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Sunday, February 5, 2023
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Opinion – From Grain to Grain: See an example of an excellent international fixed income portfolio

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I explained yesterday that investors are subject to the same risk they flee when investing in international bonds issued by Brazilian companies. Today I’m going to talk about how you can build an optimized international fixed income portfolio.

As I said yesterday, investing in bonds Brazilians is the most comfortable and what most Brazilians do. This behavior occurs due to the difficulty of selecting which companies we could invest in so as not to run a credit risk. While convenient, sheltering in what you already know is inconsistent with the objectives of diversification and protection.

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When investing in bonds Brazilians, you are subject to the risks that you are trying to avoid when investing outside Brazil. But, there is something simpler and more efficient.

The great advantage of international investing is the use of ETFs. ETFs are exchange-traded funds. In Brazil, this industry is still very nascent, but out there, there are ETFs for almost any investment you are looking for.

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These products have the advantage of being highly diversified. Therefore, the credit risk is very mitigated.

I am not suggesting, but I will list here four as an example that encompass a basic variety of types of fixed income investment:
– SHYG : Corporate bond ETF High Yield term of up to 5 years;
– SHY : ETF of US government bonds with terms from 1 to 3 years;
– SQLD : Corporate bond ETF investment grade term of up to 5 years;
– STIP: ETF of US government bonds linked to inflation with a maturity of up to 5 years;

These are ETFs that focus on short-term securities. Therefore, they will suffer less interest rate oscillation.

At this time of rising interest rates around the world, having shorter-term bonds is the most appropriate, as they suffer less from possible interest rate hikes.

Additionally, the yield curve is inverted. Therefore, longer bonds have lower interest rates than shorter ones.

The table above shows in the last four columns the performance of these ETFs over the last few years.

You may ask: how to weight ETFs in the portfolio?

You can allocate the same investment to everyone equally or use an optimization program.

A free suggestion for optimizing a portfolio is the portfolio app visualizer🇧🇷 This program optimizes your portfolio in several different ways. In this link, you can find the optimal portfolio formed by the four ETFs listed above.

You might think that the return on these listed ETFs was low. However, you should consider that they are more conservative products than the investment in the vast majority of Brazilian companies with bonds international. There are ETF alternatives with a higher expected return, but these carry greater risk, as do Brazilian bonds.

A well-diversified fixed-income portfolio, divided into public and private securities and with different indexes such as this one, meets the two criteria sought in international investment: diversification and protection.

Michael Viriato is an investment advisor and founding partner of Investor House

Follow and like De Grão em Grão on social networks. Follow the investment lessons in Instagram🇧🇷

If you have any questions or suggestions for themes, please feel free to send by email.

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