what to do with cash reserve and recommendation for bonds for EU investor

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Topic Author
antonkanton
Posts: 6
Joined: Fri Mar 17, 2023 8:21 am

what to do with cash reserve and recommendation for bonds for EU investor

Post by antonkanton »

Hi all,

I read with great interest this thread viewtopic.php?t=398359. I am a resident of the Netherlands and my sister lives in Germany. I would be very grateful if you can help me out with picking a suitable instrument for the following goals. We both have too much cash laying around on IBKR (we are in the Ireland one) and especially my sister is relatively risk averse (would like to have a portfolio of 50% stocks and 50% of instruments that are less volatile but still give some interest). I am a bit more offensive but also would like to hold 20-30% less volatile assets, of which some serve as cash reserve. Thus I am looking for two types of instruments:


1. The first instrument should be a smarter version of cash. It should share with cash that it is suitable as investment reserve. Thus, it should not crash (much) when stocks do crash and you should be able to sell it without much loss in such a situation. I say "not much" because it would be OK if it looses 5-10% if stocks loose much much more, say 30-50%. If I understood the current market situation, this is actually possible with short duration bond ETFs. But which products to choose when you are resident in NL or GER? What to watch out for? E.g. IBKR pays ~4% on USD but if you have 40k on there, it will only pay 4% on the 30k. Also, I am uncomfortable to hold so much cash there but my bank pays nothing for it. Furthermore, most of my money is in EUR. I found VDST that seems like a great alternative to the cash I hold in USD. Would you agree? If I understand correctly, if interest rates rise, this instrument will drop only little in value compared to long duration bonds, while stocks are at much higher risk in that environment, meanwhile it will quickly pick up the new interest rates also and you are not too stuck in that position. For EUR, I was thinking about this product: https://www.ishares.com/nl/particuliere ... tf-de-fund. This is seems safe but I did not understand why this chart is declining for so many years. I thought these instruments should be very stable in value. So, there seems to be something I do not understand correctly. I was also wondering about EUR hedged ETFs such as this one: https://www.amundietf.lu/en/individual/ ... 2182388749 Those invest in US Treasuries. What are your opinions on that? Especially for my sister I want to be very careful and take little risk and I am afraid I am overlooking risks.


2. Which bonds would you recommend for someone who likes to have a 50/50 portfolio with stocks and bonds? Why would someone invest in long duration bonds anyways in this time where you get higher interest in short duration bonds? I understand that when rates drop, that these will rise in value but therefore they do not pay high interest atm. If you could recommend products that would be great. I was thinking to pick these for my sister to hold long term:

iShares Global Corporate Bond ETF IE00B9M6SJ31 90% allocation
UBS Euro Treasury 1-10 ETF LU0969639128 6% allocation
iShares Global High Yield Corporate Bond ETF IE00BJSFR200 2%
iShares USD Emerging Markets Bond ETF IE00BYXYYK40 2%

Or just keep it simple and buy only the first one. But I would be curious to understand better why someone would prefer instrument number 2 over 1 in this current environment.

Looking forward to your input and to learn from you. Especially grateful if you have concrete product recommendations and explanations why these products are suitable for my goal. I am very keen on learning about these topics and in the meantime I hope you can help me to avoid bigger mistakes. If you know about a clever tutorial for people in my situation, feel free to point me there.

Thank you,
Anton
DJN
Posts: 996
Joined: Sun Nov 19, 2017 11:30 pm

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by DJN »

Hi,
read these sections of the Bogleheads Wiki for non US investors:
https://www.bogleheads.org/wiki/Outline ... _domiciles
https://www.bogleheads.org/wiki/Buildin ... _portfolio
Might be helpful.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by daviddem »

Consider a money market mutual fund for your USD (and also your Euros). Invesco USD Liquidity Portfolio Acc is currently yielding 4.8%, min purchase 150k USD.
Topic Author
antonkanton
Posts: 6
Joined: Fri Mar 17, 2023 8:21 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by antonkanton »

Thank you both for the responses. I read through most of the first link. And I also will read through the moneymarkets link provided in the other thread. I never heard of that in context with passive investing. But definitively curious. If it is explained in the FAQ you provided in the other thread just ignore it but I am of course most curious how this compares risk/return wise with the products I suggested above.
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by Valuethinker »

antonkanton wrote: Fri Mar 17, 2023 11:43 am Hi all,


2. Which bonds would you recommend for someone who likes to have a 50/50 portfolio with stocks and bonds? Why would someone invest in long duration bonds anyways in this time where you get higher interest in short duration bonds? I understand that when rates drop, that these will rise in value but therefore they do not pay high interest atm. If you could recommend products that would be great. I was thinking to pick these for my sister to hold long term:

iShares Global Corporate Bond ETF IE00B9M6SJ31 90% allocation
UBS Euro Treasury 1-10 ETF LU0969639128 6% allocation
iShares Global High Yield Corporate Bond ETF IE00BJSFR200 2%
iShares USD Emerging Markets Bond ETF IE00BYXYYK40 2%

Or just keep it simple and buy only the first one. But I would be curious to understand better why someone would prefer instrument number 2 over 1 in this current environment.
3 of those funds have significant credit risk in the bonds. You will see that show up this week if it has not already - Credit Suisse bailout.

Global Corporate Bond is likely to depart from the performance of government bonds.

Euro Treasury is likely to be the most stable.
Topic Author
antonkanton
Posts: 6
Joined: Fri Mar 17, 2023 8:21 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by antonkanton »

Hi all,

I read through the Bogleheads Wiki with great interest. If I understood all correctly, what you would recommend is to pick one or more of the instruments in the table at the bottom of this page: https://www.bogleheads.org/wiki/Cash_eq ... _investors

Is that correct? Any specific recommendations what to consider when investing as German or Dutch resident?
DJN
Posts: 996
Joined: Sun Nov 19, 2017 11:30 pm

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by DJN »

Hi,
the section on cash equivalents provides an overview of possible approaches to the cash or cash like portion of a portfolio for a non US investor.
If you choose to use any of these suggestions you should first satisfy yourself of your reasoning for your choice. Not a cop-out but you really should get to grips with each fund suggestion.
I use ERNE, VDST and IB01 for this purpose, I have no idea what a dutch or German resident should use. The expense ratio is important and will always impact on the "return" but you should get most if not all of your money back.
DJN
Yah shure. | Have a look at the Bogleheads Wiki in the first instance.
Topic Author
antonkanton
Posts: 6
Joined: Fri Mar 17, 2023 8:21 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by antonkanton »

OK, after searching for quite a while, I came to the conclusion that this one should be a safe cash alternative for my Euros: https://www.ishares.com/de/privatanlege ... ckerSearch (ticker EXVM). I do not yet fully understand why the price has declines 26% in the last decade though and I first will read the whole product description before I buy it. But it has been recommended by several experts as cash alternative for Germans.

For my USD I would like to pick the invesco product davidem proposed by I have only 40k USD so not enough. Therefore, I though VDST would be a good alternative.
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by Valuethinker »

antonkanton wrote: Sat Apr 01, 2023 7:24 am OK, after searching for quite a while, I came to the conclusion that this one should be a safe cash alternative for my Euros: https://www.ishares.com/de/privatanlege ... ckerSearch (ticker EXVM). I do not yet fully understand why the price has declines 26% in the last decade though and I first will read the whole product description before I buy it. But it has been recommended by several experts as cash alternative for Germans.

For my USD I would like to pick the invesco product davidem proposed by I have only 40k USD so not enough. Therefore, I though VDST would be a good alternative.
https://www.ishares.com/de/privatanlege ... ckerSearch

The benchmark has had negative returns as well.

German short term government bonds were paying negative yields for a number of years post the financial crisis of 2008-09. That probably explains what is going on.

This past year, when Eurozone interest rates went significantly positive for the first time in many years, probably means they did particularly poorly. However it also means their yields are now higher and so returns *should* be positive going forward (if interest rates do not rise further).

PS isn't it incredible. The Google translate allowed me to read a German financial document even though I speak no German.
Siaigi
Posts: 130
Joined: Sun May 17, 2020 4:24 am
Location: Italy

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by Siaigi »

Valuethinker wrote: Sat Apr 01, 2023 10:49 am
This past year, when Eurozone interest rates went significantly positive for the first time in many years, probably means they did particularly poorly. However it also means their yields are now higher and so returns *should* be positive going forward (if interest rates do not rise further).
Therefore, given that interest rates in Europe will probably still be increased, wouldn't it be better to limit ourselves to buying European bonds with a good investment grade? Maybe inflation indexed?
Siaigi
Posts: 130
Joined: Sun May 17, 2020 4:24 am
Location: Italy

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by Siaigi »

Valuethinker wrote: Sat Apr 01, 2023 10:49 am
This past year, when Eurozone interest rates went significantly positive for the first time in many years, probably means they did particularly poorly. However it also means their yields are now higher and so returns *should* be positive going forward (if interest rates do not rise further).
Therefore, given that interest rates in Europe will probably still be increased, wouldn't it be better to limit ourselves to buying European bonds with a good investment grade? Maybe still inflation indexed?
daviddem
Posts: 275
Joined: Wed Jul 06, 2016 12:53 pm

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by daviddem »

Siaigi wrote: Sat Apr 01, 2023 2:10 pm Therefore, given that interest rates in Europe will probably still be increased, wouldn't it be better to limit ourselves to buying European bonds with a good investment grade? Maybe still inflation indexed?
Even if they are good investment grade, bond prices are still sensitive to interest rates. If the rates rise, the price of your bond on the secondary market drops. The further the maturity of the bond, the more the price drops. Not a problem if you have individual bonds and hold them to maturity, but if you sell them on the secondary market you loose money. Same with bond funds: the longer their average weighted maturity, the more the NAV drops when interest rates rise. And even if you have individual bonds and hold them to maturity: do you want to be stuck with 3% interest when everyone else gets 4-5% after the rates have risen?

With a money market fund or ultrashort bond fund: the NAV does not drop when interest rates rise (or very little for ultrashort bond funds) and when the government raises interest rates, the interest the fund pays you rises in tune almost immediately.

You can find the list of money market mutual funds available on IBKR by going to research -> mutual funds and screening for money market. I compiled the results of the scanner in an Excel spreadsheet to make initial comparison easier. Do your research and read all the fund literature before buying. Some of them use only government-issued securities, others are exposed to banks' commercial paper and CDs etc. Some use tricks like securities lending to enhance yield at the cost of some additional risk.
Valuethinker
Posts: 49038
Joined: Fri May 11, 2007 11:07 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by Valuethinker »

Siaigi wrote: Sat Apr 01, 2023 2:09 pm
Valuethinker wrote: Sat Apr 01, 2023 10:49 am
This past year, when Eurozone interest rates went significantly positive for the first time in many years, probably means they did particularly poorly. However it also means their yields are now higher and so returns *should* be positive going forward (if interest rates do not rise further).
Therefore, given that interest rates in Europe will probably still be increased, wouldn't it be better to limit ourselves to buying European bonds with a good investment grade? Maybe inflation indexed?
Even the experts don't get these predictions right.

1. I never suggest buying below investment grade. Indeed the Credit Suisse bonds which were just wiped out may have been Investment Grade. At least half of all corporate IG bonds are issued by financial companies, so there is always that risk.

I prefer sovereign credit risk (developed countries).

I generally suggest holding a global govt bond index fund, hedged into GBP (or EUR in the case of a Eurozone investor). In the UK case this is to avoid the very long duration of the gilt (UK govt bond) index-- over 13 years. In the Eurozone case this is to avoid excessive concentration on Italian govt bonds (about half the index?).

2. Inflation indexed bonds will also fall in value if interest rates rise. Empirically they are very volatile. In the Eurozone the majority are issued by Italy and France? I think they can form a valuable part of an investor's bond portfolio, but not the whole part.

I do have worries about concentration of credit risk on Italy. Italy exiting the Euro in some way is a total nightmare scenario, but the higher yield of Italian govt bonds over German or Dutch, say, tells you there is some risk. We don't need to take our own view, we just need to look at the market view.

Read Monevator.com on bonds (UK perspective, but applicable).
Topic Author
antonkanton
Posts: 6
Joined: Fri Mar 17, 2023 8:21 am

Re: what to do with cash reserve and recommendation for bonds for EU investor

Post by antonkanton »

Valuethinker wrote: Sat Apr 01, 2023 10:49 am
antonkanton wrote: Sat Apr 01, 2023 7:24 am OK, after searching for quite a while, I came to the conclusion that this one should be a safe cash alternative for my Euros: https://www.ishares.com/de/privatanlege ... ckerSearch (ticker EXVM). I do not yet fully understand why the price has declines 26% in the last decade though and I first will read the whole product description before I buy it. But it has been recommended by several experts as cash alternative for Germans.

For my USD I would like to pick the invesco product davidem proposed by I have only 40k USD so not enough. Therefore, I though VDST would be a good alternative.
https://www.ishares.com/de/privatanlege ... ckerSearch

The benchmark has had negative returns as well.

German short term government bonds were paying negative yields for a number of years post the financial crisis of 2008-09. That probably explains what is going on.

This past year, when Eurozone interest rates went significantly positive for the first time in many years, probably means they did particularly poorly. However it also means their yields are now higher and so returns *should* be positive going forward (if interest rates do not rise further).

PS isn't it incredible. The Google translate allowed me to read a German financial document even though I speak no German.


Thank you! And yes, that is quite incredible haha! I will go ahead next week in purchasing the EXVM and VDST. If anyone thinks there are better alternatives for my goal or think I should diversify the EXVM with another MMF please let me know. I am also interested in finding inflation index bonds to diversify my portfolio but that would be another thread.
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