10 Q&As about the new NISA

[TokyoBoglehead]

I find myself in some agreement here - my guess is that currency market fluctuations do contribute a large proportion of gains or losses seen on foreign currency assets, be they bonds or equities. (This makes taking a tsumitate style approach to accumulating the assets attractive if one is going to invest over a long period of time.)

My Monex summary tells me that I have only around 1.5% of my portfolio in yen-based equities and bonds. So yes I am assuming 98.5% non-yen currency risk there. My yen currency risk is all in my house and future wage income, plus what yen I keep in the bank.

I was comparing the relative risks and upsides of foreign bonds held by a yen investor vs foreign bonds equities held by a yen investor.

At the myindex.jp site, there is a section on the 資産配分 page, if you scroll down to the bottom, see below 大暴落！ あの時のリターンは？
You can select your favorite financial crisis and it shows how different asset classes did in different cases.
Again there the currency fluctuations play a big role, but it seems to me that indeed bonds performed less poorly than stocks during those crises, and also performed worse in the subsequent recoveries.
One thing I would add here is that I aim to rebalance my portfolio at the end of each year. So if my equities had really sold off then I would probably find myself selling some foreign bonds (maybe at a loss due to currency fluctuations), and buying more equities.

But it’s interesting to look at the aforementioned data at myindex.jp - depending on the financial crisis non-yen bonds actually killed it in one case (IT bubble), but got killed in another (Lehman shock).

Rebalancing? In your taxable account or ideco, and hopefully not your nisa?

I look to avoid that personally, that's one of the advantages of a single global equity fund, they automatically rebalance.

......
Bonds do stand firmer in a crisis, but often those that stayed100% equities did better post crisis.

And at the end of the day I don't have a clear answer. But if you're confident the yen isn't going to rise as the us pulls back on interest rates in the next year or two, those yields are mighty temping.

If your not sure either way cash or equities seem a better bet.

[sutebayashi]

Rebalancing? In your taxable account or ideco, and hopefully not your nisa?

Right. (But when (legacy) nisa was all I had, and I wasn’t maxing it out, yes I have rebalanced within my nisa too. I had no other use for the tax free allocation at the time, having just bought a house. These days if I can rebalance additively I do so, but I would sell outperformers for losers too if I had to to rebalance.)

I look to avoid that personally, that's one of the advantages of a single global equity fund, they automatically rebalance.

I think that depends on the asset allocation, objectives, time horizons.

Indeed I do no rebalancing in my kids j-nisas for that reason - those accounts are all equities, but for my more diversified portfolio, without rebalancing the portfolio allocation will change over time, likely becoming riskier than the original asset allocation I selected.

But if you're confident the yen isn't going to rise as the us pulls back on interest rates in the next year or two,

Conversely are you confident the yen is going to rise in the next year or two, on top of what the US authorities will do?

My plan is to stick with my asset allocations for a couple of decades or more. What the currency rates do over the next year or two is not a concern for me. (Indeed, if the yen strengthens that would be a nice chance to buy more foreign assets cheaply, in my mind.) The past track record at seen at myindex.jp etc suggests that over my time horizon I’ll be making a return on my portfolio, irrespective of currency movements.

Now, I do speculate explicitly on currencies. my first love! But I do that in margin forex accounts. But even there I have no clue about where the currency rates might be in a year or two.

[ToushiTime]

1.5% of my portfolio in yen-based equities and bonds.

You mean Japanese stocks, Nikkei, TOPIX index funds, and JGBs, and Japanese corporate bonds?

Or do you mean yen-denominated mutual funds that invest in overseas indexes etc, make up 1.5% of your portfolio, as opposed to dollar-denominated ETFs that invest in the same overseas indexes?

At the myindex.jp site, there is a section on the 資産配分 page, if you scroll down to the bottom, see below 大暴落！ あの時のリターンは？

Thanks for that link
So developed nation bonds did better that stocks in the Depression (based on the other data I provided), less well than stocks in the Asian Crisis (rising 20% vs 23%) better than stocks in the Dot.com bubble, and less badly in the Global Financial Crisis.
https://myindex.jp/user/myaa_demo.html

It’s also worth noting that US stocks took 3x as long to recover from the Depression as from the other crashes.
https://myindex.jp/study/data/crisis.html

So if my equities had really sold off then I would probably find myself selling some foreign bonds (maybe at a loss due to currency fluctuations), and buying more equities.

Ah, I hadn’t thought of rebalancing yet. So, you set a ratio and readjust your holdings to keep in line with that at the end of each year?

Do you do dollar-averaging also?

[sutebayashi]

1.5% of my portfolio in yen-based equities and bonds.

You mean Japanese stocks, Nikkei, TOPIX index funds, and JGBs, and Japanese corporate bonds?

So i am talking about dollar-denominated US ETFs, that invest globally including Japan, and what that gives me is about 1.5% Japan exposure, if I believe what my Monex account tells me.

Specifically, I own
- VEA, which is like a global developed market equities ETF, ex-US stocks. This VEA includes some Japanese equities exposure.
- BNDX, which is a global developed market bond ETF, excluding, ex US-bonds. This also includes some JGBs.

I use these as broad equivalents to the eMAXIS developed markets equities and bond funds (plus other ETFs for US exposure), but the Japan exposure in the ETFs is one of the differences between them.

Ah, I hadn’t thought of rebalancing yet. So, you set a ratio and readjust your holdings to keep in line with that at the end of each year?

Yes, that’s basically what I do.

If I were awake enough, I might rebalance in the middle of the year too if a really big move happened.

Recently I typically have some extra cash at the end of the year, and I buy more of everything to bring each towards the target %, and sell anything that I have too much of.

The general advice I see is to try to rebalance without selling (which might incur taxes), plus if you sell something and buy something else, the associated transaction fees can be a drag on performance too. It’s also a hassle So limiting this to once a year seems common advice.

Do you do dollar-averaging also?

Yes I have monthly purchases set up for Toshin tsumitate that does that for me. I continue to use eMAXIS slim funds for that.

[ToushiTime]

So i am talking about dollar-denominated US ETFs, that invest globally including Japan, and what that gives me is about 1.5% Japan exposure, if I believe what my Monex account tells me.

In a scenario where I, as an investor based in Japan with yen savings and income, had a choice between:

A) buying a dollar-denominated US EFT investing in the S&P

vs

B) buying an unhedged yen-denominated mutual fund, such as eMaxis, investing in the S&P,

do the currency gains/losses (strong dollar = good for me, weak dollar = bad) emerge at the same time in each case?

I imagine the US ETF is simply; everything is converted into yen, the day you sell.
With unhedged eMaxis funds is it the same process, other than you start off buying the product in yen?

[TokyoBoglehead]

So i am talking about dollar-denominated US ETFs, that invest globally including Japan, and what that gives me is about 1.5% Japan exposure, if I believe what my Monex account tells me.

In a scenario where I, as an investor based in Japan with yen savings and income, had a choice between:

A) buying a dollar-denominated US EFT investing in the S&P

vs

B) buying an unhedged yen-denominated mutual fund, such as eMaxis, investing in the S&P,

do the currency gains/losses (strong dollar = good for me, weak dollar = bad) emerge at the same time in each case?

I imagine the US ETF is simply; everything is converted into yen, the day you sell.
With unhedged eMaxis funds is it the same process, other than you start off buying the product in yen?

With us ETFs you must buy the USD first or accept the rather poor default spread.

When sold, you receive USD. However, it is sometimes possible to have your currency automatically converted. This is seldom to your advantage.

Japanese Funds get better, institutional exchange rates typically.

[ToushiTime]

When sold, you receive USD. However, it is sometimes possible to have your currency automatically converted. This is seldom to your advantage

Ah, that's the difference, thanks.
So with US-dollar-denominated ETFs, when you sell, you get dollars which you can keep until you decide to convert back into yen.

[ToushiTime]

- VEA, which is like a global developed market equities ETF, ex-US stocks. This VEA includes some Japanese equities exposure.
- BNDX, which is a global developed market bond ETF, excluding, ex US-bonds. This also includes some JGBs.

I use these as broad equivalents to the eMAXIS developed markets equities and bond funds (plus other ETFs for US exposure), but the Japan exposure in the ETFs is one of the differences between them.

Why do you use these instead of eMaxis?

Because eMaxis funds are classified as PFICs, and/or because you want dollar-denominated funds and/or because of the different country exposures in eMaxis versus the equivalent US-based ETFs ?

[sutebayashi]

Why do you use these instead of eMaxis?

I do continue to buy eMAXIS slim funds, and basically I think they are perfectly fine and the best option for tsumitate style index investing.

But the US ETFs have even lower annual fees than the eMAXIS funds, which I thought was an attraction (so I sold chunks of my mutual funds and switched into ETFs). On the other side there is the double/triple taxation issue oft mentioned here, the need to reinvest dividends paid somehow (Monex has fee refunds for certain ETF purchases so this is no big deal), plus the explicit foreign exchange conversion costs.
I don’t sell / buy the ETFs frequently, but I do like that they are exchange traded, so if I do want to sell one day, I will sell at a price I can see, or set a limit order at a price of my choosing. I don’t like mutual funds in that you put in your order today, but the trade is only executed the next day and you find out what the price you got ‘em for was later. I like things to be explicit and transparent, and I’m a little paranoid about mutual funds.
But these are fine margins these days and like I say, I continue to buy eMAXIS mutual funds, and same for my spouse’s account and the kids’. I switched to these ETFs largely for my educative purposes and to alleviate some boredom, satisfy curiosity.

do the currency gains/losses (strong dollar = good for me, weak dollar = bad) emerge at the same time in each case?

Should do. The mutual funds being priced in yen and US ETFs in dollars shouldn’t affect the performance, when both are evaluated in yen terms, I think.
The differences in performance would come from, I think, the different indexes tracked - the eMAXIS funds track an MSCI index ex-Japan, where the ETFs i have track an FTSE index. South Korea is regarded as an emerging market by one but not the other. Plus the ETFs pay out dividends, rather than reinvest internally like the eMAXIS funds.

It’s easier to go with the eMAXIS funds - I might indeed sell my ETF positions down a bit to fill up my new NISA in 2024.

And at least for Monex the basic way to use the US stocks account is to put dollars in, and when you sell your positions you get dollars back (even though it is US dollar based the tokutei account setup makes handling any tax easy enough, for me at least). They have some automatic yen conversion schemes available to purchase dollar stocks, but I avoid that, again because I am a control freak.

[ToushiTime]

Why do you use these instead of eMaxis?

I do continue to buy eMAXIS slim funds, and basically I think they are perfectly fine and the best option for tsumitate style index investing.

But the US ETFs have even lower annual fees than the eMAXIS funds, which I thought was an attraction (so I sold chunks of my mutual funds and switched into ETFs). On the other side there is the double/triple taxation issue oft mentioned here, the need to reinvest dividends paid somehow (Monex has fee refunds for certain ETF purchases so this is no big deal), plus the explicit foreign exchange conversion costs.
I don’t sell / buy the ETFs frequently, but I do like that they are exchange traded, so if I do want to sell one day, I will sell at a price I can see, or set a limit order at a price of my choosing. I don’t like mutual funds in that you put in your order today, but the trade is only executed the next day and you find out what the price you got ‘em for was later. I like things to be explicit and transparent, and I’m a little paranoid about mutual funds.
But these are fine margins these days and like I say, I continue to buy eMAXIS mutual funds, and same for my spouse’s account and the kids’. I switched to these ETFs largely for my educative purposes and to alleviate some boredom, satisfy curiosity.

do the currency gains/losses (strong dollar = good for me, weak dollar = bad) emerge at the same time in each case?

Should do. The mutual funds being priced in yen and US ETFs in dollars shouldn’t affect the performance, when both are evaluated in yen terms, I think.
The differences in performance would come from, I think, the different indexes tracked - the eMAXIS funds track an MSCI index ex-Japan, where the ETFs i have track an FTSE index. South Korea is regarded as an emerging market by one but not the other. Plus the ETFs pay out dividends, rather than reinvest internally like the eMAXIS funds.

It’s easier to go with the eMAXIS funds - I might indeed sell my ETF positions down a bit to fill up my new NISA in 2024.

And at least for Monex the basic way to use the US stocks account is to put dollars in, and when you sell your positions you get dollars back (even though it is US dollar based the tokutei account setup makes handling any tax easy enough, for me at least). They have some automatic yen conversion schemes available to purchase dollar stocks, but I avoid that, again because I am a control freak.

Thanks.

That double/triple taxation issue only applies to US-based ETFs and Japanese funds that wrap US funds, and not to direct purchases of US individual stocks, or Treasuries, correct?

Also, do you find it easy reclaiming the US tax paid on those ETFs?
I think Adamu mentioned something about the Japanese brokerages providing the necessary tax documents.