Bonds allocation and instruments. A bit lost

[alesli]

Hi everyone, I have a doubt about how to increase my exposure to fixed income instruments.

The boundary conditions:

• Current allocation: emergency fund in a HYSA, while my investments are fully in cheap stocks ETFs (80% world and 20% swiss for some local bias)
• Life situation: 35, employed, married, kids may arrive soon, renting a flat and maybe buying one in 5-10 years (difficult to predict)
• swiss taxation: dividends and fixed income are taxed as income with the marginal income rate, while capital gains are tax free

The problem:

As I am not 20yo anymore, I would like to increase my exposition to bonds to ca. 20% of the invested amount, also in order to reduce the volatility of the portfolio in case I will want to buy a house in less than 10 years.

Which instrument would suit me the best?

Some possibilities are:

• HYSA, current yield 1.5%
• Swiss Bonds with duration of max 7 years, current yield ca. 1.8%. Since buying bonds in Switzerland is an expensive thing, ca. 0.4% of fees should be considered, leaving a net yield of ca. 1.4%
• Swiss govt bond ETF (CSBGC3 and -7): yield 1.1%
• HY Corp Bond ETF: yield 8.2%. I don't like neither the hedged version (hidden hedging costs up to 2%) nor the currency risk.

No solution is really appealing to me.

I don't like the bond ETFs because they are basically tools to bet against the rise of interest rates, especially when the coupons are small. When the time span of the investment is known, one should use real bonds.

For the moment I tend to just keep the course, by splitting the bonds allocation between an HYSA and the stock ETF.

Is my analysis flawed? Do you have better ideas than mine? Cheers everyone!

 

[hrosec]

@alesli What amounts are we talking about?
If you buy bonds directly or through a fund, you are also exposed to the risk that interest rates rise and the principal might decrease in value. Similarly, bonds aren't that liquid. Additionally, as you stated briefly, each coupon payment will be taxed at your marginal tax rate. If you really opt for this you could also go for a medium term bond at a bank which is not traded but directly placed at the bank (Kassenobligation).

 

[alesli]

@hrosec 100 k more or less.
Thanks for the input - Kassenobligationen are probably the way to go when the deadline is known and below 10 years.
I am also considering additional payments in the 2nd pillar because of their immediate tax advantage and their availability in case of a home purcahse.
It would be quite tax efficient in the short term and (moderately) at the time of the purchase, but not so profitable if kept in the 2nd pillar until retirement because of the opportunity cost

 

[virtualhope]

@alesli Let me know when you find something lol

While my risk profile is much higher, I will need to increase my bonds at some point too.

 

[lhoie]

@alesli I think you should have a look at Medium-term note, fixed deposit or term deposit offered by banks.

IMO bonds in CHF are not worth it, as well as bond funds & ETFs

The yield on bonds is just so low. Bond funds & ETFs reinvest into new bonds but are affected by interest rate moves (i.e. losses if rates increase)

 

[davisc]

@alesli check the iShares iBonds ETF as those are a "fixed" bond-portfolio held to maturity. Unfortunately only available in EUR/USD as CHF is a rather illiquid bond market

 

[javerys]

@alesli A total world bond/ibond etf hedged in chf?

Not efficient cause hedging is expensive but you will be diversified and might capture higher yield.