The Lemon Fool

Hi,
Traditionally I count cash savings as my bond element and do not hold any bonds in the portfolio. I am now considering two ETF's, they are VAGP (Vanguard Global Bonds) and VGOV (Vanguard UK Gilts). I wonder if Bonds are now worthwile considering as they have sustained terrible losses. I am not looking for income but looking for an alternative to equity holding. Does anyone currently hold a Bond fund or ETF ibn their portfolio and do you think they are likely to continue their recent volatility?
Thanks,
Monty

You may find today's Monevator article helpful: https://monevator.com/cash-bonds-different/

I went for IGLT although AGBP/VAGS are worth considering if you don't just want government bonds. It's a pity that the fees are so high on IGLH (ishares global government bond GBP hedged) as it's probably ideal. Personally I buy bond ETFs for ballast and I am prepared to risk losing a bit during rising rates to gain whenever rates start falling in response to some market disaster in the future.

AWOL wrote:I went for IGLT although AGBP/VAGS are worth considering if you don't just want government bonds. It's a pity that the fees are so high on IGLH (ishares global government bond GBP hedged) as it's probably ideal. Personally I buy bond ETFs for ballast and I am prepared to risk losing a bit during rising rates to gain whenever rates start falling in response to some market disaster in the future.

Thanks AWOL,
Still undecided I opted for approximately 50% VGOV and 50% VAGP to add about 15% Bonds to the portfolios. I am viewing them as a way to soften from 100% equities in the short term whilst I give it more thought.
Monty

Some prefer to push bond risk over to the stock side. Might hold 75/25 stock/cash instead of 60/40 stock/bonds PV example

Direct holdings, such as index linked gilts, incur little taxation of the interest when you opt for a low yield gilt (such as 0.125%), have price appreciation tax exempt (and where part of that price appreciation is inflation). https://www.yieldgimp.com/index-linked-gilt-yields TR26 for instance has a recent price of 96.63, is a 0.125% yielder, matures in March 2026 (so a little over 2.5 years time) so indicative of around a 3.37% price appreciation (maturity value 100) over 2.5 years = 1.38% real (above and beyond whatever inflation is). Tax free. More difficult than that and the link above indicates a actual 1.24% (because its accumulated some interest that is paid to the seller so the actual price paid is higher than 96.63). Also that's not the actual price you pay, nor is 100 the actual redemption/maturity value, both are increased by the amount of inflation since the gilt was first issued. As is the interest payments not 96.63 * 0.125%, but 0.125% of the inflation adjusted price amount.

If inflation is 5% and a gilt provides 1% above that, 6% total, that is tax exempt, then another who otherwise pays 20% tax has to achieve a 7.5% gross return to compare. When bonds are held outside of tax-exempt (ISA/whatever) due to being tax efficient then that leaves more space inside ISA for stocks. Yet another factor is that Gilts are pretty much guaranteed, corporate bonds or high street bank cash/bonds are not, and have £85K limited protection.

Another choice for 'something different' might be to hold something like what a retiree might hold. A 70 year old might for instance seek a relatively safe 5% SWR, 5% of the initial portfolio value as income that is increased by inflation each year ... for 20 years. i.e. returns all of their inflation adjusted capital via yearly instalments. Over the last 130+ years and thirds each inflation pacing (index linked gilts for instance), stocks (FT All Share) and gold ... had a 100% success rate in supporting a 5% SWR over all 20 year periods (calendar year granularity). And more often left a decent residual. In the rare bad cases ended with near nothing remaining, in the few good/great cases ended with 100%+ of the inflation adjusted portfolio value still available, in the average/median case ended with 44% of the inflation adjusted portfolio value still available at the end of 20 years.

If that 5% inflation adjusted amount were dripped into stocks over the 20 years, then in the case of a bad sequence of returns, stocks did relatively poorly, that might accumulate stocks at a decent rate (average real price). Somewhat counter-balance another portfolio of lumped-in 100% stock holdings poorer rewards. If stocks do great, lumped-into portfolio does well, so the 'bond' side that dripped the 5% real 'interest' was a lag/drag factor, but overall combined results are inclined to still be reasonable. Averages your overall holdings, and where 'average' is more often good, or at least good-enough. Reduces the risk of more extreme bad case outcomes, but also reduces the prospect of a extremely great outcome.

I just spotted this interesting thread.

I thought those interested in Global Bond ETF's might well be interested in this article from Occam Investing, which covers Global bond ETF's. Although it focuses predominantly on Vanguard products, it does also include i-shares ETF IGLH.

https://occaminvesting.co.uk/the-best-v ... investors/

The article draws my focus onto VAGP for global (aggregate) bond exposure including corporate bonds, and IGLH for global government bond exposure (exc corporate bonds).

It leaves me thinking, does one really need separate UK Gilts exposure, or is it sufficient to rely on the 6-8% coverage from the global bond ETF's? .

richfool wrote:I just spotted this interesting thread.

I thought those interested in Global Bond ETF's might well be interested in this article from Occam Investing, which covers Global bond ETF's. Although it focuses predominantly on Vanguard products, it does also include i-shares ETF IGLH.

https://occaminvesting.co.uk/the-best-v ... investors/

The article draws my focus onto VAGP for global (aggregate) bond exposure including corporate bonds, and IGLH for global government bond exposure (exc corporate bonds).

It leaves me thinking, does one really need separate UK Gilts exposure, or is it sufficient to rely on the 6-8% coverage from the global bond ETF's? .

The hedging of a global bond fund is neither perfect or cost free.

UK gilts are in sterling, of a very high credit quality and offer a similar income to an aggregate bond portfolio which contains many lower quality bonds.

If you want more income then sterling investment grade bonds could be an add on.

My own reason to hold non sterling bonds is currency risk and I hold significant sums in US Government bonds, in particular TIPs

Vanguard's research suggests that global bonds hedged into the local currency is the best option, and that is (more or less) reflected in their packaged funds. Nonetheless, hedging costs money and is not perfect. Just using gilts is a reasonable alternative, and is advocated by Lars Kriojer:

https://monevator.com/tag/kroijer/

You do not really need corporate bonds. If you want more risk, you can hold more equities.

Maybe of some practical interest
Aged 77 retd 20+ years with a30/70 equity/bond portfolio
Bonds have been a single investment ie a Vanguard Global Bond index fund hedged to the Pound for many of those years
Portfolio has been through many ups and downs during this time including the last year or two
The bond part of my portfolio has however done what it was supposed to do
Reduced portfolio volatility
Preserved wealth
Grown a little
The stockmarket is a lifetime play and big drops are part of the game-investors should be aware of this
Bond fund did what it was supposed to do even though bond drops of last year or twos magnitude was unusual
I alway have 2-3 years living expenses in cash equivalents to ride out market drops without selling equity or bonds when they are down
Worked well -so far!
xxd09

I conclude from the above posts, not to bother with Corporate bond ETF's. and to watch costs which will be higher for hedged products.

So I'm thinking now, do I stick with the cheaper (0.10%) VAGP, with it's broad based hedged exposure to global government bonds (60%), albeit with some corporate bonds (40%), and/or focus on the higher costing (0.25%) hedged exposure solely to government bonds of IGLH? ...... So either, or both!?

And then, bearing Hariseldon's comments in mind, do I increase the focus on/exposure to (UK government bonds by) by adding UK Gilts, and if so, do I use: VGOV or IGLT, or even GIL5 (the latter under 5 year maturities)?

richfool wrote:I conclude from the above posts, not to bother with Corporate bond ETF's. and to watch costs which will be higher for hedged products.

So I'm thinking now, do I stick with the cheaper (0.10%) VAGP, with it's broad based hedged exposure to global government bonds (60%), albeit with some corporate bonds (40%), and/or focus on the higher costing (0.25%) hedged exposure solely to government bonds of IGLH? ...... So either, or both!?

And then, bearing Hariseldon's comments in mind, do I increase the focus on/exposure to (UK government bonds by) by adding UK Gilts, and if so, do I use: VGOV or IGLT, or even GIL5 (the latter under 5 year maturities)?

Or for the latter (exposure to UK gilts) why not purchase individual gilts direct. You then get to choose the time to maturity and get the choice of holding to maturity or not. Plus if you don't have space in an ISA or SIPP you can buy low coupon shortish dated gilts and there won't be much if any tax to pay. That's what I've done purchasing low coupon gilts out to 2028 and planning to hold to maturity for a YTM of between 4.2 and 4.7%

richfool wrote:I conclude from the above posts, not to bother with Corporate bond ETF's. and to watch costs which will be higher for hedged products.

So I'm thinking now, do I stick with the cheaper (0.10%) VAGP, with it's broad based hedged exposure to global government bonds (60%), albeit with some corporate bonds (40%), and/or focus on the higher costing (0.25%) hedged exposure solely to government bonds of IGLH? ...... So either, or both!?

And then, bearing Hariseldon's comments in mind, do I increase the focus on/exposure to (UK government bonds by) by adding UK Gilts, and if so, do I use: VGOV or IGLT, or even GIL5 (the latter under 5 year maturities)?

Might I suggest you ask the question why do you want to hold anything other than UK Government bonds ?

Comparing Vanguards UK Gilts ETF to its Aggregate Bond ETF

Will they offer an improved return ?
No the YTM is the same

Will they offer improved credit quality ?
No both are AA-

Is there a chance that the hedging could result in additional cost or deviation due to extreme currency movements that the hedging cannot protect against ?
Yes

Hariseldon58 wrote:

richfool wrote:I conclude from the above posts, not to bother with Corporate bond ETF's. and to watch costs which will be higher for hedged products.

So I'm thinking now, do I stick with the cheaper (0.10%) VAGP, with it's broad based hedged exposure to global government bonds (60%), albeit with some corporate bonds (40%), and/or focus on the higher costing (0.25%) hedged exposure solely to government bonds of IGLH? ...... So either, or both!?

And then, bearing Hariseldon's comments in mind, do I increase the focus on/exposure to (UK government bonds by) by adding UK Gilts, and if so, do I use: VGOV or IGLT, or even GIL5 (the latter under 5 year maturities)?

Might I suggest you ask the question why do you want to hold anything other than UK Government bonds ?

Comparing Vanguards UK Gilts ETF to its Aggregate Bond ETF

Will they offer an improved return ?
No the YTM is the same

Will they offer improved credit quality ?
No both are AA-

Is there a chance that the hedging could result in additional cost or deviation due to extreme currency movements that the hedging cannot protect against ?
Yes

I get where you are coming from.

After further research today, my thinking has evolved to IGLH (Global Gov bonds, hedged), plus VGOV (UK Gilts). I still see a case for Global Gov bonds (without the corporates element), despite the higher cost and hedging implications, but propose to hold an equal weight of UK Gilts.

One of my reference points: https://occaminvesting.co.uk/the-best-v ... investors/

richfool wrote:

Hariseldon58 wrote:
Might I suggest you ask the question why do you want to hold anything other than UK Government bonds ?

Comparing Vanguards UK Gilts ETF to its Aggregate Bond ETF

Will they offer an improved return ?
No the YTM is the same

Will they offer improved credit quality ?
No both are AA-

Is there a chance that the hedging could result in additional cost or deviation due to extreme currency movements that the hedging cannot protect against ?
Yes

I get where you are coming from.

After further research today, my thinking has evolved to IGLH (Global Gov bonds, hedged), plus VGOV (UK Gilts). I still see a case for Global Gov bonds (without the corporates element), despite the higher cost and hedging implications, but propose to hold an equal weight of UK Gilts.

One of my reference points: https://occaminvesting.co.uk/the-best-v ... investors/

I understand the conventional advice but disagree in part…

Consider the split between hedged global government bonds and UK Gilts, in ‘normal’ times what do you gain ?
Nothing, remember any difference in interest rates difference is lost in the hedging process.

So presumably the upside of holding other countries government bonds is security in the event that UK Government bonds are seen as less creditworthy. I understand this concern , it’s unlikely but possible.

So let’s assume that there is a market wide loss of confidence in UK Gilts, it’s likely that prices would fall ,yields rise and your holding of global government bonds is looking a great idea.

I believe you still have a problem because your global bonds are hedged back to sterling….

What happens to sterling when a crisis is hammering the strength of UK Government Bonds ? It’s probable that sterling would fall, the value of your hedged bonds, however safe they are , hold steady in sterling terms but fall too in real terms because if the devaluation of sterling.

My view is that you might consider holding US$ or Euro government bonds that are NOT hedged. In the event of a UK localised crisis these bonds will hold steady in value but rise in sterling denominated value in the event of the pound falling.

I appreciate the volatility of other countries bonds and these should be held with a longer term view accordingly. Currency movements tend to even out over time , with a tendency for sterling to fall over the longer term.

If the bulk of your equities are global they are largely dollar linked and doesn’t that suggest that the bonds you hold to combat their volatility are also dollar/Euro/yen ?

I know that this is not conventional thinking but I hope you can see my logic.

In summary my personal view is hold sterling bonds with a duration of under five years, plus other Government bonds , mainly US treasuries with an intermediate duration.

Duration of UK Gilt Index funds is around 10 years, there are shorter duration UK Gilt Index funds eg IGLS (0-5yr gilts) and GBPG ( 1-10yr gilts). In the event of a UK Gilt crisis it would be advantageous to hold cash or short duration Gilts. This avoids interest rate risk in a crisis.

Hariseldon58 wrote:

richfool wrote:I get where you are coming from.

After further research today, my thinking has evolved to IGLH (Global Gov bonds, hedged), plus VGOV (UK Gilts). I still see a case for Global Gov bonds (without the corporates element), despite the higher cost and hedging implications, but propose to hold an equal weight of UK Gilts.

One of my reference points: https://occaminvesting.co.uk/the-best-v ... investors/

I understand the conventional advice but disagree in part…

Consider the split between hedged global government bonds and UK Gilts, in ‘normal’ times what do you gain ?
Nothing, remember any difference in interest rates difference is lost in the hedging process.

So presumably the upside of holding other countries government bonds is security in the event that UK Government bonds are seen as less creditworthy. I understand this concern , it’s unlikely but possible.

So let’s assume that there is a market wide loss of confidence in UK Gilts, it’s likely that prices would fall ,yields rise and your holding of global government bonds is looking a great idea.

I believe you still have a problem because your global bonds are hedged back to sterling….

What happens to sterling when a crisis is hammering the strength of UK Government Bonds ? It’s probable that sterling would fall, the value of your hedged bonds, however safe they are , hold steady in sterling terms but fall too in real terms because if the devaluation of sterling.

My view is that you might consider holding US$ or Euro government bonds that are NOT hedged. In the event of a UK localised crisis these bonds will hold steady in value but rise in sterling denominated value in the event of the pound falling.

I appreciate the volatility of other countries bonds and these should be held with a longer term view accordingly. Currency movements tend to even out over time , with a tendency for sterling to fall over the longer term.

If the bulk of your equities are global they are largely dollar linked and doesn’t that suggest that the bonds you hold to combat their volatility are also dollar/Euro/yen ?

I know that this is not conventional thinking but I hope you can see my logic.

In summary my personal view is hold sterling bonds with a duration of under five years, plus other Government bonds , mainly US treasuries with an intermediate duration.

Duration of UK Gilt Index funds is around 10 years, there are shorter duration UK Gilt Index funds eg IGLS (0-5yr gilts) and GBPG ( 1-10yr gilts). In the event of a UK Gilt crisis it would be advantageous to hold cash or short duration Gilts. This avoids interest rate risk in a crisis.

Some prefer to push bond risk over to the stock side, might hold 50/50 stock/hard cash (as in under a mattress). On that basis the inclination is to sleep on dollar bills rather than Pound notes. The UK repeatedly demonstrates failings - even more so in recent years where its been relegated to being seen as a clown. Chops and changes too frequently (16 housing Ministers ..etc. for instance). Globally largely seen as uninvestable given the choice of alternatives, and with the likely prospect of Labour incoming - even more so.

Hariseldon 58-I think that’s a very interesting point you have made
I switched from a 5 year gilt ladder many years ago because of the work involved and I wanted access to world markets as I had done with my equity-logical step?
Been in a global bond index fund hedged to the pound for many years now
It’s certainly a simple solution especially as you get older
Your bond split is something I might do if starting out again but at 77 making life more complicated is problematic
xxd09

xxd09 wrote:Hariseldon 58-I think that’s a very interesting point you have made
I switched from a 5 year gilt ladder many years ago because of the work involved and I wanted access to world markets as I had done with my equity-logical step?
Been in a global bond index fund hedged to the pound for many years now
It’s certainly a simple solution especially as you get older
Your bond split is something I might do if starting out again but at 77 making life more complicated is problematic
xxd09

The UK Gilts in IGLS is a good starting point and the US$ exposure in VUTA and/or ITPS (US$ Tips) is my long term policy.

Interesting-how do you split these 2 funds in your portfolio?-what % in each fund seeing the the US fund market is so big
xxd09

Harisledon58 wrote:I understand the conventional advice but disagree in part…

Consider the split between hedged global government bonds and UK Gilts, in ‘normal’ times what do you gain ?
Nothing, remember any difference in interest rates difference is lost in the hedging process.

So presumably the upside of holding other countries government bonds is security in the event that UK Government bonds are seen as less creditworthy. I understand this concern , it’s unlikely but possible.

So let’s assume that there is a market wide loss of confidence in UK Gilts, it’s likely that prices would fall ,yields rise and your holding of global government bonds is looking a great idea.

I believe you still have a problem because your global bonds are hedged back to sterling….

What happens to sterling when a crisis is hammering the strength of UK Government Bonds ? It’s probable that sterling would fall, the value of your hedged bonds, however safe they are , hold steady in sterling terms but fall too in real terms because if the devaluation of sterling.

My view is that you might consider holding US$ or Euro government bonds that are NOT hedged. In the event of a UK localised crisis these bonds will hold steady in value but rise in sterling denominated value in the event of the pound falling.

I appreciate the volatility of other countries bonds and these should be held with a longer term view accordingly. Currency movements tend to even out over time , with a tendency for sterling to fall over the longer term.

If the bulk of your equities are global they are largely dollar linked and doesn’t that suggest that the bonds you hold to combat their volatility are also dollar/Euro/yen ?

I know that this is not conventional thinking but I hope you can see my logic.

In summary my personal view is hold sterling bonds with a duration of under five years, plus other Government bonds , mainly US treasuries with an intermediate duration.

Duration of UK Gilt Index funds is around 10 years, there are shorter duration UK Gilt Index funds eg IGLS (0-5yr gilts) and GBPG ( 1-10yr gilts). In the event of a UK Gilt crisis it would be advantageous to hold cash or short duration Gilts. This avoids interest rate risk in a crisis.

Hmm, there's a bit to digest there.

My Initial reactions are:

- In buying passives/ETF's, one is seeking to broaden exposure and hopefully risk. The overall consensus seems to support the buy global and hedge strategy.
- OK I understand your point re focus outside the UK. I have a strong emphasis on that through my equity (IT) holdings. The idea of buying a couple of bond ETF's was to broaden risk/protect against equity market falls and hopefully capitalise on possible future interest rate reductions.
- Similarly, I accept/agree sterling seems to have a long term trend of depreciation, and my equity holdings and some other FX holdings are my way of seeking to offset that.
- I note that global bond ETF's seem to have the greatest exposure to the US anyway.(c 65%)
- I concur with xxd009's point that at my age, I am trying to simplify things as I get older.

Thanks for the suggestions of IGLS and VUTA and possible ITPS. I will do some research on them.

Thanks for your input. Much appreciated. I have to go out now, but will certainly give further thought to this.
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