Portfolio performance report Q3 2019
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Change in portfolio: to global bond fund hedged in Euro
I made a change in my portfolio this quarter! If you recall from last quarter, the bond fund in my portfolio was Xtrackers Global Government Bond (LU0908508731). This fund tracks the “FTSE World Government Bond Index - Developed Markets” index, which is composed of investment-grade sovereign bonds from developed markets (US, Europe, Japan, etc…)
It has come to my attention that changes in currency exchange rates are the main cause for the volatility of international bonds. This is explained well in “But what about currency risk?" on the Index Fund Investor blog. The role of bonds in my portfolio is to be a stabilizer during periods of high volatility, for instance during downturns. So we want to limit the volatility of the bonds fund.
A big portion of the bonds in the “Xtrackers Global Government Bond” fund are denominated in another currency but the Euro. Therefore, they are subject to currency risk. To eliminate this source of volatility, we have two choices:
- Only hold bonds in Euro, which means to pick a bond fund that has bonds only from countries in the Eurozone.
- Hold both Euro and international bonds, but hedge the currency of the latter to Euro. The hedging counteracts changes in currency exchange rates, thereby nullifying that part of the volatility.
A study by Vanguard showed that both options have yielded similar returns in the past. However, they believe that when faced with two seemingly equivalent alternatives, they recommend going global because of the additional diversification. When you only hold bonds from the Eurozone, you limit yourself to one particular region of the world. By exposing yourself to bonds from the entire developed market, you get a diversification benefit.
Therefore, I opted to replace my bond fund with its Euro-hedged counterpart Xtrackers Global Government Bond EUR Hedged. It tracks the same index but is hedged to Euro. A check on Backtest confirms the theory: this fond is less volatile (as measured by standard deviation).
Composition
After the change, my portfolio looks as follows:
| Type | ETF | Ticker | Allocation |
|---|---|---|---|
| Government bonds | Xtrackers Global Government Bond EUR Hedged | DBZB | 18% |
| Developed | iShares Core MSCI World | IWDA | 49% |
| Small cap | iShares MSCI World Small Cap | IUSN | 14% |
| Emerging markets | Xtrackers MSCI Emerging Markets | XMME | 10% |
| REIT | Amundi ETF FTSE EPRA NAREIT Global | EPRA | 9% |
Growth
Portfolio performance as of October 1st 2019.
I invested €729 into the portfolio during the last quarter. The total value of the portfolio has increased by €1,974. Overall, I’m seeing gains of €4,037 on the entire portfolio. This equates to a 13.3% total return.
Performance per asset
Performance per asset as of October 1st 2019.
The developed market equities and REITs continue to do well. They, together with the bonds, have been the reason for the growth of the portfolio.
Quote to ponder about
“The stock market is designed to transfer money from the active to the patient.” — Warren Buffett