Euro HB Permanent Portfolio using ETFs

[tarentola]

I would like to put together a HB PP in Euros, in the form of ETFs traded on Euronext. I am in France. I had a look at previous topics here and on the Bogleheads forum, but did not find many concrete ETF suggestions for European residents. Here are my thoughts so far:

Bonds. Not a great deal of choice here.
Deutsche Bank iBoxx® Euro Sovereigns Eurozone 25+ (X25E:DE) is my preference, as the bonds are long enough. There is also iShares 15-30y Euro Bonds (IBGL) and Lyxor 15y bonds (MTF), but these do not meet the criterion of 20+ year bonds.

Shares. A tracker of the German DAX index. As I am in France, I should select a CAC-40 index tracker, or a Eurostoxx 200 or 600 tracker, but these have not done well over the last decade by comparison with the DAX.

Gold. ETFS Physical Gold ETC (PHAU) or similar gold bullion ETC.

Cash. A cash deposit account, paying about 2% these days. Another possibility would be a short bond ETF such as EasyETF iBOXX Short (ISS).

I would be grateful for comments on the selection.
Tarentola

[AdamA]

I would like to put together a HB PP in Euros, in the form of ETFs traded on Euronext. I am in France.

I don't have any good advice on this, but am curious to hear from those who know more.

I wonder how a Euro-based PP would do right now.

Maybe you'd be better off using the Franc?  Not sure...

[stone]

tarentola, I think there is some stuff about euro zone PP on http://europeanpermanentportfolio.blogspot.com/.

Adam, I don't see why a Swiss Franc based PP would be especially helpful for a French saver. The French person is going to be paying for living expenses in euros. The Swiss Franc might be in a speculation driven bubble at the moment. I guess the thing to check out is what euro long duration government bonds do in terms of correlations to stocks.

[stone]

That  blog http://europeanpermanentportfolio.blogspot.com/. has a really nice backtest showing how much more stable a euro PP is than an American PP converted into euros. Basically it drives home the point that the PP needs to be in the currency you need day to day.

[AdamA]

tarentola, I think there is some stuff about euro zone PP on http://europeanpermanentportfolio.blogspot.com/.

Adam, I don't see why a Swiss Franc based PP would be especially helpful for a French saver. The French person is going to be paying for living expenses in euros. The Swiss Franc might be in a speculation driven bubble at the moment. I guess the thing to check out is what euro long duration government bonds do in terms of correlations to stocks.

Yeah, I know.

Just seems like the Euro lacks the advantages of the dollar.  It's a lot easier for the US to print dollars than it is the Central Bank of Europe to print Euros...

But you're right.  You need to have the PP in the currency that you actually use.

[moda0306]

I would argue that a European individual should use some US bonds.

Curious... How much commerce is the dollar used for in Europe, if much at all?

I just don't see having a pegged currency as being a smart idea... The PP works exceptionally well with an printable currency to prevent the default risk associated with stocks, and gold to prevent harm from the inflation of the currency... it works much better that way than to be in a Greek PP (I use that term to describe what a Euro PP could look like... UGLY).

I think the dollar, being the world's reserve currency, could never really be thought of as other than a "quasi-domestic currency" of many countries.

I don't know... still thinking through this.

[kw]

Hi Tarentola,

It seems indeed that a EU-PP is somewhat more difficult to implement than a US-PP. 
I live in Holland and have a euro based permanent portfolio.

At this moment the following ETFS are used:

stocks: VGK(US) and SXD(DE)
gold: IAU and PHAUP(etfs physical gold)
bonds: IBGL and EXX6(DE)
cash: cash deposit accounts

Before VGK , I used IMEU.
SXD and EXX6 are later additions when I added cash to the PP.

The PP is running for nearly 2 years now and the return is approx. 18% net (tax paid) in those 2 years.
In Holland we pay a capital tax of 1.2% each year, so you have to add 2.4% to the PP to get 20-21%(before tax).

[tarentola]

Thanks for the replies, and particularly to kw for the information.

kw - the SXD Eurostoxx 600 seems like a logical choice, as does the MCSI Europe index. EXX6 is 10.5+ year bonds; again I understand this one but the bond duration seems a bit short for a strict HB PP.  I would be interested to know why you picked those particular ETFs.  And why two ETFs in each category, rather than one?

I did not want to restart the debate about the merits of Euro investment for dollar investors. Personally I would like to invest in dollar-denominated ETFs, as the choice is wider and he information easier to obtain, but the fluctuations in the Euro-dollar rate put me off and are of course contrary to the spirit of the HB PP for a European investor.

The europeanpermanentportfolio site results are encouraging. It tracks a portfolio but does not name specific investments as far as I can see. I did set up some dummy Euro portfolios as a short backtest and here are the results  in Euros for two PPs set up very recently, on 4 August 2011:

A HB PP using 3 Euro ETFs (PHAU, IBGL and CAC) and simple cash, is slightly up (0.94%).

A PRPFX copy, using 8 Euro ETFs,  is breaking even (+0.01%).

Another Euro HB PP set up on 4 December 2010 is up 1.08%. For comparison, the actual Cuggino PRPFX fund is up 7.81% in that period, but some or all of this difference is presumably due to Euro appreciation against the dollar (+9%).

In conclusion: the evidence indicates that the PP concept works well in Europe, but it would be nice to have a better choice of ETFs. Any other suggestions welcome.

[AdamA]

I did not want to restart the debate about the merits of Euro investment for dollar investors.

I don't think there's much to debate.  You should use the currency you spend, for the most part.  The Euro is popular enough that if it had a problem, I suspect gold would do very very well to make up for it.

[gizmo_rat]

The europeanpermanentportfolio site results are encouraging. It tracks a portfolio but does not name specific investments as far as I can see.

In conclusion: the evidence indicates that the PP concept works well in Europe, but it would be nice to have a better choice of ETFs. Any other suggestions welcome.

I think Marc De Mesel (europeanpermentportfolio) is a hardcore PP advocate so holds bonds and gold directly.

He blogs more frequently at http://www.marcdemesel.be/  in dutch (google translate is your friend).

[kw]

Hi Tarentola,

EXX6 was bought because I found IBGL to have a lot of Spanish and Italian bonds. I wanted to have more German bonds. This was before the ECB started to buy Spanish and Italian debt. IBGL is also changing its Holdings regularly, the index it's based up on is updated each month.

The DB tracker has longer duration than EXX6, I wasn't aware of it before I read your post. The DB tracker does not pay interest which I do not like. Have to do more research on that one.

Harry Browne said somewhere that you should use the longest duration bonds you can get.

Why 2 ETFs in each class?

I like VGK, its expense ratio is low and the dividend is high. I like SXD, because it is the Euro part of the 600 index.
SXD is a German ETF, with a low expense ratio, also present on the Paris bourse. VGK in dollars and SXD in euros.

IAU in dollars and PHAUP in euros. The bonds are in euros.

When rebalancing it is handy to be in both currencies. So a rebalance  can stay in dollars or euros and only occasionly you need to exhange dollars for euros.

Harry Browne also advised to have more ETFs (I think he talked about 3 or so) for each category.

Another reason is that you change your portfolio in increments, don't want to swap everything in one go.

I like to show you 2 graphs:
the first one shows you my EU-PP where I bought 'shares' in my PP and follow that share price.
the second one shows you the movements of each category around the average





in the first chart you see that this year was rather flat. There were good timing opportunities to add to the EU-PP

in the second chart you can see a gold rebalance, two additions. Hope to get a gold rebalance soon again 


Cheers, KW

[kw]

Hi Tarentola,

Just had a look at the ishares website:

EXX6  Modified Duration (%)                     13,72

TLT    Effective Duration                                15.89

IBGL  Modified Duration (%)                          13,46

My feeling is EXX6 responds better than IBGL and X25E.

The DB tracker 25+ (X25E) is not only Germany, but also Italy, Spain, Belgium (AAA,AA)

[tarentola]

gizmo_rat : I didn't know Marc Mesel had a blog as well. He lists his PP which includes German 30-year bonds, which he presumably buys directly in Belgium.

kw - thanks for explaining your reasoning. I have ordered HB's book so I hope to understand the details of his approach soon, including how many ETFs per category. I have no particular reason to hold dollar ETFs, as I am not American.

Also I take your point about exposure to less secure bonds such as Spain. I am not sure how easily I can buy German bonds here in France, but I will look into it. EXX6 tracks bonds of 10.5 years and up so is not strictly suitable for a HB PP. So there remains IBGL or X25E for a long bond ETF, or (preferably) German or French bonds directly.

I have just found another candidate: IBOXX EUR LIQUID SOVEREIGNS DIVERSIFIED 25+ TR (LU0444606619, X509) which replicates the 25+year bond index. I will investigate this one.

[D]

Whoever mentions Euro PP mentions German bonds. I think if you are not comfortable with investing in the cash and bonds and stocks of your own country, I'd rather go with US PP, especially given the fact that USD is world-reserve currency. Maybe after 100-200 years of EU having a good track record of being a country, you could consider EU PP. Maybe if I was German or Brit, I'd consider German PP (and not EUR but DM) or UK PP, but since I'm not, I stick with US PP. 

What good European ETFs could you use to build US PP?

[kw]

Hi D,

I have a US-PP as well. Just the standard VTI, IAU, TLT and SHY.

It would be difficult to use european ETFs to build a US-PP.

If you measure your US-PP in euros, it is not linear. So it seems (less volatility)better to create your own european PP in euros, if that is your home currency.

[stone]

D, I think the key thing is that German bonds are in euros and (because Germany is the strongest Eurozone economy) act as the Euro denominated "flight to safety". If you are French and have German 30year treasuries, you do not get any exchange rate risk. USD give severe exchange rate risk for Eurozone or British PP holders. A US PP would have had several down years over the past decade once converted into Euros. Also the USD seems to be slipping from being a sure bet as the global reserve currency for the future. Perhaps the Euro might be saved from collapse (eg by Germany leaving the Euro). We don't know. That's why it is so important to confine the exchange rate risk to the gold part of the PP.

[kw]

Hi Tarentola,

EXX6 is 10.5 +.

-------------------------------
13,23 BUNDESREPUB DEUTSCHLAND DE0001135275 113527 1,12 Germany Government 4,00 04/01/37
12,59 BUNDESREPUB DEUTSCHLAND DE0001135226 113522 1,25 Germany Government 4,75 04/07/34
11,45 BUNDESREPUB DEUTSCHLAND DE0001135176 113517 1,30 Germany Government 5,50 04/01/31
10,48 GERMANY (FEDERAL REPUBLIC OF) DE0001135366 113536 1,30 Germany Government 4,75 04/07/40
9,73 GERMANY (FEDERAL REPUBLIC OF) DE0001135069 113506 1,30 Germany Government 5,62 04/01/28
8,43 BUNDESREPUB DEUTSCHLAND DE0001135325 113532 1,19 Germany Government 4,25 04/07/39
8,17 BUNDESREPUB DEUTSCHLAND DE0001135044 113504 1,43 Germany Government 6,50 04/07/27
7,12 GERMANY (FEDERAL REPUBLIC OF) DE0001134922 113492 1,34 Germany Government 6,25 04/01/24
6,93 BUNDESREPUB DEUTSCHLAND DE0001135085 113508 1,22 Germany Government 4,75 04/07/28
6,73 BUNDESREPUB DEUTSCHLAND DE0001135143 113514 1,41 Germany Government 6,25 04/01/30
5,14 GERMANY (FEDERAL REPUBLIC OF) DE0001135432 113543 1,02 Germany Government 3,25 04/07/42
------------------------------------

These are the bonds in EXX6. You see the shortest is 04/01/24 and the longest 04/07/42.

It is not what you want but certainly 10.5+ years.

[D]

Hi D,

I have a US-PP as well. Just the standard VTI, IAU, TLT and SHY.

It would be difficult to use european ETFs to build a US-PP.

If you measure your US-PP in euros, it is not linear. So it seems (less volatility)better to create your own european PP in euros, if that is your home currency.

Yes, me too, except that I hold treasuries directly in order to receive interests rather than dividends and as such to be taxed at 0% rather than 30% in US. I think a perfect setup for a foreigner would be all treasuries kept directly in US (not through an ETF), S&P 500 through a European ETF in order to avoid US estate tax, and gold can be held anywhere where there is no tax on it. For lots of countries interests and foreign income is exempted from tax, so this setup might be a full tax free setup for your retirement.

[kw]

Hi D,

Thanks for your advice!

Tax is completely different here(Holland), basically a 1.2% tax on capital and no other taxes, so rents and dividends and capital gains etc. is not taxed.
Holding treasuries direct is an interesting thought. I am with Interactive Brokers and will look if that is possible for me.
SP500 through a european ETF is perfectly possible, indeed the US estate tax is not nice.
Ishares now has a Gold fund in Ireland(0.25 ER), but that is only available in London in pounds. I wait till that is available in euros, until that time PHAUP (0.39 ER) is a reasonable alternative. Gold can also be bought in shops here, it is not taxed only a markup.(however Silver is taxed, that is considered a commodity)

K

[tarentola]

kw, sorry, my mistake about the duration. I confused it with another bond ETF (GXJ), and have corrected my statement in the post.

On the subject of Europeans investing in a PP in dollars: the exchange rate risk effectively rules it out, at least for me. Over the last five years alone, the Euro has fluctuated between $1.20 and $1.60. Gold would be effectively exempt from this 25-30% fluctuation, but the other classes would be affected. The tax situation was something I had not considered.

To summarize on the subject of bond ETFs eligible for the PP: there are at least two Euro long (25+) bond ETFs, X25E and X509, both traded in Germany. Next best seem to be IBGL (15+) and EXX6 (10.5+).

[D]

Hi D,

Thanks for your advice!

Tax is completely different here(Holland), basically a 1.2% tax on capital and no other taxes, so rents and dividends and capital gains etc. is not taxed.
Holding treasuries direct is an interesting thought. I am with Interactive Brokers and will look if that is possible for me.
SP500 through a european ETF is perfectly possible, indeed the US estate tax is not nice.
Ishares now has a Gold fund in Ireland(0.25 ER), but that is only available in London in pounds. I wait till that is available in euros, until that time PHAUP (0.39 ER) is a reasonable alternative. Gold can also be bought in shops here, it is not taxed only a markup.(however Silver is taxed, that is considered a commodity)

K

I think Craig mentions ZKB Gold ETF as a good ETF, for which you have Euro version ZGLDEU.SW. Maybe you should diversify your gold holdings. IB is charging for purchase of US bonds, so maybe better to open an account with Schwab, Fidelity, or any other big US firm that let's you buy them for free. Investment tax sounds great in Holland - if the income tax is similar, I'll look for my next job in Holland :-) 

[kw]

Hi D,

Thanks for the gold ETF reference!
Income tax is an order of magnitude higher than Capital tax here , sorry to disappoint you. Always welcome to work here)



By now we have a few European ETF possibilities for a EU-PP and a US-PP:


------------------------------------------------------------------------------------------------------
Stock
EU: IMEU(MSCI Europe), SXD(euro stoxx600), SXP(stoxx 600), EUEA(euro stoxx 50)

US: IUSA(SP500), ISAM(MSCI USA)
------------------------------------------------------------------------------------------------------

Gold
EU/US : PHAUP(ETFS gold), ZGLDEU.SW(Zurcher Kantonalbank euro Gold ETF), IGLN(Ishares Ireland gold Etf, at this moment only in London)
------------------------------------------------------------------------------------------------------

Bonds
EU: X25E (deutsche bank 25+, all countries, interest compounded), X509(Commerzbank 25+, all countries), IBGL      (Ishares  15+, all countries), EXX6(Ishares 10.5+, Germany)

USA: treasury bonds direct , BTMA (treasuries 7-10 yr, for a 50% allocation not recommended)
------------------------------------------------------------------------------------------------------

Cash
EU: IEGE(euro treasuries 0-1), IBGS( euro treauries 1-3), EXVM(German treasuries money market), EXHB(Germany 1.5-2.5), EXHG(euro sovereigns 1.5-2.5)

USA : treasury bills direct, IBTS (treasuries 1-3 yr)
------------------------------------------------------------------------------------------------------



Looking forward to any additions, to make a nice list!

[D]

Here is a nice list of all EU-based S&P 500 ETFs:

http://www.etfexplorer.com/en/indices/1-SP-500/etfs

Expense ratios range from 0.15-0.4%. iShares ETF is the largest but also the most expensive one.

[kw]

ETF explorer is a nice tool.
The ETFs in Europe are generally more expensive than the USA ones. Vanguard should open shop here.

[tarentola]

kw, thanks for the checklists.
Of the available bond funds:
<<EU: X25E (deutsche bank 25+, all countries, interest compounded), X509(Commerzbank 25+, all countries), IBGL      (Ishares  15+, all countries), EXX6(Ishares 10.5+, Germany)>>

the order of three-year performance from ADVFN is
EXX6
X25E
X509
IBGL

No big difference in volatility, based on looking at the graphics on ADVFN.FR. EXX6 and E25E are pretty much neck and neck; X25E was ahead a few months ago. X25E would be my preference as it is slightly less volatile than EXX6 and more in the spirit of the PP as it holds longer (25+ year) bonds.

Similarly, of the stock indexes,

<<EU: IMEU(MSCI Europe), SXD(euro stoxx600), SXP(stoxx 600), EUEA(euro stoxx 50)>>

The four listed have similar volatilities and IMEU is the best performer by a few percent. The DAX index is a better performer but more volatile.

Gold: Not a great deal of choice here. Physical gold rather than certificates or futures or mines, so I would pick PHAU or VZLD, which have identical performances.

For the short-term bond funds as homes for cash, IEGE contains the shortest bonds and has the smoothest performance. EXVM, EXHB and EXHG can lose money, and EXVM in particular has lost a few percent over three years. Personally I think I will keep cash simply as cash on deposit.