Portfolio Two Updated February 2018, and It’s Tax Time

Portfolio Two is our second longest lived portfolio, at 13 1/2 years.  This portfolio is unique because the individual stocks have been sold off and replaced with ETF’s and a CD.  See the details here or at the link on the right.

The beneficiary has invested $7000 and the trustee $14,200 for a total of $21,200.  The current value is $38,428 for a gain of $17,228 or 81%, which is 7.7% a year when adjusted for the time value of cash flows.

Walking through the detailed transactions often helps you to find items you’ve overlook – we noted that the biotech ETF IBB had a stock split (3-1) in December 2017 so I have been understating the value of this portfolio by almost $2000 since that time on my consolidated view.

There were no stock sales last year so the only tax impacted item is dividends which were approximately $632 during 2017.

The portfolio is doing well.  It is interesting to see that the VEO ETF has returned 33% including dividends since we’ve owned it but the HEFA ETF has returned 19% including dividends… the difference is due to the 10% or so fall in the US dollar vs a basket of other world wide currencies.  HEFA is hedged so you get returns in original currencies while VEO also includes the net effect of the dollar on returns (which magnified returns in this case).


The Impact of the Dollars’ Fall on Portfolios

A few years’ back the dollar fell significantly against other currencies around the world.  US citizens who don’t travel overseas may not have seen the impact, but the impact was real in terms of investors in that anyone holding overseas assets (Europe, Canada, Australia) saw a “double return” in that the investments themselves rose and the return after the currency surge was an even bigger boost.

Then the dollar rose against most other currencies, and there were discussions that the Dollar / Euro ratio would move towards 1/1.  In general, if anyone has a prediction about FX, treat it with more than a grain of salt, because the consensus is often very wrong.

ETF’s took notice of investors wanting to get the underlying return of foreign stocks without the impact of the US dollar vs their currency, and ETF’s like HEFA were created.  HEFA takes a non-US portfolio of large capitalization stocks from major markets around the world and hedges them against fluctuations in the US dollar.  While it isn’t a perfect mix (because the underlying weighting of stocks comprising each index are different), HEFA under-performed the Vanguard non-US stock  ETF VEU by a bit less than 10%.  This is what you’d expect because the dollar fell by about 10% when compared to a basket of major market currencies during the last 12 months.

In this case, buying HEFA hurt returns because the dollar fell against foreign currencies.  When the dollar falls, you are better off in foreign assets.  On the other hand, HEFA would have been a superior investment to VEU during all the times when the US dollar was strengthening.