Advice/thoughts on Bond Allocation (Netherlands)

For investors outside the US. Personal investments, personal finance, investing news and theory.
Sister forums: Canada, Spain (en español)
---------------
Post Reply
Topic Author
MinimalMaximising
Posts: 5
Joined: Sun Jun 06, 2021 2:38 pm

Advice/thoughts on Bond Allocation (Netherlands)

Post by MinimalMaximising »

Hello everyone,

I’m new to the forum and would appreciate any thoughts or advice on allocating the bond portion of a portfolio.

Personal situation and goals: 38 years old and total portfolio including real estate is around Eur 700k. Investment goal is to gain greater financial independence. I enjoy my work and don’t anticipate wanting to retire early, but at some point age 45yr-55yr I’d like to substantially reduce to part-time work, better work-life balance and more flexibility. At the moment, I am willing to have significant (high) risk and to strap in for a bumpy ride when the value of shares drops suddenly. I am not a big spender, settled with a life partner, no kids yet, and don’t anticipate any other major purchases in the future.

Portfolio allocation: About EUR 500k of my 700k portfolio is equity value in two mortgaged properties. I might unlock in future by remortgaging. I could then reinvest this in stocks/bonds.

At present, the remaining 200k eur is invested in an 80/20 shares/bonds split. The shares are a mixture of ETFs, mainly a Vanguard global all cap ETF, with some individual shares that are mainly big US tech. All the ETFs and individual shares are SRI or ESG screened and I’d like to keep it that way.

I’ve been following Bogles advice in his book for a 50/50 government bonds / corporate bond split. I am currently buying the following bonds:

10% in Vanguard US Treasury Bond ETF VUTY | IE00BZ163M45
5% in XTrackers II ESG EUR Corporate Bonds XB4F | LU0484968812
5% in Bloomberg Barclays MSCI US Liquid Corporates Sustainable UCITS ETF UE25 | LU1215461085

I’m on the De Giro platform so limited to ETFs available on there. Any suggestions for better bond ETF allocation that I could be using?

My reason for choosing the current allocation are (i) it’s a fairly simple selection that I can keep track of (II) it includes Europe corporates as well as US but excludes Europe government bonds that are currently giving negative yields (iii) I understand US Treasury Bonds tend to mirror the US stock market better than other government bonds.

I am investing in EUR but I didnt go for currency hedging as the USD-EUR is currently low (historically, at least for last five years) , plus I am willing to ride out currency fluctuations since I don’t anticipate urgent need to draw on any of the investments.

Lastly , I’ve selected short term USD treasury bonds to put a lump sum that I plan to dollar cost average into shares over the next 12 months, or rebalance if shares take a big tumble within the next 12 months:

iShares treasury bonds 1-3 years USD ETF IBTS | IE00B14X4S71

I’d be interested to hear any thoughts or advice on these bond allocations - many thanks!
sean.mcgrath
Posts: 786
Joined: Thu Dec 29, 2016 5:15 am
Location: US in NL

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by sean.mcgrath »

Welkom, MinMax.

I am not an expert, but fwiw I have my bonds in iShares Euro aggregate bond (IEAG). It's a mix of Corp and Gvt Euro bonds. I keep it in Euros because I do believe in a certain amount of LT currency hedging to my home currency (although in your case you are so heavily in property that you don't have that issue yet).

The negative yields don't bother me, as I assume yield differences between USD and EUR are mostly inflation expectations.
jg12345
Posts: 427
Joined: Fri Dec 11, 2020 12:03 pm

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by jg12345 »

Welcome OP,
since this is post #1, I suggest taking a look at the boglewiki and also the Bahrain chapter put out an amazing guide
viewtopic.php?f=22&t=350532

My thoughts for your bond allocation:
1- Currency hedging. I'm unsure how the current status of EUR/USD change should matter, and I doubt you do know what lies ahead. with this said, the usual advice is for you to be EUR-hedging your bond part. First, because the reason for bonds in portfolio is stability. Second, because you will retire in EUR. People here can probably talk more about this!

2- Allocation. As to what allocation I'd use, 2 points: first I am counting 5 ETF for your bond allocation, and second it seems you're betting on US bond market being better than others. you may want to think to simplify and diversify. You could simplify to
- 1 ETF like ishares AGGH, or vanguard global bond eur hedged. The vanguard one has 30% in corporate+mortgage backed bonds already or
- 2 ETF, like a EUR hedged government bonds ETF like IGLE or XGSH, and a EUR hedged corporate bonds like IBCQ.DE

Both solutions would both simplify by decreasing ETF number and diversify away from your US-tilt.

3- Other options which you may want to consider/that have been discussed in the forum recently: putting bond allocation into CDs/term deposits while interest rates are this low. Little volatility, and no negative yields. Raisin.com could be good for EU people to get access to EU countries bonds, in case NL banks offer very low rates. And inflation-linked bonds, although this does not seem what it's worrying you now (XGIN or similar)

As a side note, I would not be so confident about single stock investment in your equity part. If they are less than 5%, and you are convinced you know better than the market, so be it. Otherwise I would rebalance into ftse all-world whenever possible (tax considerations play a role)

I hope this helps!
User avatar
tre3sori
Posts: 460
Joined: Wed Jul 24, 2019 3:13 am

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by tre3sori »

jg12345 wrote: Mon Jun 07, 2021 5:26 am 10% in Vanguard US Treasury Bond ETF VUTY | IE00BZ163M45
5% in XTrackers II ESG EUR Corporate Bonds XB4F | LU0484968812
5% in Bloomberg Barclays MSCI US Liquid Corporates Sustainable UCITS ETF UE25 | LU1215461085
You could make a small and simplifying move with the newly available
Vanguard ESG Global Corporate Bond Ucits ETF EUR Hedged Acc, ISIN: IE00BNDS1P30, ticker: V3GF

I would sell the single stocks (depending on capital gains tax situation).

Your portfolio would look like
80% Vanguard ESG Global All Cap UCITS ETF
10% Vanguard US Treasury Bond ETF
10% Vanguard ESG Global Corporate Bond Ucits ETF EUR Hedged

Can governments be "ESG"? The EU is issuing green bonds (I don't know how they are green.
I guess the money is used to finance green projects like Hydrogen economy etc.)
I wouldn't be surprised if there will be an "ESG" or green government bond fund eventually.

MinimalMaximising wrote: Sun Jun 06, 2021 3:37 pm Lastly , I’ve selected short term USD treasury bonds to put a lump sum that I plan to dollar cost average into shares over the next 12 months, or rebalance if shares take a big tumble within the next 12 months:

iShares treasury bonds 1-3 years USD ETF IBTS | IE00B14X4S71
Seems reasonable to me.
The information provided is intended to be entertaining. It is not to be construed as professional advice. Use it at your own risk.
Topic Author
MinimalMaximising
Posts: 5
Joined: Sun Jun 06, 2021 2:38 pm

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by MinimalMaximising »

Thanks very much for the warm welcome to Bogleheads and the thoughtful advice. @jg12345 I'll read the boglewiki and also the Bahrain chapter's guide to get me started.

1. Currency hedging - my understanding was that the current status of EUR/USD is significant because a weak USD should encourage me to overweight the currency risk in my portfolio towards USD. I can achieve this by buying ETFs whose underlying holdings are dependent on USD. I am thinking that the EUR/USD rate should revert to the mean in the long-term, so although I cannot know the future, it is reasonable to expect that USD will recover from 5 year historical lows. In addition, I understand that many large US corps are not depending only on USD for their business, so if I buy S&P500 ETF there is a significant amount of diversification of currency risk across many global currencies. That said, I can see that even with my property in Europe as @sean.mcgrath pointed out, I'm still putting a lot of eggs into the USD basket, so I'll reconsider that.

2. Allocation. Thanks for the suggestions of bond ETFs. I'm keen on the new Vanguard ESG Global Corporate Bond Ucits ETF EUR Hedged Acc, ISIN: IE00BNDS1P30, ticker: V3GF suggested by @tre3sori . However ,this is not yet available on De Giro platform. Maybe they will add it in future. There is also a JP Morgan Global Green Bond although I cannot find much information about its holdings.

3. Single stock investments. I'm becoming a Boglehead, but I'm still not completely convinced that even with my limited knowledge I cannot beat the index on occasion by tilting towards companies that are highly disruptive. It's not my (very limited) financial knowledge that told me 5 years ago that Amazon was going to continue to outpace the S&P 500, it was my belief about the direction society was heading (i.e. online). I might get shot down for saying this (!) but I believe there are some changes in technology whose effect should tell us that index investing is going to underweight us where there are major shifts going on that are not reflected in the market cap. For example, deciding to buy Apple and Tesla a few years ago did not require financial acumen, just an expectation that in the long-term, these companies would continue to grow faster than the rest of the market. How does Bogle explain Warren Buffett's massive 40%+ tilt towards Apple? As I said, I'm still learning about this.

4. ESG / SRI. Can governments be "ESG"? Without getting political, I'd say they can. A government involved in human rights abuses / genocide / apartheid would be the clearest example I suppose. Without naming any specific countries (I'm conscious of the forum rules here) there have been certain situation in the 20th century we'd have to ask ourselves whether we would have been comfortable investing/loaning funds to a foreign government. I suppose ESG for governments could also be seen as an extension of sanctions systems. If the US / international community / UN decides to impose trade sanctions and embargoes on a country, that would be a good reason to exclude the country from an ESG global government bond fund.

Thanks again!
sean.mcgrath
Posts: 786
Joined: Thu Dec 29, 2016 5:15 am
Location: US in NL

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by sean.mcgrath »

MinimalMaximising wrote: Tue Jun 08, 2021 5:16 am Thanks very much for the warm welcome to Bogleheads and the thoughtful advice. @jg12345 I'll read the boglewiki and also the Bahrain chapter's guide to get me started.

1. Currency hedging - my understanding was that the current status of EUR/USD is significant because a weak USD should encourage me to overweight the currency risk in my portfolio towards USD. I can achieve this by buying ETFs whose underlying holdings are dependent on USD. I am thinking that the EUR/USD rate should revert to the mean in the long-term, so although I cannot know the future, it is reasonable to expect that USD will recover from 5 year historical lows. In addition, I understand that many large US corps are not depending only on USD for their business, so if I buy S&P500 ETF there is a significant amount of diversification of currency risk across many global currencies. That said, I can see that even with my property in Europe as @sean.mcgrath pointed out, I'm still putting a lot of eggs into the USD basket, so I'll reconsider that.
OP,
Again, I am clearly not an expert, but I have thought a bit about currencies. It could be that this is helpful.

I do believe in purchase-price-parity (PPP) as a natural way to gauge the "true" relative value of currencies. I don't think that I can predict short-term currency swings, but my experience is that over periods like decades, rates tend to converge on PPP. Some years ago I looked at the Netherlands vs. USD for many decades and despite swings the ratio ended up at 1.0. So I look at the deviation from PPP as a measure of long term exposure risk.

I like to use the Big Mac Index as an easy way to monitor it. I was protecting myself against an overly strong USD for more than a decade. I'm not sure why you think that the USD is weak. According to that site, the drop in the USD a year or so ago has brought things pretty well into line (the EUR 9% undervalued using the basic index, and 13% overvalued using a GDP-adjusted version).

In general, I would suggest short term EUR assets to match a short term EUR obligation; e.g., if you are planning to buy a house soon. Otherwise, I try to limit risk of long term currency shifts. I look at the deviation to PPP as my amount "at risk" and focus on the USD. At least recently, it has had the biggest deviations of major currencies.

In January last year USD was 19% "overvalued" vs. EUR. I try to keep my LT currency "risk" below 7% or so, which means back then I tried to not have more than 35% - 40% of assets in USD. That includes bonds, real estate and, in theory, the value of pension/benefits. Now it seems close enough that I don't worry about it.
Valuethinker
Posts: 49017
Joined: Fri May 11, 2007 11:07 am

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by Valuethinker »

I think the Original Poster should invest in a global bond index fund or ETF, hedged into Euros.

I have posted my rationale (largely about diversifying credit risk) here - many times in the last couple of years.

Returns will be on average around 0 or negative (but with swings, year on year). Might be as high as 1% (you take the Yield to Maturity of the bonds, but then subtract an estimate of default rate then *add* an estimate of how much recovery in default there might be). Of course if interest rates fall even further, there will be capital gains.

An alternative is term deposits (CDs) with Eurozone banks within the 100k deposit insurance limit per institution. 0 or nearly 0 interest is better than a negative return.

*however* you have to believe the national government can bail out the depositors if there is some disaster. That's absolutely true for Germany, Netherlands, France. It's not necessarily true of Estonia or Malta or Slovenia (to randomly pick 3 small nation).
Topic Author
MinimalMaximising
Posts: 5
Joined: Sun Jun 06, 2021 2:38 pm

Re: Advice/thoughts on Bond Allocation (Netherlands)

Post by MinimalMaximising »

Thanks a lot for the useful comments.
Post Reply