Global nomad from EU seeks 1 more bond Etf for diversification

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Jaxx
Posts: 29
Joined: Mon Aug 17, 2015 1:43 pm

Global nomad from EU seeks 1 more bond Etf for diversification

Post by Jaxx » Mon Apr 10, 2017 10:47 am

Hi guys,

I am relatively new to the game. I am EU citizen living as an expat in the ME.

I have purchased the Vanguard World Stock Etf and my next purchase will be a bond Etf.

I am considering 2 options:

A) Just buy the ishares global government bond ucits and maybe in the inflation protected version when I get a little older (currently 34)
Or
B) Buy Vanguard total bond market Etf and Ishares euro aggregate bond ucits.

Option A I see is safer in one way as I rely on government bonds with high credit ratings (although 2008 highlighted as to whether we can trust credit ratings from the agencies). However, considering recent government performance,I wonder if this is diversified enough. I am thinking about adding Corporate bonds, although they apparently are strongly correlated with stocks.

Anyone know of any good alternative other than corporate bonds?

Option B I see is more diversified but still focussed on/ restricted to the west (and there is a lot of government debt). It allows for me to convert to euros if I retire to the EU. But will probably incur higher transaction costs, both buying and selling.

Could really use the help guys.

Jaxx

User avatar
Tyler Aspect
Posts: 476
Joined: Mon Mar 20, 2017 10:27 pm
Location: California
Contact:

Re: Global nomad from EU seeks 1 more bond Etf for diversification

Post by Tyler Aspect » Tue Apr 11, 2017 12:50 am

Are you living in Montenegro? Do you have American citizenship?

You have to be sure of tax implications before going ahead and purchasing an ETF. The country of domicile for the ETF is quite important.
Past result does not predict future performance. Mentioned investments may lose money. Contents are presented "AS IS" and any implied suitability for a particular purpose are disclaimed.

Jaxx
Posts: 29
Joined: Mon Aug 17, 2015 1:43 pm

Re: Global nomad from EU seeks 1 more bond Etf for diversification

Post by Jaxx » Tue Apr 11, 2017 2:35 am

Tyler Aspect wrote:Are you living in Montenegro? Do you have American citizenship?

You have to be sure of tax implications before going ahead and purchasing an ETF. The country of domicile for the ETF is quite important.



Hi Tyler, no I live in the UAE. No taxes here. And the UAE Dirham is pegged to the USD.

Valuethinker
Posts: 33144
Joined: Fri May 11, 2007 11:07 am

Re: Global nomad from EU seeks 1 more bond Etf for diversification

Post by Valuethinker » Tue Apr 11, 2017 5:05 am

Jaxx wrote:Hi guys,

I am relatively new to the game. I am EU citizen living as an expat in the ME.

I have purchased the Vanguard World Stock Etf and my next purchase will be a bond Etf.

I am considering 2 options:

A) Just buy the ishares global government bond ucits and maybe in the inflation protected version when I get a little older (currently 34)
Or
B) Buy Vanguard total bond market Etf and Ishares euro aggregate bond ucits.
[/quote

Reality is it will make no huge difference, and your choices at 54 will be different than your choices now-- what's available, and what you choose.

I would take A:

- look at the charts for 2008, and corporate bonds (investment grade). That is not a risk free investment. Remember a lot of corporate bonds are issued by banks and other financial institutions

- even if there are credit issues with one or more western governments, (Italy?), you have to take it as a given that developed world government debt will mostly be repaid on time, and in full. Otherwise just about every investment strategy here goes out the window-- we are in a repeat of the 1930s & 40s

Question which currency (if any) does A hedge back to? I am basically focusing on Sterling ETFs & funds, because that will be my currency of retirement. To which one has to say, after 2016-- OUCH! Oh well, we can only Brexit once, right? ;-).

Option A I see is safer in one way as I rely on government bonds with high credit ratings (although 2008 highlighted as to whether we can trust credit ratings from the agencies). However, considering recent government performance,I wonder if this is diversified enough. I am thinking about adding Corporate bonds, although they apparently are strongly correlated with stocks.

Anyone know of any good alternative other than corporate bonds?

Option B I see is more diversified but still focussed on/ restricted to the west (and there is a lot of government debt). It allows for me to convert to euros if I retire to the EU. But will probably incur higher transaction costs, both buying and selling.


I do not know of a better alternative to bonds. In some countries term deposits/ CDs are available that *within government guaranteed limits on bank accounts* offer higher returns than current bond yields (terms usually up to 5 or 10 years). However as the people of Iceland found out, ditto Cyprus (although in the end the 100k EUR deposit guarantee was honoured there), if your government goes broke, then the deposit insurance might not be worth much-- the case was in the UK the Icelandic banks were offering 8% online deposit rates when the UK banks were offering 5%. However it turned out (for certain financial institutions, but not all of them) that the guarantee was actually to be made good by the *home* government, ie Iceland, not the UK government compensation scheme. Thus, those deposits were under threat- -I don't know if they were actually paid out.

So hold government bonds (investment grade, developed) and live with it.

Although some Emerging Markets bonds are probably better credit risk than some developed countries, generally I don't like the asset class. EM have severe correlation risk-- one going down can cause a panic in others. Why take equity like risk for bond like returns? I'd rather own the stocks.

Jaxx
Posts: 29
Joined: Mon Aug 17, 2015 1:43 pm

Re: Global nomad from EU seeks 1 more bond Etf for diversification

Post by Jaxx » Tue Oct 31, 2017 1:31 am

Valuethinker wrote:
Tue Apr 11, 2017 5:05 am
Jaxx wrote:Hi guys,

I am relatively new to the game. I am EU citizen living as an expat in the ME.

I have purchased the Vanguard World Stock Etf and my next purchase will be a bond Etf.

I am considering 2 options:

A) Just buy the ishares global government bond ucits and maybe in the inflation protected version when I get a little older (currently 34)
Or
B) Buy Vanguard total bond market Etf and Ishares euro aggregate bond ucits.
[/quote

Reality is it will make no huge difference, and your choices at 54 will be different than your choices now-- what's available, and what you choose.

I would take A:

- look at the charts for 2008, and corporate bonds (investment grade). That is not a risk free investment. Remember a lot of corporate bonds are issued by banks and other financial institutions

- even if there are credit issues with one or more western governments, (Italy?), you have to take it as a given that developed world government debt will mostly be repaid on time, and in full. Otherwise just about every investment strategy here goes out the window-- we are in a repeat of the 1930s & 40s

Question which currency (if any) does A hedge back to? I am basically focusing on Sterling ETFs & funds, because that will be my currency of retirement. To which one has to say, after 2016-- OUCH! Oh well, we can only Brexit once, right? ;-).
Option A I see is safer in one way as I rely on government bonds with high credit ratings (although 2008 highlighted as to whether we can trust credit ratings from the agencies). However, considering recent government performance,I wonder if this is diversified enough. I am thinking about adding Corporate bonds, although they apparently are strongly correlated with stocks.

Anyone know of any good alternative other than corporate bonds?

Option B I see is more diversified but still focussed on/ restricted to the west (and there is a lot of government debt). It allows for me to convert to euros if I retire to the EU. But will probably incur higher transaction costs, both buying and selling.
I do not know of a better alternative to bonds. In some countries term deposits/ CDs are available that *within government guaranteed limits on bank accounts* offer higher returns than current bond yields (terms usually up to 5 or 10 years). However as the people of Iceland found out, ditto Cyprus (although in the end the 100k EUR deposit guarantee was honoured there), if your government goes broke, then the deposit insurance might not be worth much-- the case was in the UK the Icelandic banks were offering 8% online deposit rates when the UK banks were offering 5%. However it turned out (for certain financial institutions, but not all of them) that the guarantee was actually to be made good by the *home* government, ie Iceland, not the UK government compensation scheme. Thus, those deposits were under threat- -I don't know if they were actually paid out.

So hold government bonds (investment grade, developed) and live with it.

Although some Emerging Markets bonds are probably better credit risk than some developed countries, generally I don't like the asset class. EM have severe correlation risk-- one going down can cause a panic in others. Why take equity like risk for bond like returns? I'd rather own the stocks.
Thanks for this! That's really useful! Jaxx

Valuethinker
Posts: 33144
Joined: Fri May 11, 2007 11:07 am

Re: Global nomad from EU seeks 1 more bond Etf for diversification

Post by Valuethinker » Tue Oct 31, 2017 4:09 am

Jaxx wrote:
Mon Apr 10, 2017 10:47 am
Hi guys,

I am relatively new to the game. I am EU citizen living as an expat in the ME.

I have purchased the Vanguard World Stock Etf and my next purchase will be a bond Etf.

I am considering 2 options:

A) Just buy the ishares global government bond ucits and maybe in the inflation protected version when I get a little older (currently 34)
Or
B) Buy Vanguard total bond market Etf and Ishares euro aggregate bond ucits.

Option A I see is safer in one way as I rely on government bonds with high credit ratings (although 2008 highlighted as to whether we can trust credit ratings from the agencies). However, considering recent government performance,I wonder if this is diversified enough. I am thinking about adding Corporate bonds, although they apparently are strongly correlated with stocks.

Anyone know of any good alternative other than corporate bonds?

Option B I see is more diversified but still focussed on/ restricted to the west (and there is a lot of government debt). It allows for me to convert to euros if I retire to the EU. But will probably incur higher transaction costs, both buying and selling.

Could really use the help guys.

Jaxx
Buy A

Simple and sweet.

EUR/ USD movements are your main risk factor depending upon where you might retire. Eventually you might want to buy a property in your intended country/ place of retirement.

You don't need diversification into credit risk. If you look at what happened after Lehman in Sept 2008 corporate bonds, which have credit risk and thus economic sensitivity, took an absolute pounding.

Something like half of Eurozone corporate debt is issued by financial companies. In other words, you are taking another bet on the health of the Eurozone banking sector- -when we know the Italian banks are in a sleepwalk slow motion crash. And because of politics, Spain not looking too great either.

Post Reply