Home Investment How Significant is the Return Difference Between The Global Aggregate Fixed Income Hedged to SGD versus Hedged to USD?

How Significant is the Return Difference Between The Global Aggregate Fixed Income Hedged to SGD versus Hedged to USD?

by Deidre Salcido
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2025.02.02 Global Aggregate Bonds 7.png


I wanted to think through this financial independence financial planning problem that I have. It is regarding drawing down a bond heavy portfolio for a specific purpose.

But before I can tackle that problem, I may want to find out the difference in return for different timeframes between a USD fixed income return and if it is SGD hedged. Given that the SGD have appreciated much against the USD, a SGD like return is lower.

But why do I care about returns in SGD? Because most of the Singaporeans that I am considering spends in SGD. Even if your fixed income return is good, eventually, Singaporeans will have to convert and spend in SGD.

My motherhood financial planning statement is that it is better to be in the currency you will spend in retirement for fixed income. Not that important for equities.

I decide to look at the difference in return for the Bloomberg Global Aggregate Bond Index since I have the returns data for hedge to USD, hedge to SGD and unhedged. This might intrigued those investors who are invested in a fund that tracks the index.

If you are Interactive Brokers like me, you can buy the iShares Core Global Aggregate Bond UCITS ETF (Ticker: AGGU). This is a hedged to USD and accumulating ETF.

If you wish for a hedge to SGD one, you can get the Amundi Index Global Aggregate Fund (ISIN: LU2420246212). You can get it from Endowus (my referral code). I understand that you can buy with POEMS now as well (fund link here). POEMS does not have wrap fees, or platform fees.

But this article is not an advise to buy but to reflect upon the currency difference.

If you are interested in more about the global aggregate bond, here are some of my past articles:

  1. All long term returns rolling data can be found in One Page Financial Data post.
  2. Reflecting about A Stupid Income Strategy I Came Up With
  3. How does a Bond Index Fund Recover its Value After being Decimated by Rising Rates?
  4. Should I Take Less Risk in My Fixed Income Allocation by Moving Away from a Global Aggregate Bond ETF?
  5. Did I Recommend the Wrong Minimum Bond Investment Time Horizon?

Let us take a look at the historical returns.

The Difference in 1-Year Bloomberg Global Aggregate Bond Returns.

The chart below shows the rolling 1-year return of the Global Aggregate Bond that is hedged to SGD, to USD and unhedged:

There are 279 1-year periods in the last 24 years or so.

1-Year returns can be positive or negative. I do liken the current rate environment to be pretty similar to the 2000 to 2007 periods and if so you can see that there are some years where the 1-year returns can be pretty good. But it should not be so surprising to see negative returns.

The unhedged bond returns are very volatile! You can see that the blue line tends to swing below or above the other two wildly.

The returns that are hedged to SGD and USD respectively are pretty close together.

In the depths of the Fixed Income Depression, the unhedged had a -20.79% return but the hedged ones have -12.1%. Such a big difference.

I plotted the returns for the Hedged to SGD minus the Hedged to USD below:

This will allow us to see the difference likely between the two choices. The returns for the Hedge to SGD is lower for the 1-year return starting in 2000 to 2008.

SGD have been strengthening against the USD.

It might be better to pair this with a SGDUSD currency chart:

This chart starts in 2006, but you can see that the SGD appreciation peak in 2011 before the USD strengthen. Since then the relationship have been a yo-yo.

At times, as a Singaporean, your returns can be 3.7% difference between choosing the hedge to USD or SGD. The returns of the hedge to USD is generally higher than the hedge to SGD.

I listed the difference in percentiles below:

If you like to use median or average, the difference will be -0.39% or that your SGD returns tend to be 0.40% less over a 1-year timeframe. Not a biggie when the median 1-Year hedge to USD return is 4.1%!

But if you learn something from me over the years, it is that you might have a mismatched in expectations versus the reality when you see that the recent hedge to USD return is 4% but the hedged to SGD one is 2%.

The Difference in 5-Year Bloomberg Global Aggregate Bond Returns.

The duration of the Bloomberg Global Aggregate Bond funds is about 6 years. The rule of thumb is to use a fixed income portfolio that has a shorter duration than when you need the money. So this means that your goal should be 7 years away.

I think looking at a 5-year annualized return is not too far away from 6. I expect that we see negative returns over a 5-year period.

If you wish to capture the yield-to-maturity currently seen, the research shows that your time horizon should be at least 2 x duration -1 and in this case 11 years.

The chart below shows the rolling 5-year return of the Global Aggregate Bond that is hedged to SGD, to USD and unhedged:

Note that these are annualized returns not cumulative returns.

You can see a clear downtrend. The returns also look more smoothed out. As the interest rate fall, the annualized return becomes slightly lower and lower.

Most 5 year returns are positive except from 2019 where the 5 year period factors in the recent Fixed Income Depression.

I tabulated the 5-year annualized return by percentiles here:

The unhedged returns still looks damn wild, either much higher or much lower than the two.

Again, if you like median returns, if you invest for 5 years and get 3.67% or 4.2% p.a. that is pretty good. You get a diversified fixed income portfolio, that don’t lose money.

But if you look at the worse case, you can see that at times, you don’t earn anything.

But I still think it is much better than the range of 5-year equity returns.

Actually, if we view it from the percentile angle, the difference isn’t that much. Even at the 20th percentile, the returns is at 2.7% or 3% p.a. That is pretty good.

I plotted the returns for the Hedged to SGD minus the Hedged to USD below:

I think we are able to see the situation better. When SGD strengthens, we can see a 1.1% ANNUALIZED return difference.

Let me group them by percentile:

Conclusion

I think given the choice, you always want to invest for fixed income in a currency that you will spend in (often after you are financially independent). If you are retiring in Europe, use a hedged to EUR one.

Since I am having a 15% allocation to AGGU, I am going against this principal, and since this whole post is on the Bloomberg Global Aggregate Bond index, you can see potentially how big of a return difference.

If I go with AGGU, my returns will look higher but when we convert to SGD the returns will be muted.

I gather some good data in that the 5-year annualized difference can be -0.3% p.a. or in a more conservative case -1.1% p.a. If it is 1-year, it might be -0.4% to -1.2%.

That might be a range I can adjust.


If you want to trade these stocks I mentioned, you can open an account with Interactive Brokers. Interactive Brokers is the leading low-cost and efficient broker I use and trust to invest & trade my holdings in Singapore, the United States, London Stock Exchange and Hong Kong Stock Exchange. They allow you to trade stocks, ETFs, options, futures, forex, bonds and funds worldwide from a single integrated account.

You can read more about my thoughts about Interactive Brokers in this Interactive Brokers Deep Dive Series, starting with how to create & fund your Interactive Brokers account easily.

KyithKyith



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