Bond part of portfolio in inflation linked bond ETF

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ForceForce3001
Posts: 4
Joined: Thu Apr 01, 2021 7:27 am

Bond part of portfolio in inflation linked bond ETF

Post by ForceForce3001 »

Hello everyone,
I am 40 year old Boglehead investor from European country Serbia (non EU). 70% of my portfolio is the stock ETF FTSE All-World (VWCE). Remaining 30% is a risk-free, fixed-income part of the portfolio, hence the bond ETFs. I want to allocate one third of 30% (10% of total) to inflation-linked bond ETF (abbreviated ILB). My options:

1. Eurozone ILB would be a logical solution because EUR is true-life reserve currency in my country although we have domestic currency RSD. However, euro-ILB are exposed to Italy and I am fearful of Greek crises scenario. I have no confidence in the EUR in the long run. In addition, these ETFs have become much more expensive since the beginning of the year (up 8%). Example ETF for option 1 is: iShares Euro Inflation Linked Government Bond UCITS ETF (ISIN IE00B0M62X26).

2. Second option is a global inflation-linked bond ETF, e.g. Xtrackers Global Inflation-Linked Bond UCITS ETF 1C EUR hedged (ISIN LU0290357929). On the positive side, the risk is diversified to more countries outside the EU, but the ETF duration is over 12 years, which exceeds my time-horizon of 10 years and exposes me to a potential capital loss due to interest rates hike.

3. Third option is the US TIPS ETF. Positive: USD is a world reserve currency, in a way US inflation is world inflation - raw materials and commodities are priced in USD. iShares USD TIPS UCITS ETF EUR Hedged (Acc) ISIN IE00BDZVH966 has duration of reasonable 8 years. Moreover, EUR-hedged share class eliminates currency risk, and my home currency RSD was stable against EUR for the last five years. Or maybe USD share class is better option (I noticed that average trading volume is surprisingly small when compared to EUR hedged class of the same ETF (5k vs 160k).

Please advise, which option do you prefer? Does it make sense for non-US investor to buy US TIPS ETF?

Have a great day!
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galeno
Posts: 2309
Joined: Fri Dec 21, 2007 12:06 pm

Re: Bond part of portfolio in inflation linked bond ETF

Post by galeno »

My opinion. If you have >/= 60% equities you DO NOT need to hold inflation linked bonds which ALL have negative real yields. They can also have liquidity issues.

Better choices for bonds would be nominal world bonds (~AGGG) or intermediate term US treasuries (~VDTY).

With 70% equities you want your bonds to be good ballast when equities crash.
KISS & STC.
Topic Author
ForceForce3001
Posts: 4
Joined: Thu Apr 01, 2021 7:27 am

Re: Bond part of portfolio in inflation linked bond ETF

Post by ForceForce3001 »

Inflation linked bond ETFs underperformed because inflation was low. But for the next few years should we expect otherwise?
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vineviz
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Joined: Tue May 15, 2018 1:55 pm

Re: Bond part of portfolio in inflation linked bond ETF

Post by vineviz »

ForceForce3001 wrote: Thu Jun 10, 2021 11:24 am
2. Second option is a global inflation-linked bond ETF, e.g. Xtrackers Global Inflation-Linked Bond UCITS ETF 1C EUR hedged (ISIN LU0290357929). On the positive side, the risk is diversified to more countries outside the EU, but the ETF duration is over 12 years, which exceeds my time-horizon of 10 years and exposes me to a potential capital loss due to interest rates hike.
Your investment horizon is definitely not 10 years if you are only 40 years old. If you retire at age 50 and live until age 90, your investment horizon is closer to 30 years than to 10 years because the investment horizon (the figure you want to match with bond duration) is the length of time until the average portfolio withdrawal and not the length of time until the first portfolio withdrawal.

So a fund like ISIN or iShares Global Inflation Linked Govt Bond UCITS ETF (IS3V) would be completely appropriate as an inflation-linked bond fund for you.

I think a combination of 15% in one of these global inflation liked bond funds and 15% in a global aggregate bond fund (e.g. iShares Core Global Aggregate Bond UCITS ETF, AGGH) would be an entirely reasonable bond allocation if you expect to retire in the next 10 years.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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