weight in bonds, hedged or unhedged, in any currency. Of course, bond interests during hyperinflation will also rise enormously but your pot in hedged bonds has already shrunk massively.

Schlabba
Posts: 52
Joined: Sat May 11, 2019 9:14 am

Re: global bond etf - "eur hedged" if you don't trust the euro ?

Post by Schlabba » Fri Jul 12, 2019 4:41 am

msk wrote:
Fri Jul 12, 2019 3:10 am
Hedging a bond fund long term seems riddled with high risks. Any currency can collapse extremely rapidly because its government has allowed inflation to run too high and into catastrophe. Low to moderate inflation is attractive to any government because it allows it to appease its citizens with the extra couple percent (the inflation rate) worth of unbacked/unjustified free currency. But any government may misjudge and allow that "moderate" inflation to get so large that confidence is lost and the currency drops into the abyss of hyperinflation; and if you happen to have all your bonds hedged into this hyperinflated currency, you have lost massively. That's perhaps why there are people who still invest in gold. When an individual contemplates a 30+ year investment horizon, many would urge a low weight in bonds, hedged or unhedged, in any currency. Of course, bond interests during hyperinflation will also rise enormously but your pot in hedged bonds has already shrunk massively.
The alternative to hedging currency is having wild currency volatility on your ‘safe’ part of your portfolio. If you have any adversity in your life that requires you to take money out of your investments you might end up losing alot on your unhedged ‘safe’ investments.

I personally think the likelyhood of having to use some of my investments is higher than the euro collapsing.

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