International International Shares - Hedged vs Unhedged?

There is a saying among property investors they like property because it is something they understand. They have faith in it and it doesn't scare them even if there is doom and gloom around.

In the same way I think I understand IVV and the companies that form bulk of the index weighting. I know about the products and services and feel comfortable investing in them.

Its basically investing in something known to you and you will not get scared into selling when things are looking doom and gloom.

Don't underestimate the power of the investment vehicles that got you in current situation of financial independence.

Cheers
Oracle

 

Yes in theory but due to US domicile I would not invest in it.

Also, I would probably go Asia or emerging market ahead of more developed market even though VEU has emerging markets

Cheers
Oracle

 

Also worth considering that the "investment industry" has convinced many of us that diversifying away from asx listed companies is necesary, when as an individual investor, although some diversification may be good risk management, is it actually necessary? Constrast this with the "investment industry" whereby a broader investment universe including international listed stocks, unlisted equity, bonds, etc, actually *is* necessary - the asx just isn't big enough. What would happen if the majority of Australians only invested in a single asset class in a single/concentrated market..... oh wait a minute....

Anyway - yeah,diversify!, buy international! Others will continue "bottom trawling" the asx what a horrible market, stay away

 

I really liked this video from Charlie

I have posted posted it here in the past.



Cheers
Oracle

 

A useful chart I thought:



To hedge or not to hedge? That is the question.

 

Reinforces your reluctance to hedge international equities.
Quite a good article explaining how the market cycles effect hedging. The bond explanation was interesting as well.
The conclusion:
Our overall conclusion is the starting point for long term investors who expect to stay invested through the cycle, should be not to hedge international equities, but do hedge foreign currency bonds.

 

Well given that maintaining a low number of holdings and simplicity is still important to me any additions to the portfolio demand a great deal of consideration nowadays. Also in the case of hedged Global there has been a few major barriers for me to overcome especially in regard to distributions. I don’t think I’ve ever researched / procrastinated over any investment decision so much.

The contrarian / value side of me and applying common sense as opposed to behavioural bias in regard to distributions has prevailed. Also considered was the stage of life being retirees. Now is also beginning to look like a opportunistic time to begin accumulation of hedged Global. So without further ado (drum roll) VGAD will be added to the no / low tax SMSF portfolio along similar reasoning / application as detailed by @dunno.

 

They do, and I even did with my point to point LIC comparison in the other thread - but at least I'm aware of it. It's a deadly dangerous and totally unrealistic way to evaluate the performance of any particular fund, share, LIC etc. Change the start and end points just a little and you can get wildly different results - albeit moreso with individual shares than index funds - something I've been acutely aware of as I try to plot my own future path.

 

Well I’ve been quite conservative with the trigger for switching accumulation of Developed Global Equities to Hedged by setting the target at around 0.65 AUD / US. That level has well and truely been breached. Given our circumstances I’m now accumulating VGAD rather than VGS in the SMSF given the tax implications of Hedging.

Comparison of VGS vs VGAD below:


Bogleheads would be proud as most accumulation going forward is being directed toward VAS / VGAD (local currency) and VGS (global currency). Also no temptation toward supposed less correlated asset classes such as property / infrastructure etc. Simplicity and a lesson or two from @dunno ‘s sloth. Alternatively I’m getting old and lazy.

Not advice.

 

Although it goes against simplicity, an alternative is to have a moving portfolio target that adjusts the amount of new funds towards hedged allocation based on current AUD vs historic levels, such as below:


But even then there is the question with a portfolio of VAS/VGS/VGAD - should VAS be considered as part of the hedged?

In a 50% scenario (AUD=0.79USD), should the portfolio be:
a) 50 VAS / 25 VGAD / 25 VGS
b) 25 VAS / 25 VGAD / 50 VGS
c) 33 VAS / 33 VGAD / 33 VGS
d) other?
Which would offer the mathematically best outcome from long term re-balancing?

Would love to get some thoughts.

 

You mentioned the tax implications of hedging… What does this mean if you invest in VGAD outside SMSF?

 

I think you'd go with a) as your AU allocation would be independent to your total global allocation. How would you plan to implement this? Would you realise and reinvest on a regular basis?

 

What is the reasoning for changing the ASX allocation? IMO that should be fixed so you can benefit from long-term rebalancing, selling recent strong performers to buy recent weak performers.

There are 2 options IMO:
1. Fix and rebalance VAS, VGAD and VGS at 40 / 10 / 50 for example. The VAS + VGAD allocation = 50%, which is your currency hedging. I believe VDHG tends to keep their allocation static like this option, although there may be slight perturbations.
2. Fix VAS and rebalance VGAD and VGS as per your table. e.g. VAS/VGAD/VGS ranges from 50/0/50 to 50/25/25 to 50/50/0 (near where we are at now).

 

For me, doing it actively is yet another thing I'm at risk of doing wrong.

Having said that, I recalled reading somewhere that the smartest strategy during previous Events was to bet on the Aussie dollar going down. So I held off adding VGAD when rebalancing.

As a result VGS went down less than most which was nice.

Of course, since the current bottom, VGAD has done better.

I'm not smart or lucky enough to time things so my new strategy is to simply put all new funds into VDHG, which has a 60ish/40ish split.

 

Great summary and great thread. Coming back to this one now for some guidance and thought provoking. A lot of theory has been proven over the period this thread started to now.Thanks to all who contributed.
@Nodrog @dunno @The Falcon @Anthony Brew

 

@Nodrog and @dunno I too would like a bit more info on this if you are willing and have the time.

 

This excellent post by @dunno will help:

Exchange Traded Funds (ETFs) 2020 [ETF]

 

Excellent explanation. Thanks @Nodrog and @dunno

 

Simply hedging can at times result in interest income and capital gains in excess of that which occurs in typical low turnover unhedged ETFs. These distributions particularly given their lumpy nature are not tax efficient unless in a low / no tax environment.

 

AUD/USD predictions

https://www.brisbanetimes.com.au/bu...-australia-and-the-world-20201209-p56ly7.html

I'd rather not know....