Yay or nay? Rakuten Index Balance Fund (70% VT + 30% yen-hedged BNDW) in NISA account?

[ToushiTime]

Also, your future earnings and your Japanese pension are "yen hedges" in a way, as that part of your future income is all yen-denominated, not to mention your Japanese bank account.
If you don't want to leave your spare cash in a bank account, there are JGBi funds, which roll over inflation-linked Japanese government bonds. Unlike your bank account the fund doesn't have the 10 million yen deposit protection, of course.
It yielded 2-3% returns from 2021 to 2023 but was negative in 2013 to 2020.
https://www.am.mufg.jp/pdf/koumokuromi/ ... 231026.pdf
Discussed here, from part way down
https://www.retirejapan.com/forum/viewtopic.php?t=3692

This user said someone who's recently retired at the top of the thread.

Thanks for pointing that out. So future pension income only, not earnings.

[ToushiTime]

That's true. Might be something to be said for a balanced fund which overweights Japanese stocks and bonds like the Nissay Index Balanced Fund (equally weighted 4 asset classes type) with an expense ratio of 0.154%? That one buys foreign stocks direct rather than via a US ETF, and so in a NISA account it is only subject to the tax withheld by the originating country, rather than that plus the tax withheld by the US. Also, because 50% of the stocks and bonds held by the fund is from Japan, that also means that foreign tax is only applicable to half of its holdings.

Would that Nissay Index Balanced Fund be the core of your portfolio?
This one, I guess: https://www.nam.co.jp/report/pdf/mo121534-1.pdf
It would be massively overweight Japan, given that Japan only accounts for about 5% or 6% of global market cap (and therefore the All Country fund)
https://www.statista.com/statistics/710 ... y-country/

You are sacrificing global diversification for the sake of yen hedging.

This would just be for the NISA part. I'm thinking of NISA as the last account that'll be cashed out, after all the money in my taxable account has been drawn down. Since this will be when I'm probably quite decrepit, I am thinking that something which doesn't need any looking after but will keep chugging along on auto pilot until the bitter end will be appropriate.

Your idea of the JGBi fund is also good. In the long term, who knows what'll come to pass?

Incidentally my original idea of the Rakuten Index Balance fund (70 VTI + 30 hedged BNDW) might not be so tax inefficient after all. According to Vanguard, the foreign tax paid by VXUS last year was 6.80% of its dividends and the foreign tax paid by BNDX (the international half of BNDW) last year was 0.26% of its dividends. Since VXUS comprises about half of VT, and the other half is VTI which is US total stock market, the triple taxation hit from taxes paid in the origin countries was actually less than 3.6% of its dividends, since the US half of BNDW (ie. BND) pays out dividends too and those dividends are not subject to 'foreign' withholding tax.

Now, when you consider that VT has 84.2% of the components of Small Cap ETF (VWO) and 85.8% of the components of FTSE All-World ex-US Small-Cap ETF (VSS) which would both be quite expensive to cover via a Japanese mutual fund, the triple taxation penalty of less than 3.6% of paid out dividends doesn't seem too prohibitive. That is, of course if you think small caps might outperform in the long run.

Foreign tax credit information for eligible Vanguard funds:
https://investor.vanguard.com/content/d ... s-2024.pdf

For me, going 50/50 Japan/others and 50/50 stocks/bonds doesn't seem diversified enough geographically or by asset class.
I guess it depends how much your NISA makes up of your overall portfolio.

I just noticed you have retired. Sorry, I missed that in your original post.
Check out this podcast about post retirement investments.
They challenge the recent paper by Cederberg and others that recommends 100% equities even after retirement. The guest pushes bonds and gold after retirement.
Building a Bulletproof Retirement Portfolio, with Tyler from Portfolio Charts, May 15, 2024
https://podcasts.apple.com/jp/podcast/m ... 0655629930
Host: Ramin Nakisa, https://www.linkedin.com/in/raminnakisa ... xperience/
Nakisa also had a good explanation elsewhere about bond laddering after retirement.

As for the 3.6% tax cost for third countries, it may not seem much, but if that were an increase in the expense ratio of a fund, you would probably baulk at buying it.
This is good for playing out how expense ratios drag on your returns.
https://larrybates.ca/t-rex-score/

I am totally with you on adding small caps for greater diversity. That is my biggest gripe about eMaxis SLIM All Country. I don't have an ideal solution for that. Cost-wise, it may be better to combine eMaxis SLIM All Country with some combination of the VIOV, VBR, VB, and VSS ETFs, and the ＳＢＩ－ＳＢＩ・Ｖ・米国小型株式インデックス・ファンド wrap of VB (tracking the US CRSP Index, only available on SBI and Matsui) for the small-cap exposure and just take the tax hit on those separately.
* Those ETFs wouldn't go in your NISA account as the dividends would fall outside the NISA protection and be taxed in Japan, from what I read.

[ChapInTokyo]

Would that Nissay Index Balanced Fund be the core of your portfolio?
This one, I guess: https://www.nam.co.jp/report/pdf/mo121534-1.pdf
It would be massively overweight Japan, given that Japan only accounts for about 5% or 6% of global market cap (and therefore the All Country fund)
https://www.statista.com/statistics/710 ... y-country/

You are sacrificing global diversification for the sake of yen hedging.

This would just be for the NISA part. I'm thinking of NISA as the last account that'll be cashed out, after all the money in my taxable account has been drawn down. Since this will be when I'm probably quite decrepit, I am thinking that something which doesn't need any looking after but will keep chugging along on auto pilot until the bitter end will be appropriate.

Your idea of the JGBi fund is also good. In the long term, who knows what'll come to pass?

Incidentally my original idea of the Rakuten Index Balance fund (70 VTI + 30 hedged BNDW) might not be so tax inefficient after all. According to Vanguard, the foreign tax paid by VXUS last year was 6.80% of its dividends and the foreign tax paid by BNDX (the international half of BNDW) last year was 0.26% of its dividends. Since VXUS comprises about half of VT, and the other half is VTI which is US total stock market, the triple taxation hit from taxes paid in the origin countries was actually less than 3.6% of its dividends, since the US half of BNDW (ie. BND) pays out dividends too and those dividends are not subject to 'foreign' withholding tax.

Now, when you consider that VT has 84.2% of the components of Small Cap ETF (VWO) and 85.8% of the components of FTSE All-World ex-US Small-Cap ETF (VSS) which would both be quite expensive to cover via a Japanese mutual fund, the triple taxation penalty of less than 3.6% of paid out dividends doesn't seem too prohibitive. That is, of course if you think small caps might outperform in the long run.

Foreign tax credit information for eligible Vanguard funds:
https://investor.vanguard.com/content/d ... s-2024.pdf

For me, going 50/50 Japan/others and 50/50 stocks/bonds doesn't seem diversified enough geographically or by asset class.
I guess it depends how much your NISA makes up of your overall portfolio.

Ah the 50/50 Japan/others and 50/50 stocks/bonds is the allocation of the Nissay fund that I mentioned as a potential option for lowering exposure to triple taxation (by overweighting Japanese assets), but the Rakuten Index Balance fund (70 VTI + 30 hedged BNDW) is approx 6% Japan/94% R.O.W. and 70/30 stocks/bonds so that one is a more aggressive market cap weighted total world investment.

As for the triple taxation hit from taxes paid in the origins countries, that "less than 3.4% is the proportion of dividends, not of the amount invested and that figure will be even more diluted when you add the 50% US stocks by the Total Stock Market (VTI) component of VT, and the 50% US Total Bond Market (BND) component of BNDW so as for this Rakuten fund I feel that the triple taxation issue will disappear in the margin of error between the performance of ACWI (the index used by eMAXIS Slim All Country) and FTSE Global All Cap (the index used by Vanguard Total World Stock Index Fund (VT)). I've not actually run the numbers on this though.

I wonder whether anyone here (or the investment blogger Shintaro) has looked into the actual impact of triple taxation on a portfolio using US domiciled Global stocks/bonds balanced ETFs...
--
P.S. Thanks for the link to
Building a Bulletproof Retirement Portfolio, with Tyler from Portfolio Charts, May 15, 2024
https://podcasts.apple.com/jp/podcast/m ... 0655629930

The suggestion of 30% gold was a bit of a shock to me although I have considered adding a little bit of gold exposure to my portfolio as an inflation hedge. I do wonder though whether gold is better than JGBi funds for this, considering the volatility of gold prices. Perhaps the whole point of gold in the retirement portfolio is for diversification and long term inflation hedge and not risk reduction like with a JGBi?

[ToushiTime]

This would just be for the NISA part. I'm thinking of NISA as the last account that'll be cashed out, after all the money in my taxable account has been drawn down. Since this will be when I'm probably quite decrepit, I am thinking that something which doesn't need any looking after but will keep chugging along on auto pilot until the bitter end will be appropriate.

Your idea of the JGBi fund is also good. In the long term, who knows what'll come to pass?

Incidentally my original idea of the Rakuten Index Balance fund (70 VTI + 30 hedged BNDW) might not be so tax inefficient after all. According to Vanguard, the foreign tax paid by VXUS last year was 6.80% of its dividends and the foreign tax paid by BNDX (the international half of BNDW) last year was 0.26% of its dividends. Since VXUS comprises about half of VT, and the other half is VTI which is US total stock market, the triple taxation hit from taxes paid in the origin countries was actually less than 3.6% of its dividends, since the US half of BNDW (ie. BND) pays out dividends too and those dividends are not subject to 'foreign' withholding tax.

Now, when you consider that VT has 84.2% of the components of Small Cap ETF (VWO) and 85.8% of the components of FTSE All-World ex-US Small-Cap ETF (VSS) which would both be quite expensive to cover via a Japanese mutual fund, the triple taxation penalty of less than 3.6% of paid out dividends doesn't seem too prohibitive. That is, of course if you think small caps might outperform in the long run.

Foreign tax credit information for eligible Vanguard funds:
https://investor.vanguard.com/content/d ... s-2024.pdf

For me, going 50/50 Japan/others and 50/50 stocks/bonds doesn't seem diversified enough geographically or by asset class.
I guess it depends how much your NISA makes up of your overall portfolio.

Ah the 50/50 Japan/others and 50/50 stocks/bonds is the allocation of the Nissay fund that I mentioned as a potential option for lowering exposure to triple taxation (by overweighting Japanese assets), but the Rakuten Index Balance fund (70 VTI + 30 hedged BNDW) is approx 6% Japan/94% R.O.W. and 70/30 stocks/bonds so that one is a more aggressive market cap weighted total world investment.

As for the triple taxation hit from taxes paid in the origins countries, that "less than 3.4% is the proportion of dividends, not of the amount invested and that figure will be even more diluted when you add the 50% US stocks by the Total Stock Market (VTI) component of VT, and the 50% US Total Bond Market (BND) component of BNDW so as for this Rakuten fund I feel that the triple taxation issue will disappear in the margin of error between the performance of ACWI (the index used by eMAXIS Slim All Country) and FTSE Global All Cap (the index used by Vanguard Total World Stock Index Fund (VT)). I've not actually run the numbers on this though.

I wonder whether anyone here (or the investment blogger Shintaro) has looked into the actual impact of triple taxation on a portfolio using US domiciled Global stocks/bonds balanced ETFs...
--
P.S. Thanks for the link to
Building a Bulletproof Retirement Portfolio, with Tyler from Portfolio Charts, May 15, 2024
https://podcasts.apple.com/jp/podcast/m ... 0655629930

The suggestion of 30% gold was a bit of a shock to me although I have considered adding a little bit of gold exposure to my portfolio as an inflation hedge. I do wonder though whether gold is better than JGBi funds for this, considering the volatility of gold prices. Perhaps the whole point of gold in the retirement portfolio is for diversification and long term inflation hedge and not risk reduction like with a JGBi?

Edit: I added various points after initially writing this yesterday.

Roger that re. the Nissay vs Rakuten Fund.

I think I was only half-awake when I wrote that comment about the 3.6%, sorry!
Unless, I am screwing up my calculations again, if you had a dividend yield of 2% that would be an extra cost of 0.07%, which gets further diluted as you said. The triple taxation issue comes up a lot on this forum, hence the wiki page I linked to. It is not nothing, but it is not that bad.

You asked about Shintaro Money and tax calculations:
https://shintaro-money.com/kaigai-etf-r ... _FOFVTSBIV

BTW, if this is your fund, the 楽天・インデックス・バランス・ファンド（株式重視型）, it has a 実質コスト (real cost on Shintaro) of 0.245%, which is a bit high, possibly due to the hedging cost? The unhedged eMaxis SLIM Developed Nations Bonds fund is 0.169% and the eMaxis All Country is 0.111%. So if you were to combine them in the same ratio as your fund 70:30, you would get an average weighted cost of 0.1284% which is half the cost of your fund, and that is before you consider the additional third country/triple tax. That's quite a lot to pay, just to get the hedging and automatic rebalancing service.
https://shintaro-money.com/rakuten-vang ... x-balance/


Unlike you, I don't want to pay to currency-hedge bonds, but I realize you are retired now.
Another issue is Japan accounts for about 10% of the bond fund, if it is based on this index
https://www.ssga.com/uk/en_gb/instituti ... st-sybz-gy
I don't think I would want that much weighting for a nation with the worst debt-to-GDP ratio in the world and little prospect of generating enough growth to pay the debt off or absorb a spike in interest costs.
Also, the eMaxis SLIM bond fund is limited to government bonds while the BNDW includes corporate bonds and mortgage backed securities which are more risky.

I had thought about switching from All Country for future NISA purchases to get the all-cap exposure, so I looked at these, which all track the FTSE Global All Cap.

Unfortunately, the Rakuten one was too expensive (0.217% on Shintaro) compared to All Country (0.111%).
The SBI wrap of VTI, SPDW and SPEM, which effectively tracks the FTSE Global All Cap, uses Resona, which nearly went under in 2003, as its trust bank, which puts me off a bit.
I would have gone for the SBI wrap of VT, but my NISA is with Rakuten which doesn't offer that.

Rakuten VT Wrap: 0.217% "real cost" on Shintaro (Trust Bank: Sumitomo Mitsui Trust Bank)
楽天・全世界株式インデックス・ファンド [楽天・VT(楽天インデックス・シリーズ)
https://www.rakuten-sec.co.jp/web/fund/ ... 90C000FHC4

SBI VTI + SPDW + SPEM Wrap: 0.112% "real cost" (Trust Bank: Resona Bank, almost went bankrupt in 2003...)
ＳＢＩ－ＳＢＩ・全世界株式インデックス・ファンド
https://site0.sbisec.co.jp/marble/fund/ ... =28931217C

SBI VT Wrap: 0.151% real cost (Trust Bank: MUFJ Trust Bank)
ＳＢＩ－ＳＢＩ・Ｖ・全世界株式インデックス・ファンド
https://site0.sbisec.co.jp/marble/fund/ ... =289311221

実質コスト vs 信託報酬 on Shintaro here
https://shintaro-money.com/index-cost/#i-3

Re. the podcast; yeah, the 30% gold was a surprise. The host questioned that. I think the main point was just gold is another thing that may diverge from stocks in certain inflationary and geopolitical scenarios so it just helps diversify risk by asset class.

This is the guest researcher's take on gold and inflation (from his website):

"I’ve highlighted in gray the timeframes where real rates were less than 1%. While there are a few notable exceptions (like the early 1970s where gold corrected after coming off the gold standard — more on that in a minute), the relationship between the gold price and real interest rates is fairly strong. When real rates are sufficiently positive, gold does poorly because investors prefer assets that pay interest. But when real rates are very low or negative, gold does well because investors prefer not to lose purchasing power on a “safe” investment.
So personally, I would argue that the inflation-hedging properties of gold are often misunderstood by both gold bugs and gold haters. The gold price is driven by a myriad of macroeconomic factors including real interest rates. Because real interest rates are affected by inflation, gold does indirectly protect against very sharp inflation that craters real rates. But it also can respond strongly even in times of low inflation as rates fall to particularly low levels like we’re experiencing today."

https://portfoliocharts.com/2020/08/21/ ... e-of-gold/