In April 2022, I introduced on this blog The Italian Leather Sofa Model Portfolio. As a reminder, here is the portfolio composition:
- 60% stocks (via NTSX)
- 40% bonds (via NTSX)
- 20% trend (via DBMF)
- 10% commodities trend (via COM)
- 4% Tail risk (via TAIL)
- -34% cash
The idea behind the portfolio is stolen from here. The link offers the best explanation of what I think is the most common question related to it, i.e. why the portfolio uses leverage (and why, in this context, leverage decreases risk).
It represents a simplified version of the portfolio I have been building since I moved to Switzerland: here you can find details about the “enhancements” to this model.
Please note that the returns you find in the Model Portfolio series will always reflect the point of view of a USD-based investor. The ETFs are priced in USD and Testfol.io, the app I use to track the portfolio, does not allow me to change the reference currency.
Besides these ‘technicalities’, the focus of this series is on how to build a great and simple permanent portfolio. There are various solutions an investor can employ if they do not have the USD as their base currency and want to eliminate the FX volatility. As I wrote here about the All Weather Portfolio, I am not bothered by the FX risk, given my investment horizon and the fact that I do not consider myself a CHF-based investor even if I live in Zurich. Plus, I do not have any currency-specific audience that would make this series more helpful if run in EUR, CHF or GBP (if you want a deeper dive into FX risk, I wrote this).
After a flattish 0.07% in Q1-26, the portfolio jumped 8.78% in Q2-26:
Since inception plus backtest (May, 2019).VBAIX is the 60/40.
The blue line represents the Model Portfolio, while the other two are functional references (I cannot really call them benchmarks): the 60/40 portfolio (yellow line) and the S&P500 (red line).
Since inception plus backtest (May, 2019).VBAIX is the 60/40.
Q2
Below you can find details of each ETF performance, including dividends, in the quarter:
Here is the Q2 price graph for each component of the portfolio:
How to read the portfolio performance
I have to admit I fell for the single-line item performance fallacy. NTSX is the ETF with embedded leverage that allows the addition of “free diversifiers” to the portfolio. I, wrongly!, judged the merits (or otherwise) of leverage within NTSX, thinking, for example, about the implications of an inverted yield curve (NTSX borrows at the short-term rate and invests in bonds that pay the long-term rate…not great when the curve is inverted).
Leverage belongs to the portfolio.
Not only that. COM and DBMF use futures; a small fraction of the sum invested in those ETFs is posted as margin while all the balance erns the T-Bills returns. In other words, if the Bills rate is 5% and DBMF returns 3%, it means DBMF alpha, the real yield of the strategy, was -2% for that year.
Testfol.io recently rolled out a feature that lets you view the same portfolio through the eyes of a different currency investor. Instead of just USD, you can now see how your numbers look from a EUR or CHF perspective (guess which one, at least at this moment, interests me).
The results won’t shock anyone who’s thought about this before: both EUR and CHF investors end up with lower returns and higher volatility than their USD counterparts, running the identical portfolio. Same holdings, worse-looking stats. Let’s figure out why, and why it matters less than you’d think.
USD:
EUR:
CHF:
Higher Volatility Is the Easy Part
This one’s intuitive. Even people who believe currencies mean-revert over the long run will admit that in the short-to-medium term, FX adds noise.
The mistake is assuming that “mean reversion” is some law of nature for currencies. It isn’t. It’s the same mistake as assuming Germany’s stock market P/E should eventually converge with America’s. There’s no gravitational force pulling these numbers together. Each currency and each market reflects its own economy, its own inflation, its own growth story. Those things don’t have to line up, ever. And in a world where global trade is fragmenting rather than expanding, there’s even less reason to expect convergence.
So yes, bolting a foreign currency onto your portfolio adds volatility. That part’s not controversial.
Lower Returns Is the Trickier Part
Here’s where it gets more interesting.
Classic economic theory (Uncovered Interest Rate Parity, if you want the technical name) says currencies should move opposite to the interest rate gap between two countries. If the US has higher rates than the Eurozone, the euro should drift up against the dollar over time. Why? Because higher rates usually mean higher inflation, and the currency has to “make up the difference” so that real returns, what you can actually buy with your money, stay roughly aligned across countries.
Put another way: a global stock portfolio should return something like risk-free rate + equity risk premium. The equity risk premium is the same no matter where you live. So if your local risk-free rate is lower, your headline return should be lower too. That’s not a flaw, it’s the system working.
Of course, in the real world, carry exists. Higher-yielding currencies tend to appreciate against lower-yielding ones, which throws a wrench into the tidy theory. And that’s exactly the puzzling bit we see in the data:
- A EUR-based investor holding a USD cash instrument benefited from carry.
- A CHF-based investor holding the same thing did not.
EUR:
CHF:
And here, according to Claude, what they would have earned by investing locally:
| CHF 10,000 (SNB) | EUR 10,000 (ECB) | |
|---|---|---|
| Ending value | ≈ 10,080 | ≈ 10,966 |
| Total return | ≈ +0.8% | ≈ +9.7% |
| Annualised | ≈ 0.11% per year | ≈ 1.3% per year |
The Sharpe Ratio Trick
Here’s the part that might surprise you: the Model Portfolio’s Sharpe ratio is almost identical across USD, EUR, and CHF. That seems backwards. Lower returns, higher volatility… shouldn’t Sharpe get worse?
Not so fast. Remember, Sharpe ratio is return minus risk-free rate divided by volatility. The risk-free rate is your “opportunity cost”, what you’d earn doing nothing. And that opportunity cost is much lower in EUR and CHF than in USD.
Testfol.io uses 2.5% for EUR and -0.57% for CHF as risk-free proxies, rather than the “real” local cash rates (1.3% and 0.11% from the table above). Not perfect, but directionally right: your bar to clear is lower, so even with worse headline returns and more bumps along the way, the risk-adjusted picture holds up fine.
But We Don’t Eat the Sharpe Ratio
That’s a good insight, but it comes with a big caveat: you don’t eat risk-adjusted returns, you eat drawdowns.
The extra volatility from holding USD assets isn’t free just because Sharpe looks okay. This becomes very real when you stress-test something like a 66% NTSXSIM / 34% KMLMSIM mix. Sharpe stays flat around 0.76 no matter the currency. But max drawdown gets noticeably worse for EUR/CHF investors, because during the dot-com crash, stocks and the dollar fell together.
This is exactly why hedging currency risk isn’t some sign of overcaution, especially if you’re actually drawing down your portfolio to live on. If cheap hedging is available, use it. Bonds are the easiest sleeve to ‘hedge’, and you can often do it at basically no cost. Commodities, by the fact that they are priced in USD, come already pre-packaged with a currency hedge (this bit might not be intuitive at all but…ask Claude why ;)). On the alternatives side, products like MFEH (the EUR-hedged version of DBMF) are a genuinely useful development for non-US investors who want that smoother ride.
You don’t need to hedge everything, though. If you’re using leverage, the leveraged portion of your return isn’t exposed to FX at all (assuming you borrow in the same currency you’re investing in). Leverage effectively dilutes your FX exposure as a share of the total portfolio. That probably deserves its own deep dive at some point, but for now: it’s a real effect, and testfol.io can’t model it yet, so you’ll have to take my word for it.
Nominal Returns Are a Distraction
Last point, and maybe the most important one: EUR and CHF investors will always (as…in the past, so far) see lower headline CAGR than USD investors in the same portfolio. That’s fine. It’s not a defect. It’s because they’re also dealing with lower inflation.
What actually matters is real return, not nominal. Testfol.io can’t fully capture this either, since it defaults to US inflation data regardless of your currency. But think it through: risk-free rates roughly track local inflation. CHF risk-free rates are near zero largely because Swiss inflation is near zero too. It’s not a perfect one-to-one relationship, but it’s there, and it’s exactly why the Sharpe ratio calculation works the way it does: it’s already adjusting for this stuff under the hood.
The Bottom Line
Know what fight you’re actually in.
Having your whole portfolio priced in USD isn’t a disaster. You might even come out ahead… but treat that as a bonus, not the plan. What matters is understanding exactly what risks you’re carrying, where they’re coming from, and how big they really are.
The truth sits between the two extremes people love to argue: “I’m doomed because I’m tied to the dollar” and “currency risk doesn’t matter because it all evens out eventually.” Neither is right. Reality, as usual, is messier and more interesting than either bumper sticker.
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