HEDGEFUNDIE's excellent adventure [Spain]

For residents of Spain.
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SpaniardBoglehead
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HEDGEFUNDIE's excellent adventure [Spain]

Post by SpaniardBoglehead »

[Moved into a new thread from: HEDGEFUNDIE's excellent adventure Part II: The next journey --admin LadyGeek]

Hello to everyone,

My first post here! I'm sorry in advance for my bad English, I'm not a native speaker. I'm a Boglehead from Spain, we have a forum of our own where we help each other to Stay the course (Check it out https://bogleheads.es/foro/). You're a role model for us all and we learn a lot from you, so thank you.

Recently I've been reading about HFEA and I wanted to implement it by allocating 10% of my portfolio to this strategy. In Spain, we mainly invest in mutual funds because they have tax advantages over ETFs (we can move money from one mutual fund to another one without paying any taxes, unlike with ETFs), but of course there are no leveraged mutual funds, so the only way to go is with UPRO/TMF in an US-based brokerage like IBKR or Tastyworks (which one of those would you recommend?).

The thing is, there is no such thing as Tax-exempt accounts like Roth IRA or 401k in Spain, so Tax Loss Harvesting (works the same as in US) is going to play a huge role in my portfolio. I was planning to start with 60%UPRO-40%TMF and rebalance quarterly. To TLH, I would use SPXL to end up with 60%SPXL-40%TMF, suits perfectly. The problem appears when it comes to replacing TMF. I would use UBT (only 2x leveraged) to end up with 40%UPRO-60%UBT. Or should I stay with 60%UPRO-40%UBT? What do you think? Do you know any better alternative o strategy?

I can't use futures or options because of my portfolio size.

Thank you a lot,
Regards.
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LadyGeek
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by LadyGeek »

Welcome! ¡Bienvenidos! I have moved your post to a new topic so we can discuss your situation in detail.

SpaniardBoglehead is referring to our brother Spain forum Foro Bogleheads® España - Inversión Pasiva, Indexada y Periódica.

(I am a member of both forums.)
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petulant
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by petulant »

I seem to recall many practitioners of HFEA suggested EDV as a temporary tax-loss harvesting partner with TMF. The theory is that TMF is composed of short-term borrowing plus exposure to long-duration bonds, which can be functionally similar to bonds of even longer duration--e.g., using cash X and borrowing Y amount at short-term rates to buy X+Y 10-year Treasury bonds may be similar to buying a 20-year Treasury bond with cash X. I believe they also reviewed volatility and correlation information that showed EDV could act similarly to TMF in moments of market stress, e.g., EDV and TMF both shot up in April 2020. I think TMF is still "more" whatever EDV is, though, so the ratios are off and you would only use EDV temporarily. You can search the HFEA II thread for "EDV" and find their discussion--might find their alternative options as well.
Hydromod
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by Hydromod »

TMF is for (i) crash protection, (ii) portfolio volatility reduction through low or negative correlation, and (iii) reducing effective leverage on equities.

The first role is from the "flight to safety" reaction to crashes, where investors transfer from equities to treasuries.

The second role occurs because daily movements of the assets are not perfectly correlated. This effect is most beneficial for negative correlation, which has occurred for long periods of time. The effect is muted when the correlation is positive, which also has occurred for extended periods.

Both of these first two also tend to give a rebalancing bonus, where you are automatically selling at highs to buy at lows.

The optimal long-term leverage on S&P 500 has been found to be around 2x; with HFEA, the effective leverage is 0.55*3x = 1.65x. Cutting leverage will cut volatility.

Starting with those points, the portfolio construction historically would have been ok long-term when the effective leverage was <2x with pure equities. The rest of the actions are for volatility control.

This is a sort of long-winded way of saying that the key point is to control the leverage on UPRO. You get the biggest bang with respect to price movement with TMF, but UBT or TLT or cash will also work, albeit with higher volatility.

You are perhaps increasing your risk and reducing your rebalancing bonus with some hedge other than TMF, but realize that this is a short-term issue that will only last for 30 days. You should do a little check to see how often you will be doing this. A bit poorer insurance for a small fraction of the time you are invested may not be all that worrisome.
skierincolorado
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by skierincolorado »

Are you sure you don't have enough for futures? They are better for a number of additional reasons. You'd probably need about 20k to get started with futures.

You can use edv to tlh but switch back to tmf as soon as possible.

When you rebalance you should be keeping the amount of upro as close to target as possible or else you will increase your sequence of returns risk greatly. Dropping it to 40% temporarily and then going back to 60% isn't a good idea.
TedSwippet
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by TedSwippet »

SpaniardBoglehead wrote: Fri Aug 05, 2022 9:27 am I was planning to start with 60%UPRO-40%TMF and rebalance quarterly. To TLH, I would use SPXL to end up with 60%SPXL-40%TMF, suits perfectly. The problem appears when it comes to replacing TMF. I would use UBT (only 2x leveraged) to end up with 40%UPRO-60%UBT. Or should I stay with 60%UPRO-40%UBT?
Two notes on this.

Firstly, as an EU resident, you may find it difficult to access these ETFs. An EU regulation known as PRIIPs effectively restricts brokers from offering US domiciled ETFs to EU residents. And secondly, Spain has no estate tax treaty with the US, meaning that anything you hold in US domiciled funds or ETFs, or any other 'US situs' assets, above $60,000 is at risk of confiscation of 26-40% by US estate tax.

Further details in the wiki, for example:

- Are nonresident aliens at risk from US estate taxes?
- EU legislation : UCITS, MiFID II and PRIIPs
- ETF domicile recommendations table for US stocks
Topic Author
SpaniardBoglehead
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Joined: Fri Aug 05, 2022 7:49 am

Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by SpaniardBoglehead »

petulant wrote: Fri Aug 05, 2022 10:14 am I seem to recall many practitioners of HFEA suggested EDV as a temporary tax-loss harvesting partner with TMF. The theory is that TMF is composed of short-term borrowing plus exposure to long-duration bonds, which can be functionally similar to bonds of even longer duration--e.g., using cash X and borrowing Y amount at short-term rates to buy X+Y 10-year Treasury bonds may be similar to buying a 20-year Treasury bond with cash X. I believe they also reviewed volatility and correlation information that showed EDV could act similarly to TMF in moments of market stress, e.g., EDV and TMF both shot up in April 2020. I think TMF is still "more" whatever EDV is, though, so the ratios are off and you would only use EDV temporarily. You can search the HFEA II thread for "EDV" and find their discussion--might find their alternative options as well.
Yes, I see it now, EDV is probably a better alternative to UBT for TLH, almost have the same volatility, with less expense ratio and no borrowing costs.

I think for those who are targeting 100% exposure to stocks, EDV is a better permanent alternative to TMF too. But if we want 150-200% exposure to stocks, we must stick with TMF.
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SpaniardBoglehead
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by SpaniardBoglehead »

TedSwippet wrote: Fri Aug 05, 2022 10:51 am
SpaniardBoglehead wrote: Fri Aug 05, 2022 9:27 am I was planning to start with 60%UPRO-40%TMF and rebalance quarterly. To TLH, I would use SPXL to end up with 60%SPXL-40%TMF, suits perfectly. The problem appears when it comes to replacing TMF. I would use UBT (only 2x leveraged) to end up with 40%UPRO-60%UBT. Or should I stay with 60%UPRO-40%UBT?
Two notes on this.

Firstly, as an EU resident, you may find it difficult to access these ETFs. An EU regulation known as PRIIPs effectively restricts brokers from offering US domiciled ETFs to EU residents. And secondly, Spain has no estate tax treaty with the US, meaning that anything you hold in US domiciled funds or ETFs, or any other 'US situs' assets, above $60,000 is at risk of confiscation of 26-40% by US estate tax.

Further details in the wiki, for example:

- Are nonresident aliens at risk from US estate taxes?
- EU legislation : UCITS, MiFID II and PRIIPs
- ETF domicile recommendations table for US stocks
Yes, unfortunately we have no access to US domiciled ETFs from an EU brokerage. That's why I will be opening an US brokerage. Interactive Brokers and TastyWorks offer their services in Spain. We just need to inform our Tax Administration Agency and fill some forms.

To me knowledge, US and Spain do have a taxation agreements.
https://www.hacienda.gob.es/Documentaci ... E_EEUU.pdf
https://sede.agenciatributaria.gob.es/S ... nidos.html
TedSwippet wrote: Fri Aug 05, 2022 10:51 am meaning that anything you hold in US domiciled funds or ETFs, or any other 'US situs' assets, above $60,000 is at risk of confiscation of 26-40% by US estate tax
First time I hear that, I neet to investigate if this is applicable to spanish residents.
Topic Author
SpaniardBoglehead
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Joined: Fri Aug 05, 2022 7:49 am

Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by SpaniardBoglehead »

skierincolorado wrote: Fri Aug 05, 2022 10:49 am Are you sure you don't have enough for futures? They are better for a number of additional reasons. You'd probably need about 20k to get started with futures.

You can use edv to tlh but switch back to tmf as soon as possible.

When you rebalance you should be keeping the amount of upro as close to target as possible or else you will increase your sequence of returns risk greatly. Dropping it to 40% temporarily and then going back to 60% isn't a good idea.
Yes, varying UPRO holdings so dramatically in a short period of time doesn't sound good. For now, i'll be utilizing EDV as TMF replacement (hopefully for just 2 months a year o so) and stick with my original AA 60%-40%

I will give futures a try, for sure, as my portfolio grows and as I get a deeper understanding of how they work, but not right now.
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SpaniardBoglehead
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by SpaniardBoglehead »

Hydromod wrote: Fri Aug 05, 2022 10:21 am TMF is for (i) crash protection, (ii) portfolio volatility reduction through low or negative correlation, and (iii) reducing effective leverage on equities.

The first role is from the "flight to safety" reaction to crashes, where investors transfer from equities to treasuries.

The second role occurs because daily movements of the assets are not perfectly correlated. This effect is most beneficial for negative correlation, which has occurred for long periods of time. The effect is muted when the correlation is positive, which also has occurred for extended periods.

Both of these first two also tend to give a rebalancing bonus, where you are automatically selling at highs to buy at lows.

The optimal long-term leverage on S&P 500 has been found to be around 2x; with HFEA, the effective leverage is 0.55*3x = 1.65x. Cutting leverage will cut volatility.

Starting with those points, the portfolio construction historically would have been ok long-term when the effective leverage was <2x with pure equities. The rest of the actions are for volatility control.

This is a sort of long-winded way of saying that the key point is to control the leverage on UPRO. You get the biggest bang with respect to price movement with TMF, but UBT or TLT or cash will also work, albeit with higher volatility.

You are perhaps increasing your risk and reducing your rebalancing bonus with some hedge other than TMF, but realize that this is a short-term issue that will only last for 30 days. You should do a little check to see how often you will be doing this. A bit poorer insurance for a small fraction of the time you are invested may not be all that worrisome.
Yes, I'm convinced I shouldn't be varying my stocks exposure.

In Spain, to apply for tax loss harvesting, we need to stay out al least 2 months before switching back to the original ETF. So, assuming twice TLH on bonds on average per year, I'll be holding 1/3 of the time EDV vs 2/3 TMF. Not that short period of time, but still.
TedSwippet
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by TedSwippet »

SpaniardBoglehead wrote: Sat Aug 06, 2022 5:36 am Yes, unfortunately we have no access to US domiciled ETFs from an EU brokerage. That's why I will be opening an US brokerage. Interactive Brokers and TastyWorks offer their services in Spain.
On this point, maybe read the following:

- Interactive brokers screws EU customers - Bogleheads.org
- Interactive Brokers won't let me buy UPRO (can't do HFEA?) - Bogleheads.org
- PRIIP Order Reject Translations | IB Knowledge Base
SpaniardBoglehead wrote: Sat Aug 06, 2022 5:36 am To me knowledge, US and Spain do have a taxation agreements.
https://www.hacienda.gob.es/Documentaci ... E_EEUU.pdf
https://sede.agenciatributaria.gob.es/S ... nidos.html
These are US income tax treaties. US estate tax treaties are separate, and there are far fewer of them:

Estate & Gift Tax Treaties (International) | Internal Revenue Service

Because Spain has no US estate tax treaties, Spanish investors risk losing 26-40% of their US based investments above $60,000 to US estate tax if they die while holding them:

Some Nonresidents with U.S. Assets Must File Estate Tax Returns | Internal Revenue Service
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cos
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by cos »

SpaniardBoglehead wrote: Fri Aug 05, 2022 9:27 am In Spain, we mainly invest in mutual funds because they have tax advantages over ETFs (we can move money from one mutual fund to another one without paying any taxes, unlike with ETFs), but of course there are no leveraged mutual funds, so the only way to go is with UPRO/TMF in an US-based brokerage like IBKR or Tastyworks (which one of those would you recommend?).
Do you have access to PSLDX? If so, that might be worth a look.
TedSwippet
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Re: HEDGEFUNDIE's excellent adventure [Spain]

Post by TedSwippet »

cos wrote: Sat Aug 06, 2022 9:17 am
SpaniardBoglehead wrote: Fri Aug 05, 2022 9:27 am In Spain, we mainly invest in mutual funds because they have tax advantages over ETFs (we can move money from one mutual fund to another one without paying any taxes, unlike with ETFs), but of course there are no leveraged mutual funds, so the only way to go is with UPRO/TMF in an US-based brokerage like IBKR or Tastyworks (which one of those would you recommend?).
Do you have access to PSLDX? If so, that might be worth a look.
Pimco US domiciled mutual fund? Highly unlikely to be accessible to a Spanish investor and US nonresident alien. And even if accessible, as with US domiciled ETFs, a potential massive US estate tax trap anyway.
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