My portfolio: seeking advice

[chiant1113]

Hello everyone,

Following the advices of John Bogle, I decided to create a two fund portfolio (75% equities, 25% bond).

My question is about the bond part of the portfolio. I have two options and I would like to know what you thing about it:

1) 100% AGGH, a global aggregate €-hedged.

2) 50% VGEA and 50% XBLC. Since there is no ideal euro aggregate accumulation etf, I would simulate it with this 50% governative and 50% corporate euro bond. I will lose geographical diversification, but I won’t pay the hedging costs.

My portfolios would thus be:

1) 75% VWCE, 20% AGGH, 5% IBCI

or

1) 75% VWCE, 10% VGEA, 10% XBLC, 5% IBCI


…what do you think? Thanks, guys

[hithere]

The data is limited, but VAGF seems to be doing a better job tracking its index than AGGH:

https://www.trackingdifferences.com/ETF ... 00BG47KH54
https://www.trackingdifferences.com/ETF ... 00BDBRDM35

As for corporate bonds, you don't need them. If you want higher risk and return, just increase the stock portion of your portfolio rather than buying riskier bonds.

[jg12345]

Hello everyone,

Following the advices of John Bogle, I decided to create a two fund portfolio (75% equities, 25% bond).

My question is about the bond part of the portfolio. I have two options and I would like to know what you thing about it:

1) 100% AGGH, a global aggregate €-hedged.

2) 50% VGEA and 50% XBLC. Since there is no ideal euro aggregate accumulation etf, I would simulate it with this 50% governative and 50% corporate euro bond. I will lose geographical diversification, but I won’t pay the hedging costs.

My portfolios would thus be:

1) 75% VWCE, 20% AGGH, 5% IBCI

or

1) 75% VWCE, 10% VGEA, 10% XBLC, 5% IBCI


…what do you think? Thanks, guys

1) why 5% IBCI? I think any ETF should be at least 10%, otherwise no difference, it's only complexity. Some people do 50% inflation linked and 50% global aggregate for their bond part, i think that might be something you want to consider vs 100% global aggregate bond.
2) If your issue is that AGGH is dist and not acc, why not VAGF global bond aggregate eur hedged acc?

[chiant1113]

1) why 5% IBCI? I think any ETF should be at least 10%, otherwise no difference, it's only complexity. Some people do 50% inflation linked and 50% global aggregate for their bond part, i think that might be something you want to consider vs 100% global aggregate bond.

In my model IL is 1/5 of the bond component of the portfolio.. I can raise it it 1/4 (6,25%) but I wouldn’t go over that level.

2) If your issue is that AGGH is dist and not acc, why not VAGF global bond aggregate eur hedged acc?

No, AGGH is Acc, but it’s 4 times bigger than VAGF, for the same TER. It helps! The point of my question is: should I have a global bond and pay the hedging costs or should I buy € bonds and not pay the hedging?

[chiant1113]

The data is limited, but VAGF seems to be doing a better job tracking its index than AGGH:

https://www.trackingdifferences.com/ETF ... 00BG47KH54
https://www.trackingdifferences.com/ETF ... 00BDBRDM35

As for corporate bonds, you don't need them. If you want higher risk and return, just increase the stock portion of your portfolio rather than buying riskier bonds.

AGGH is 4 times bigger than VGAF, for the same TER. It helps!
Corporate bonds are still investment grade, thus kinda decor related to equities. We need them, because government bonds have lower yield. Bogle suggests to use 50/50 gov/corp. I agree on what you say, but about high yield bonds.

The point of my question is: should I have a global bond and pay the hedging costs or should I buy € bonds and not pay the hedging?

[tre3sori]

The point of my question is: should I have a global bond and pay the hedging costs or should I buy € bonds and not pay the hedging?

You may be interested in this thread: viewtopic.php?t=289611.
Main points of the thread:
The cost of hedging should be close to the difference in the real interest rates.
Otherwise there would be opportunities for arbitrage. If the cost of hedging is higher than the difference in real interest rates you could buy global bonds and sell a currency hedge and make a profit.
Conclusion: the real return of a global bond fund hedged to EUR should be similar to the real return of a EUR bond fund with a similar risk profile.
The real interest rate in the EUR zone is kept artificially low by the ECB. Real rates in the US are higher -> the cost of hedging is about as high as it needs to be to bring US real rates to the low level of EUR real rates. Same logic applies to other currency pairs.
Global bond markets are pretty efficient, currency hedging is pretty efficient. If you are convinced of EUR real rates being permanently lower than global real rates, you could even go with unhedged global bonds, save the cost of hedging and pocket the saving yourself. You may get rewarded for this "currency play" if EUR loses further compared to a basket of foreign currencies. You may get punished if EUR appreciates.
Should you pay the cost of hedging? Not, if you want higher yields than available in the Eurozone. You won't get them. If there are higher yields elsewhere, the cost of hedging takes them away. Maybe if you want more diversification, less volatility (a joke after a history bear market in bonds ) ... this paper gives you a list of reasons:
https://www.vanguard.ca/documents/going ... -bonds.pdf

[galeno]

We use 100% AGGG as our only bond fund. We like that it is larger, distributing, and unhedged.

When paired with 50% VWRD our port has 60% US equities and 40% USD bonds. So 50% USD and 50% non-USD.

[Valuethinker]

The point of my question is: should I have a global bond and pay the hedging costs or should I buy € bonds and not pay the hedging?

You may be interested in this thread: viewtopic.php?t=289611.
Main points of the thread:
The cost of hedging should be close to the difference in the real interest rates.
Otherwise there would be opportunities for arbitrage. If the cost of hedging is higher than the difference in real interest rates you could buy global bonds and sell a currency hedge and make a profit.
Conclusion: the real return of a global bond fund hedged to EUR should be similar to the real return of a EUR bond fund with a similar risk profile.
The real interest rate in the EUR zone is kept artificially low by the ECB. Real rates in the US are higher -> the cost of hedging is about as high as it needs to be to bring US real rates to the low level of EUR real rates. Same logic applies to other currency pairs.
Global bond markets are pretty efficient, currency hedging is pretty efficient. If you are convinced of EUR real rates being permanently lower than global real rates, you could even go with unhedged global bonds, save the cost of hedging and pocket the saving yourself. You may get rewarded for this "currency play" if EUR loses further compared to a basket of foreign currencies. You may get punished if EUR appreciates.
Should you pay the cost of hedging? Not, if you want higher yields than available in the Eurozone. You won't get them. If there are higher yields elsewhere, the cost of hedging takes them away. Maybe if you want more diversification, less volatility (a joke after a history bear market in bonds ) ... this paper gives you a list of reasons:
https://www.vanguard.ca/documents/going ... -bonds.pdf

Why is the cost of hedging equal to the difference in real interest rates? The real interest rate is uncertain because it's hard to forecast inflation (the inflation derivatives market is not liquid)? So you can't know what your actual real value will be, say 1 year out?

Why not nominal interest rates?

The cost of Foreign Exchange Forward contracts is, simply, the difference in nominal interest rates (with a very small spread around that).

[tre3sori]

Why is the cost of hedging equal to the difference in real interest rates? The real interest rate is uncertain because it's hard to forecast inflation (the inflation derivatives market is not liquid)? So you can't know what your actual real value will be, say 1 year out?

Why not nominal interest rates?

The cost of Foreign Exchange Forward contracts is, simply, the difference in nominal interest rates (with a very small spread around that).

I was convinced that (in the thread I mentioned) alex_686 was right in saying: "Most bond funds use "Zero Cost" hedging, where the cost of the hedge is the difference between short term home currency government bonds and the short term foreign currency bonds. Normally, short term bonds have a high correlation with inflation. So the true cost of hedging should be pretty close to the difference in the real interest rates - as opposed to the nominal rates."

[Valuethinker]

Why is the cost of hedging equal to the difference in real interest rates? The real interest rate is uncertain because it's hard to forecast inflation (the inflation derivatives market is not liquid)? So you can't know what your actual real value will be, say 1 year out?

Why not nominal interest rates?

The cost of Foreign Exchange Forward contracts is, simply, the difference in nominal interest rates (with a very small spread around that).

I was convinced that (in the thread I mentioned) alex_686 was right in saying: "Most bond funds use "Zero Cost" hedging, where the cost of the hedge is the difference between short term home currency government bonds and the short term foreign currency bonds. Normally, short term bonds have a high correlation with inflation. So the true cost of hedging should be pretty close to the difference in the real interest rates - as opposed to the nominal rates."

I don't understand (from that thread) why, if the cost of hedging is exactly the difference in nominal rates, one would say the "true cost of hedging" is closer to the real interest rates?

Alex knows his stuff. So maybe if I read more about it I will be persuaded that is the case.

[galeno]

The cost of hedging these large funds is so negligable that it's safe to just ignore it.

We use unhedged AGGG because it's a distributing fund. AFAIK all the hedged funds, e.g. VAGU & AGGU, are accumulating funds.

[tre3sori]

We use unhedged AGGG because it's a distributing fund. AFAIK all the hedged funds, e.g. VAGU & AGGU, are accumulating funds.

Fortunately there is a distributing share class, Vanguard Global Aggregate Bond UCITS ETF - EUR Hedged Distributing (VAGE). That's what I use since I live off the dividends of my portfolio. But it only seems to be available at German stock exchange.

[jg12345]

1) why 5% IBCI? I think any ETF should be at least 10%, otherwise no difference, it's only complexity. Some people do 50% inflation linked and 50% global aggregate for their bond part, i think that might be something you want to consider vs 100% global aggregate bond.

In my model IL is 1/5 of the bond component of the portfolio.. I can raise it it 1/4 (6,25%) but I wouldn’t go over that level.

2) If your issue is that AGGH is dist and not acc, why not VAGF global bond aggregate eur hedged acc?

No, AGGH is Acc, but it’s 4 times bigger than VAGF, for the same TER. It helps! The point of my question is: should I have a global bond and pay the hedging costs or should I buy € bonds and not pay the hedging?

I would skip the ILBs then. 0%, 5% or 6% will not make a difference

I see - I would get global bond and pay the hedging cost, between the two options.