ETF Portfolio Allocation Percentages

šŸ“Š Investing
81

I look forward to that. Iā€™ve never quite been able to get my head around fixed income.

Iā€™m getting to an age where I should at least start thinking about bonds more.

I like the idea of setting up a bond ladder eventually. As I understand it, you canā€™t really do so with ETFs in the EU/UK due to the lack of target maturity funds, so youā€™d have to buy individual bonds.

82

I already saw target ETFs.

Also there are some bond ladder ETFs, but only saw in EUR and USD. Never searched for GBP ETFs.

83

There are now fixed maturity bond ETFs: https://www.justetf.com/en/search.html?query=ibonds&search=ALL

They expire in a few years, at which point the fund will close.

1 Like
84

Comparing Investing in Bond ETFs vs. a Low-Risk Product with a Guaranteed 5.2% Return (e.g., interest rate for uninvested cash on Trading 212)

When deciding between investing in bond ETFs and a very low-risk product with a guaranteed 5.2% return, several key factors must be considered. Please see below a detailed comparison to help you make an informed decision.

1. Risk and Return

Bond ETFs

  • Risk Level: Moderate to low, depending on the type of bonds (government vs. corporate, investment grade vs. high yield).
  • Return: Variable, based on interest rate changes, credit risk, and market conditions. Historically, bond ETFs might offer returns in the range of 2-5% for investment-grade bonds, with higher yields for riskier bonds.
  • Volatility: Bond ETFs can be subject to market fluctuations, interest rate changes, and credit risk, leading to some level of volatility.

Guaranteed 5.2% Return Product

  • Risk Level: Very low, typically associated with fixed deposits, savings accounts, or certain insurance products.
  • Return: Fixed at 5.2%, providing certainty and predictability.
  • Volatility: None, as the return is guaranteed and not subject to market fluctuations (until the return rate is revised by T212, which can happen at any time).

2. Liquidity

Bond ETFs

  • Liquidity: High. Bond ETFs can be traded on the stock exchange, providing liquidity similar to stocks. Investors can buy or sell shares throughout the trading day.
  • Access to Funds: Easy access to funds due to high liquidity, but selling during market downturns might result in losses.

Guaranteed 5.2% Return Product

  • Liquidity: Typically lower. These products may have lock-in periods or penalties for early withdrawal. However, this is not the case for T212, which makes it, in my opinion, a good option/product.
  • Access to Funds: Limited until maturity or end of the lock-in period. As mentioned above about the liquidity of this product, this is not the case for T212, which makes it, in my opinion, a good option/product.

3. Inflation Protection

Bond ETFs

  • Inflation Protection: Moderate. Bonds generally do not provide full protection against inflation. Inflation-linked bonds (like TIPS) can offer some protection.
    TIPS ā€” TreasuryDirect
  • Real Return: Inflation can erode this if the coupon payments do not keep pace with rising prices.

Guaranteed 5.2% Return Product

  • Inflation Protection: Low. While the return is guaranteed, it is fixed, and high inflation could erode the real value of returns.
  • Real Return: Fixed and predictable, but not adjusted for inflation.

4. Tax Considerations

Bond ETFs

  • Tax Efficiency: Interest income from bonds is typically taxable as ordinary income. Capital gains from selling ETF shares are subject to capital gains tax.
  • Tax-Advantaged Accounts: Can be held in tax-advantaged accounts such as a UK Stock & Shares ISA.

Guaranteed 5.2% Return Product

  • Tax Efficiency: Depends on the product. Interest earned is usually taxable.
  • Tax-Advantaged Accounts: Can be held in tax-advantaged accounts such as a UK Stock & Shares ISA.

5. Diversification

Bond ETFs

  • Diversification: High. Bond ETFs typically hold a large number of bonds from various issuers, sectors, and maturities, providing diversification benefits.
  • Portfolio Role: Can be part of a diversified portfolio to reduce risk and provide income.

Guaranteed 5.2% Return Product

  • Diversification: Low. Usually represents a single investment or a fixed income product with no knowledge about its potential diversification.
  • Portfolio Role: Acts as a stable, low-risk component but potentially lacks diversification benefits of an ETF. However, T212 details how the uninvested cash is managed and where it is held. Please see the link below for further information.
    Qualifying Money Market Fund

Conclusion

Given Current Market Conditions:

  1. If you prioritize safety and guaranteed returns: The low-risk product with a guaranteed 5.2% return can be a good choice. It provides certainty and peace of mind, especially in volatile markets or for short-term goals.
  2. If you seek higher potential returns and can tolerate some risk: Bond ETFs may offer better returns over time, especially in a low interest rate environment. They provide liquidity, diversification, and can be part of a broader investment strategy.

Hybrid Approach:

  • Initial Investment (3-5 years): Use the guaranteed 5.2% return product to secure stable returns while the market is volatile or if you are close to a financial goal.
  • Long-Term Strategy: Gradually shift to bond ETFs and other diversified investments as your risk tolerance allows, aiming for higher returns over the long term.

How to Implement:

  • Start with a portion of your portfolio in the guaranteed product to secure stable returns.
  • As confidence grows or market conditions improve, rebalance towards a diversified portfolio including bond ETFs and other asset classes.
  • Review and adjust your strategy periodically based on market conditions, financial goals, and risk tolerance.

Ultimately, you could consider the benefits of guaranteed returns and diversified growth potential, optimizing for performance and risk management over different market cycles.

I hope this helped!

Disclaimer (yes, I am afraid I have to do this)

The information provided in this analysis is for educational purposes only and is not intended as investment advice. The calculations and assumptions used in this analysis are based on historical data and average return estimates, which do not guarantee future performance. Investing in financial markets involves risk, and losing some or all of your investment is possible.

Before making any investment decisions, seeking advice from a qualified financial advisor or investment professional who can assess your financial situation, risk tolerance, and investment goals is strongly recommended. The author of this analysis does not take any responsibility for any investment decisions based on the information provided herein.

2 Likes
85

The best piece of information I have read in the forum since I joined circa 4 years ago.

Congrats.

I forgot when was the last time I read or ear something similar to a detailed disclaimer like yours in any informal forum/social media/video platform/podcast platform/blog/vlog.

1 Like
86

Thanks, @RLX , I am always happy to help and contribute toward democratizing financial knowledge. I will keep posting here; however, I am also about to launch a new website that I will use to publish additional content consistently.

1 Like
87

Thanks, last I looked, I couldnā€™t find any. Iā€™m going to hold fire on bonds for a good few years yet but these ETFs will be an option when I do finally add some fixed income.

1 Like
88

I tend to agree with you @topher , as I personally do not currently own any Bond ETFs (but that is totally subjective).

In my opinion, bond ETFs offer several advantages over buying individual bonds, making them a better option. One key benefit is diversification; investing in a bond ETF gives you exposure to a broad portfolio of bonds, reducing the risk associated with holding individual Bonds. Additionally, bond ETFs are cost-efficient, as they allow investors to manage them at a relatively low fee.

Liquidity is another significant advantage. Bond ETFs trade on exchanges, providing ease of buying and selling compared to individual bonds, which can be harder to trade. This is coupled with price transparency, as bond ETFs offer real-time pricing throughout the trading day, unlike individual Bonds, where pricing can be less clear.

Convenience also plays a significant role. Bond ETFs enable investors to implement specific fixed-income strategies without requiring extensive research and selection of individual bonds. Moreover, these ETFs benefit from professional management, leveraging the expertise of fund managers to optimize the portfolio and potentially enhance returns.

In summary, bond ETFs provide diversification, cost efficiency, liquidity, convenience, and professional management, making them, in my opinion, a better alternative to buying individual bonds.

89

I am just about to have to decide for a portfolio whether to go with a China or Ex-China EM ETF.
To provide some background, the portfolio is composed by an S&P500 core, Small Cap US, World Ex-US, India, bonds, and EM (China or Ex-China).

I was looking at the following two products:

iShares MSCI EM ex-China UCITS ETF USD (Acc)
ISIN IE00BMG6Z448 | Ticker EXCS
iShares MSCI EM UCITS ETF (Acc)
ISIN IE00B4L5YC18 | Ticker SEMA

The historical performance is better for the Ex-China ETF; however, I am looking ahead, and we all know that historical returns are not a representation of future returns.
With that said my main concern about the iShares MSCI EM UCITS is that China has almost a 25% weight and Taiwan around 20%. On the contrary, in the iShares MSCI EM ex-China UCITS, Taiwan is around 25% and India around 20%.

Personally, I like to tilt toward India; however, I am also aware of the unpredictability of the markets and global policies, so things could go in favour or against China.

Initially, I was thinking of going for the ETF, including China and then having a small portion of a full India ETF. However, I now think I could go ex-China and reduce the weight of my Indian ETF.

Just to add some more confusion or data (whichever way you prefer to see it :wink: ), I simulated the two portfolios with the Montecarlo method, and I got the following results:

Portfolio including EM with China - Avg compound annual growth rate 7.60% - Avg Std deviation 8.16%
Portfolio including EM Ex-China - Avg compound annual growth rate 8.91% - Avg Std deviation 8.22%

I would appreciate some feedback.
Thanks!
Dan

1 Like
90

Itā€™s an interesting question. I sold an emerging markets tracker years ago because I wasnā€™t content with the high China allocation.

Iā€™ve long been concerned about China due to the lack of legal protection for property rights as well as other risks. However, I like to include some reduced exposure for opportunityā€™s sake.

Previously, I struck a balance through trusts like PHI and AIE. Iā€™m more confident in active managersā€™ scope to outperform in emerging markets than in say the US.

Now, Iā€™ve gone a step further and only hold a few individual stocks in emerging markets. Itā€™s risky but I would much rather own some handpicked stocks than effectively hundreds.

1 Like
91

Although this should be taken with a grain of salt, and I am aware that everything can always change, investing in India might be safer than in China due to Indiaā€™s slightly more stable democratic governance, transparent regulatory environment, and improving corporate governance practices. Indiaā€™s young, growing population and diversified economy promise sustainable growth. Additionally, Indiaā€™s favourable geopolitical relations, accessible markets, stable currency, and predictable legal framework contribute to a more secure investment climate compared to China, which faces challenges like centralized political control, regulatory unpredictability, and geopolitical tensions.
That said, I am unsure about having a full Indian ETF, and I could include it only as part of the EM ETF.

92

Thatā€™s also the reason why Indiaā€™s stock market is expensive and Chinaā€™s is cheap. The political risk in China is baked into the price.

Regarding not investing in China, there are EM ex China ETFs (I donā€™t use them myself though).

93

Yes, I am aware of Ex-China ETFs; however, I am still debating whether I should include them. I will also leave that to the investorā€™s sentiment. Personally, I might use an EM ETF including China.

1 Like