Table of Contents
Hi RIP friends,
I’m working on a new version of the somehow popular (but a bit outdated) 2018 ETF List spreadsheet. It was the output of a 3 persons brainstorming and async collaboration that happened in March-April 2018, during my investments’ spring cleaning.
Spring is coming again, this year earlier than expected (it reached 20 degrees Celsius in cold Switzerland this February) so… I’m cleaning my portfolio again.
Similar to what happened last year, the review happens at several abstraction layers that range from high (value / life goals), to mid (asset allocation), to low (ETFs picking).
Before we move on, I assume you already know what is an ETF and why I invest in passive index funds traded on stock exchanges (Exchange Traded Funds, ETFs).
This year I’m approaching high and mid layers with more confusion than last year, changing my mind every other day, but the lowest one with surgical precision: I want to scan as many ETFs as I can and document my findings and comparisons here for you.
Note: picking the best ETF is not a scientific process. There’s no objective way to sort worst to best. The ETF quality function is partially subjective and in no way a total ordering function.
Note: picking the best ETF that tracks your favorite index is a micro optimization. Be sure to invest the bulk of your energy to protect yourself from the bigger investing risks, that are all behavioral: greed, fear, confidence, and regret. Those are your worst enemies, not a 0.05% TER difference. But still, a superior ETF is always a better choice than an inferior one!
Ok, let’s move on!
The research involved and the (mostly manual) data mining to produce the final spreadsheet are taking a lot of time. I guess I devoted no less than
20 25 30 hours to the project so far. I tried to crowd-source the process, asking for help to several colleagues/friends who showed interest but I didn’t get much help so far. Shade! I’m essentially doing it all alone, so it will still take some time to be finished.
The good news (for me) is: I’m learning a lot, and I’m very satisfied with the data I’m gathering! I hope this translates to some sort of satisfaction on your side as well.
I’m sharing here what I learned so far, and the first piece of the doc that I consider in “final draft”, i.e. open for comments, suggestions, fixes, insults, compliments, thank you notes, hugs and kisses.
Here’s the (WIP) 2019 ETF List spreadsheet, enjoy!
As I said, the doc is still
Retire Work In Progress. Every time I complete a region / asset class I’ll update the doc and maybe publish a short post about it. This one will be very long, sorry. But I know you got used to it 🙂
This first post is about US ETFs. I mean ETFs tracking US stocks.
Before jumping on the meaty part of the post, let me introduce the spreadsheet, its fields, rows, and columns.
As you can see rows are grouped by color. Each color represent a category, by my arbitrary definition of a category. For example small cap US and large cap US are two different categories, while (spoiler) Pacific and Asia and Japan are in the same category.
The three categories published in this part one are: US S&P 500 (large caps), US small caps and… US salad (a mix of other US stocks-tracking ETFs). In the US salad category I put some Nasdaq ETF, high dividend/value ETF, Total Market, Growth stocks and so on.
When the category is narrow (S&P 500, Small caps) the ETFs are intended to be mutually exclusive, i.e. I’m willing to invest in zero or one among them. When the category is broad (like US salad), I might invest in zero, one or many of the presented ETFs. My personal picks and the rationale behind that will be mentioned, of course.
Let’s look at the columns! This year I added a lot of new cool features & data, I hope it’s not confusing and visually overwhelming 🙂
First column is the Ticker. The symbol used to trade a security by stock exchanges. It’s the entry you look up in your broker app / web interface if you want to invest in that ETF. Easy, isn’t it?
Second block is Fund Description. ISIN, fund domicile, Fund manager (the institution who issued the ETF), and a bunch of links. First link is always the most official one, the one owned by fund manager. Not always the most informative one though.
Common link sources are:
- JustETF.com: a source I used to consider the top one in Europe. I don’t consider it my preferred source anymore since it doesn’t have US domiciled funds, and I’m going all-in with US domiciled ETFs.
- Morningstar.com: amazing collector of resources for any, literally any, ETF in the world. main source for performance, portfolio composition and dividend distribution (5 years history).
- Morningstar.co.uk: I only use this source to get ETFs’ ISIN, which is the real unique identifier for a security and the ID I need for tax reason. False, for tax purposes in Switzerland one only needs the Valoren Nummer, but that’s another story.
- etf.com: single page per ETF full of data. Mainly for US domiciled funds.
- etfdb.com: similar to etf.com, but I like the graphic more. Also, similar data to etf.com. Plenty of articles to discovery new ETFs too. Amazing source.
- Other sources used to gather data but never ended in the Link section are: Google Finance (to bind Tickers to the right Currency), Yahoo Finance (to check EOY prices for lesser known ETFs not covered by googlefinance APIs with the right granularity), investing.com (fine grained historical data)
Third block is Asset Description, where we dive into technicalities and numbers.
- Asset type indicates whether the fund owns stocks, bonds…
- Benchmark Index is the index being tracked by the fund. Sometimes it is not uniquely defined, and a fund is benchmarked against more than one index on different websites.
- Geo is the geographic area of the fund assets (not the fund domicile itself).
- Cap is the fund market capitalization (large/mid/small).
- Type is the fund positioning in the Value/Growth (or blend) range.
- TER (Total Expense Ratio) is the fund expenses measured in basis points: “7” means 0.07% TER.
- P/E Ratio is the price to earnings ratio. Take a look at the comment on the header cell of the entire column: different sources provide different values. It’s an interesting metric but hard to find a single source of truth. Take VIOO for example: etf.com says 33.38, Vanguard says 17.8, Bloomberg says 22.21, Morningstar says 15.56 (P/PE though), etfdb.com says 18.9… A complete mess! Btw, if you care about P/E ratio for your assets, take a look at this list on etfdb of funds with lowest P/E ratio in the world. Small cap Brazilian stocks anyone?
- Capitalization is the total amount of Asset under Management (AUM), measured in “Millions” in the fund currency.
- Distr/Acc indicates the use of profits, i.e. whether they are reinvested in the fund (Accumulating, not common in US) or distributed to shareholders (Distributing).
- Currency is the reference currency of the fund for this spreadsheet. Capitalization, and EOY share values are expressed in this currency. Usually it is the most meaningful for the asset category, and the one mostly used to trade the fund.
Note that I use the words “fund” and “ETF” interchangeably. I’m always referring to ETFs, but sometime I prefer to use the word fund. An ETF is a kind of a fund, not every fund is an ETF.
Next block is EOYs (End of Year) and Dividends, i.e. raw performances.
I tracked down last 5 years of share value and distributed dividends and reported them here.
For accumulating ETFs I reported ICTax “virtual dividends”. For distributing ETFs I gathered the data from Morningstar whenever available, which is “almost always” (amazing source).
For historical values (EOY 2013-2018) I used GOOGLEFINANCE APIs, then cleaned the doc by CTRL+C & CTRL+SHIFT+V. That’s why you don’t see GOOGLEFINANCE calls.
Since using GF API is a bit tricky, here’s what a call looks like in my WIP ETF List doc:
Calling the API with 3 parameters: the Ticker, the attribute (“Price” here), the date. The call returns an array of results and that’s normally invoked to populate a range of cells, that’s why you see a “min” function call to extract a single value.
Sometimes GF doesn’t have data for a specific day, so you have to play a bit with dates. Like the following example:
Here you can see I’m asking for price in the date range December 29th-31st 2017. That’s because last two days of 2017 have been Saturday and Sunday, thus GF has no data. Sometimes you need to play with dates even more because a fund is less popular and GF doesn’t keep a daily granularity of share price. Anyway, very useful API, I strongly recommend it in your spreadsheets 😉
Next block is GROSS Total Return (in Asset Currency). This block takes data from the previous one and it’s Distribution/Accumulation aware. It means that if an ETF is distributing, total return is EOY price difference plus dividends. If and ETF is accumulating, total return is just EOY price difference.
Note: I discovered that some ETFs distributions are Capital Gain distributions. Which means, according to investopedia, “a payment to shareholders that is prompted by a fund manager’s liquidation of underlying stocks and securities in a mutual fund, or derived from dividend and interest earned by the fund’s holdings minus the fund’s operating expenses“. I discovered this while doing the research for this post and I don’t know how to embed it in my model. I don’t even know if the Swiss Tax Authority takes this into account when considering taxable distributions – which would be awesome, since capital gain is not taxed in Switzerland. On my preferred distribution source (MorningStar) each distribution is broken down in profit/income and capital gain (both short term and long term). Take a look:
Anyway, it’s rare to find CG distributions greater than Zero. I didn’t report this breakdown for my list. Does it only impact US taxation? Is it reflected into KEP (not taxed) distributions in Switzerland (like this)? I don’t know and I won’t explore this here.
The “Aggregate 2014-2018” column is the 5 year return of the fund. The higher, the better.
The returns are gross returns, it means taxes are not considered.
Next block is Swiss Taxable Amount (sorry, this blog is a bit biased toward Switzerland). Essentially dividends (virtual or real) over EOY share price. The lower, the better.
In the Notes section I added some comment and/or personal preferences (my picks, old picks, regrets and so on)
Analysis & Picks
US Large Cap
On S&P 500 (large cap US stocks) I decided to do the big switch in early February 2019, this month. I moved from CSSPX (iShares, Accumulating, IE Domiciled) to VOO (Vanguard, Distributing, US Domiciled).
VOO performances are slightly better, even though 2014 looks weird and makes the difference look small, taxes are a bit worse but that’s because CSSPX virtual dividends get the 15% withholding tax from IRS (US Tax Authority). A tax you can’t recoup. Then you pay your Swiss income tax on the virtual dividend, making your profits taxed twice.
Switching to VOO means I can fill a DA-1 form and get the 15% US withholding tax back.
Since S&P500 Yield is about 2%, the amount withhold is 15% of 2%, i.e. 0.3%. I’ve invested (Feb 28th 2019) ~$176k in VOO, which means I can get back ~$530.
Why did I pick VOO and not SPY or IVV? I don’t know.
You know… Vanguard, Bogle, stuff… Objectively, the big ETFs on S&P500 are almost identical. SPY has a fastidiously high TER (0.09%) but a total asset under management the size of Finland GDP.
Europe (Ireland) domiciled alternatives are iShares CSSPX (my previous pick) and Vanguard VUSD.
Another good reason to switch to US domiciled funds is their very low trade fees (and smaller buy/sell spread, thanks to higher capitalization).
Here’s my CSSPX/VOO(/VYM, more on this later) trade report:
I sold $134k of CSSPX and realized ~$39k tax-free capital gain. Thanks CSSPX, jumped directly to the top of my Hall of Fame 🙂
Anyway, I wanted to point out the trade fee difference: sold $134k of an IE domiciled ETF (CSSPX) and paid $45.29 fee (0.033%), bought $89k of an US domiciled ETF (VOO) and paid $1.31 fee, i.e. 0.0014% trade fee… 23 times less!
Plus I also purchased some VYM, more on this later.
US Small Cap
About small cap US, I used to own CSUSS, a IE domiciled accumulating ETF by iShares. I sold all my shares and purchased VB, US domiciled distributing ETF by Vanguard.
First all, thank you so much CSUSS for the realized $5k+ tax-free capital gain!
Second, why VB? Thanks for asking, let’s talk about diversification and US indices first.
Why small cap? The rationale behind is that “Small Cap stocks have historically performed better on average but with higher volatility“. So with my investor friends we all agreed that having a small percentage of small cap in your portfolio is a good diversification strategy and should perform better on the long term.
Diversification is good, but I don’t think you should do what I do. I’m owning too many ETFs and I don’t think this is necessary. I think this is a micro optimization attempt. You can get enough diversification by investing in a total market ETF.
Plus, the fact that small caps perform better is debatable. Some says “it’s been arbitraged away“, i.e. it doesn’t work anymore: small cap stocks are not beating large cap in last 40 years. Someone else says that’s still a thing. I didn’t run the numbers on my own, my plan is to not invest much in small cap anyway.
So, at the Asset Allocation abstraction layer I suggest you to choose between the following options for stocks in US:
- Only Large cap: pick a S&P500 ETF like VOO, IVV, SPY (or CSSPX if you want to avoid US domiciled ETFs).
- Large + Small cap: pick a S&P500 ETF and a small one like VIOO, VB, IJR (or CSUSS to avoid US ETFs).
- Total Market: just pick a total stock market ETF – which performs similar to large cap, since large cap outweighs the rest – like VTI, ITOT, SCHB, IWV (sorry, couldn’t find a valid non-US alternative).
- One of the above strategies + something more: that’s what the US salad block is about, and that’s what I’m doing: Large + Small + High Yield Dividend. Again, I’m not sure this level of diversification is necessary. Not sure it’s a smart move. Not sure it leads to superior returns. In my case adding high yield stocks didn’t lead to superior returns so far, while my friends who added tech (Nasdaq 100 index) performed better than S&P 500 during last 3 years. Growth outperformed value since 2008/9 recession, someone says the trend may revert. We don’t know. Every decision you make is market timing (cit: Financial Samurai). More on this topic: Is it worth holding a technology index fund? By IndexFundInvestor
Ok, back on track. Why VB?
I was undecided between VB and VIOO for a while. Decided to pick VB for several reasons: larger capitalization (that means lower buy/sell spread), lower TER, larger coverage (Small & some Mid caps), lower trade fees, and finally a reader suggestion on my previous post. VB performances have been inferior in last 5 years compared to the family of S&P SmallCap 600 ETFs, but I love betting on underdogs 🙂
Why didn’t I hold on CSUSS?
Yes, I could have kept investing in CSUSS, it would have not made a huge difference since small cap weight in my portfolio is relatively small and they issue small dividends… but I’m filling the DA-1 form anyway next year, so why not?
I’m invested (Feb 28th 2019) ~$30.5k in VB whose dividend yield for the last 5 years averaged to 1.15% (small cap companies usually distribute less profits). The 15% dividend withheld by the IRS I can get back is approximately… $52. Ok, not life changing, I agree.
Here’s my trade report:
Selling CSUSS costed me $36, buying VB just 73 cents!
Let’s move on to the third block: US Salad.
This block contains some interesting non-exotic ETFs tracking US stocks. I could have spent months in this category without ever seeing the end of it.
There are ETFs tracking everything: sectors, where company invests, value, growth, high yield, preferred shares, admiral shares, leveraged (!), inverse (!!), inverse leveraged (!!!), you name it. How can you resist buying shares of a fund named “Guggenheim Insider Sentiment ETF“?
Please don’t. Play it simple.
Anyway, I’ve selected roughly a dozen ETFs for this list. I hope I didn’t miss any of the most popular ones.
There’s the Total Stock Market subcategory: VTI, SCHB, ITOT, IWV, IYY Pick one of this and you’re all set for US. VTI is the ETF equivalent of the famous VTSAX mutual fund, which every US FIRE seeker invests on. It’s the main course in the Simple Path to Wealth recipe by J.L. Collins so it’s my recommended ETF if you don’t want to get dirty with large + small cap.
Sadly, the iShares alternatives seem to be playing in a different league. Small-ish capitalization and after few hours of investigation I still don’t get the difference between ITOT and IWV. And why the hell IWV has a TER of 0.20%? It’s not a small expense ratio, you can see the performance impact on the 5 years aggregate total returns. Same story for IYY, which is tracking Russel 1000 (large caps, but 2x number of stocks compared to S&P500) and has an annoying 0.20% TER.
Btw, understanding US stock indices is funny trip into a world rich of ambiguity and non-intuitiveness! Let’s dig a bit: there’s the S&P Family of indices for large, mid, small, total. Then there’s the Russell family, the MSCI family, the Dow Jones, the Nasdaq…
The Russell family is super funny: there’s the Russell 3000 which includes top 3k companies in US, and of course there’s the Russell 3000E which includes all the companies is US, which are between 3.5k and 4k (half the number of public US companies in 1996, scary). Then you’d expect the Russel 2000 index to track top 2000 companies, right? Wrong! Russel 2000 tracks the smallest 2000 companies within the Russel 3000. It’s a small cap index but it doesn’t track the smallest companies in US! Then there’s the Russell 1000, which is the largest 1000 companies, kind of S&P500(x2).
Holy crap. Only after hours of digging into US ETFs and indices I’ve found this indices comparison graph (a real gem!) on Bogleheads forum:
Other than total market, I added into the US salad section few other ETFs that tracks:
- Value/High Dividend stocks: VYM, (VIG, UDVD).
- Growth stocks: IVW.
- Tech stocks: QQQ, (CBNDX).
Let’s dig into Value and Tech a bit.
US Salad: Value Investing
I personally like Value Investing, even though it’s been underperforming since before the 2008-2009 financial crisis and even though Switzerland favors growth investing not taxing capital gains.
My personal taste is that growth is overpriced and value is not, but – again – it’s my personal belief not supported by data. I’m just trying to be smart, time the market, etc etc all things you shouldn’t do before acknowledging that it’s gambling and the expected return is below market performance. Yep, exactly like playing the roulette. I’m aware of it, I accept the psychological risks associated with both being right (overconfidence) and being wrong (regret), please don’t do like me without having acknowledged the “alive investor disclaimer” 🙂 – Maybe I should write a Manifesto about it!
That’s why I invest in High Yield Dividend stocks. I own(ed) VHYD, Vanguard High Yield Dividend (world) ETF, and decided to switch to VYM + VYMI (not in this sheet yet). VHYD had all the problems of the non-US domiciled ETFs like higher TER, higher buy/sell spread, higher trade fees, double taxation on dividends, and a fixed allocation between US and non-US stocks: 35% vs 65%.
Selling VHYD and buying VYM + VYMI allows me to control the asset allocation and avoid double taxation on the US side. In fact, my ideal AA within stocks is 15% US High Dividend and 5% non-US High Dividend, i.e a 3:1 ratio in favor of US. that means that I sold all my VHYD shares and bought a lot of VYM and just a bit of VYMI.
Again, $87 to sell $111.7k of VHYD and peanuts to buy VYM, VYMI and some VOO.
Having invested (March 2nd 2019) $92k in VYM, which has a 3.2% average yield over last 5 years, I’m expecting to get back roughly $440 of withholding tax by filling the DA-1 form.
The math for VYMI is more complex, but I think I won’t get any tax advantage over VHYD (Ireland Domiciled). More on this when introducing World ETFs in one of my next posts.
Am I exposing myself to US too much? Maybe.
Btw, the largest companies in VYMI are the Swiss big three – Nestlé, Roche and Novartis – which I already own via Postfinance Pension75 (Pillar 3A) and MEUD (Stoxx600 Europe).
Holy crap, Nestlé is everywhere in my portfolio!
Fun story: it took me a while to sell VHYD. That’s because it’s the first time I sold an asset at a loss.
VHYD realized losses: $6556. Ouch.
Even though I knew I was going to buy higher quality ingredients to essentially reconstruct a similar (better) product, selling an ETF at a loss is tough.
Well, if we consider dividends distributed during the year and half I owned VHYD, then the loss is mitigated a bit (by ~$3k), but if we also consider opportunity cost, i.e. if I invested the money elsewhere, it’s been a bad investment. That’s why I’ve doubled down 🙂
Right after I made my mind on Value investing, two blog posts in the FIRE universe have been published that made myself shackle a bit, and added uncertainty in my investment strategy.
A year ago I’ve been (intuitively, not rigorously) convinced by the Yield Shield concept exposed by Wanderer, one of the two Canadian bloggers behind Millennial-Revolution blog. I was already invested in dividend stocks, and doubled down on them roughly when their post series was being published.
A couple of weeks ago, Big ERN (EarlyRetirementNow), one of my favorite blogger, published a debunking post named The Yield Illusion: How Can a High-Dividend Portfolio Exacerbate Sequence Risk? Please go read it, it’s enlightening as always.
Even though I was investing in dividend stocks, I always knew that expected returns over the long run are lower for companies who distribute their profits compared to those who reinvest them into the company itself. But I thought at least high yield is an edge against volatility. According to Big ERN’s data… NO, IT’S NOT.
While still confused and partially convinced, Wanderer published another post on Yield Shield, doubling down on his theory on Millennial-Revolution. I was expecting a public reply to Big ERN post, but no. He didn’t even mention the Yield Illusion post.
Of course I asked about it in the comment, and I was not the only one who asked. The answer was kind of… disappointing. Big ERN jumped on the thread but the “Canadians youngest retirees” don’t seem to like arguments on their blog, so the discussion kind of died soon. Since they edited my comment and removed the link to Big ERN post, they may decide to delete the entire comment thread. For the record, here is a screenshot of Big ERN reply that didn’t get answered, and that I think it should have been.
Problem is: as much as I’d love to agree with Wanderer on this debate, math & pedigree (and personal admiration) make me err on the ERN side by large. Anyway, the fact that there’s a debate around the effectiveness of the Yield Shield – and the objective poor performance of Value investing in last 10 years – makes me stick with my fresh new plan, i.e. keep investing a good percentage of my portfolio in high yield ETFs anyway.
I’m telling you about the Yield War because I’m grateful to both Wanderer and Big ERN: they showed different angles of the Yield Battlef(y)ield to me, and kept my critical thinking muscle awake.
Among the toughest psychological enemies of a fresh new investor there’s overconfidence, i.e. thinking you got it, you figured it out. The more I dig into investing, the more I discover I know nothing.
hate love you.
US Salad: Tech Investing
Last but not least: Tech.
I used to invest heavily in Tech companies a couple of years ago. I owned shares of an ETF named XKLS, that my Hall of Fame reports having left my portfolio with $23.7k realized profits. I quit investing explicitly in tech back in September 2017. Of course I still invest a lot in Tech: a good fraction of S&P 500 (and other indices I follow) companies are tech companies.
Plus I work in Tech, so I’ve already a giant Egg in this basket.
So I don’t invest in any tech specific ETFs. My personal feeling (exposed in previous section), is that Value stocks are coming back.
Note: on this topic, Big ERN confused my mind once again saying that “there isn’t a perfect correlation between value and dividend yield. Value vs. growth is defined through book value. There are lots of value stocks with very low dividend yield and lots of growth stocks with a high yield. So, maybe dividends can still deliver in the future when we’re doing this independently from value“. GG certainty, it’s been nice to have shared part of this journey together.
Another feeling of mine is that tech (and Growth in general) correlates with high volatility. Tesla can lose 90% of its value in a day, Coca Cola is more resilient (in my humble opinion, no data). I think I can’t psychologically handle dramatic volatility, so no tech.
On top of all of this, I’m growing an anti-tech seed somewhere within my heart, and I want my investment to reflect my values.
So far, history said I’ve been wrong. Tech kept outperforming the market even in 2018: Nasdaq Total Return index was barely negative last year.
I don’t have a pick for you, dear readers. Few of my investing friends own QQQ, so that’s my default recommendation for no other reasons than word of mouth.
Maybe if you care about Growth in general, IVW is the ETF for you.
Why am I switching to US domiciled funds?
As you’ve seen, I moved a lot of money around in February.
I’ve paid ~$177 IB trade fees, most of it to sell CSSPX, CSUSS and VHYD, while peanuts to buy VOO, VB, VYM and VYMI.
Pros: More $$$
Thanks to the move I expect to recollect more than $1k withholding tax, get lower TERs, lower purchase/sale costs, smaller buy/sell spread and slightly better performances.
Btw, I don’t know (yet) how to fill and submit a DA-1 Form. Yes, this is a call to action to whomever has some experience: do you want to write a guest post on my blog? You’re welcome 🙂
Few info I’ve found on the net:
- Englishforum thread on withholding tax.
- Another EF thread on withholding tax and Swiss brokers
- MMM Forum thread on how to invest in US assets from Switzerland
- MustachianPost Forum thread on Tax optimization for ETF investing (very good)
… maybe I should write a full post about tax optimization for ETF investing one day 🙂
Anyway, all of the above benefits just thanks to switching to US domiciled ETFs!
Cons: US Estate Tax
But there’s a downside, a big and dark one. It’s called US Estate Tax.
Here’s the problem: if I happen to die, the US government can tax my heirs up to 40% on “US Situs properties“, which my US domiciled ETFs are.
That would be unbearable for my family, Of course I’m not talking about my death, I’m focusing on the estate tax now. Well, if that would happen it would be sad to not be able to laugh at the dark humor my nickname and my logo would necessary inspire. “R.I.P. RIP, the tombstone came before the retirement.” or something similar. If that happens, please do. I love dark humor, you have my permission 🙂
Anyway, let’s get pragmatic now. How does the US Estate tax really work? I’ve spent several hours digging into it and that’s a jungle of ambiguity and free interpretation of old legalese jargon.
- US citizens and residents have an exemption of ~$5.5M on US Estate Tax.
- Nonresident aliens with no US tax treaty only have $60k exemption, and I’m sorry, not being resident on Mars won’t help you, you’re probably still an alien for them. Go read this amazing article on bogleheads forum about it, that also explains why IE domiciled ETFs are so popular.
- Swiss Citizens and Residents have a double taxation treaty with US, which says that a Swiss citizen or resident has the same exemption of a US citizen ($5.5M) but prorated over the fraction of US domiciled assets in your entire wealth. It means if you die with $5M in US stocks and $5M in EU stocks, your US stocks are only tax safe for $2.75M (50% of your portfolio is US stocks, so your exemption is 50% of the max exemption). It seems a good treaty for Swiss people! The treaty is incredibly old and simple, it’s just a 2 pages document dated back in 1951! Someone says it’s flawed though. Another source of information I’ve found on the net comes from a Swiss low firm specialized in US investment advisory: Milne Legal. Last but also least, take also a look at these englishforum threads (1, 2, 3).
- The rest of EU is mostly screwed. Italy for example (didn’t dig much into it though) has an Estate tax treaty with US, but it’s a shitty one and we didn’t get same exemption of Switzerland. Anyway, if you want to know more about how Estate tax works in your country, take a look at this astonishingly good document I’ve found about 2017 Worldwide Estate and Inheritance Tax Guide. The document is not just about US, but starting on page 364 you’ll find US Estate tax details. On page 377 are listed the Estate tax treaties between US and the countries that US has a treaty with.
More on this subject: Non-US investor’s guide to navigating US tax traps on Bogleheads forum
“RIP, can you turn off the camera?”
“Can we talk about real stuff? But I’m not sure it’s ok to discuss this publicly?”
Uhm… I see where this is going. Ok, let’s talk dirty!
We’re talking about investments easily liquidable, aren’t we? I can get rid of my ETFs very easily and quickly, then convert the proceeds into CHF or EUR and within few days have all the money settled in my Swiss / European bank account, right?
Now, how badly can I pass away?
“Let’s get dark!”
- Slowly, still able to act during my last days. Easy: I’d liquidate my portfolio and move the money out of US in few days. No Estate Tax anyway.
- Slowly, unable to act during my last days (a coma?). My wife knows how to act, i.e. how to ask for help to two trusted friends who know how to do the same stuff as above.
- Suddenly, with my “IB Access Device” intact. same as above.
- Suddenly, with my “IB Access Device” destroyed. This is a scenario not covered yet. Maybe I should always keep a secondary access method available in a safe location. But how likely this event really is?
“RIP, is it legal to act as we’re discussing here? And what about AEOI? Wouldn’t your heirs be taxed anyway even if ‘you’ moved the money out quickly after you’re gone?”
The AEOI question is a good one, I don’t have an answer for it. But I guess in scenarios 1 and 2 we’re still good. Not sure abut scenario 3 & 4… anyway, if/when I move out of Switzerland I’ll do my research again. Right now I’m covered by the Swiss/US estate tax treaty. Maybe the safest thing to do then would be sell US domiciled assets and buy back JustETF friendly ETFs. The benefits should outweigh the costs even if I did all this trades just to avoid double taxation on dividends for 2019.
Cons: EU Regulations
“What about UCITS, PRIIP and all these meaningless words that I heard are going to impact my ability to invest in US Domiciled ETFs?”
Well, the short tech support answer I have for you is: “I don’t know, it works on my machine”. Which means IB allows me to invest on US funds so I don’t care. ICTax recognized the funds I invest on, so I don’t care twice.
But ok, I know, I’ve decided to have this blog and be more informative, which as a side effect forces me to leave my comfort zone and do some research.
The keyword here seems to be PRIIPs (Packaged Retail Investment and Insurance Products).
That’s what I’ve found:
- A JustETF article about PRIIPs and how is this impacting European brokers, with extra focus on UK investors. TL;DR: Are you KIDding me? No? Then you can’t operate in EU, sorry, unless you’re a sophisticated investors. You know what I concluded? That I love InteractiveBrokers even more! Take a look at the JusETF article and the “downsides” of investing on US Domiciled ETFs. If you’re using IB you’d laugh at them! “Uncompetitive foreign exchange costs“? LOL! “Higher trading costs“? ROFL!
- A post on ThePoorSwiss blog about the impact on Swiss brokers and Swiss laws. The threat seems real, Starting on January 1, 2020 (that is when UCITS funds exemption to comply with PRIIPs will expire) Swiss investors might not be able to invest in non PRIIPs compliant funds. I’ll keep an eye on this one. I might be fine because I’m a “High Net Worth Individual“, that can declare that “I understand the risks of the investment by virtue of their qualification and have at least 500k CHF“. A potential downside of this is that I might be considered a professional investor and asked to pay taxes on capital gain. Will keep an eye on this.
Holy crap what a long post!
Research & writing time probably classified this post as the most expensive one on this blog, but I’m glad I did it. I learned a lot of things, thought I knew a lot, then thought I knew nothing, then learned that some edges won’t go away and went on.
This is just part 1, about US funds. The private ETF List doc is being populated and almost ready to share on other Geos (Pacific, Emerging, Europe, World) and other asset types (bonds, precious metals, alternative investments, money market).
Follow up posts won’t be as long as this one where we covered a lot of common ground, but you can be sure that I’ll document my new findings along the way.
That’s all for today 🙂
thanks as usual for the very informative post.
I will take this opportunity to “rant” a bit about a few things that I read around the FIRE-blogs since you mentioned the Yield Shield discussion between the MillRev and ERN.
I read (a bit fast, admittedly) the MillRev series and the answer from ERN.
My takeaway, not only from this series but also from a ton of other blog posts I have been reading, including the ones you wrote, can be summarize with the following: “do whatever the hell suits you best, as long as you don’t do stupid things that you don’t understand”.
A few sparse comments:
– in the ERN post, when he does the comparison, he says “I calculated how a $1,000,000 portfolio would have performed using the three different ETF allocation. This is assuming a 4% withdrawal rate, i.e., with the first month $3,333.33 withdrawal and subsequently adjusted for inflation.”
But isn’t the Yield Shield portfolio structured in a way that you are supposed to NOT have to withdraw from it? that’s the entire point of using Yield and/or dividend strategies, right? I invest in stuff that pays me dividends (better if they have proven that they didn’t cut the dividends during recessions) and then I don’t have to worry about the principal, because I will never withdraw it!
this entire yield vs index thing, doesn’t make sense: the MillRev talk about changing the allocation after the accumulation phase, so they are actually saying that first you accumulate assets, then you change the allocation to a “yield” strategy. How is that dissimilar to the “common accepted wisdom” of shifting from 90% stocks to something like 70/30 stocks/bonds after retirement?
all these info are very nice and well thought, but to me it looks like it has a lot to do with the investor psychology (I’ll get to the numbers below). For example, the dividend/yield strategy sounds better to me because I can actually “see” the money flowing in. For you (or someone else) looking at the value of stocks/etfs growing, might be enough to be happy, since you have the mental fortitude to not panic when you see the numbers going down.
about the numbers: first of all, they are all based on historical returns, to which I call bullshit, since everyone says that history doesn’t predict the future and then they use history to try to confirm their theories so that they look more “scientific” (I work in hard-science, and all this economy stuff is extremely far away from what I consider science, sorry 😛 ). Second, we are not talking about the difference between having 1Million and having zero. We are talking about the difference between having 1Million or maybe 900k, for someone that has actually stopped working! Holy crap, we are talking about having enough money to stop working and, metaphorically, be able to scratch your belly on the couch for the rest of your life…and we are worried about this??
very interesting discussions, up to the point you realize that they hold true for US investors (as you point out in your article). I live in Germany, where capital gains and dividends are taxed exactly in the same way, as far as I can understand (if someone can correct me, that would be great. I have been changing 3 countries in the past 5 years, it is kind of difficult to keep up with everything). So, all this nice discussion is completely irrelevant, since now or later, always the same tax I have to pay.
Uff, sorry for the rant, but I have been reading a lot (probably too much), the analysis-paralysis is real and I needed to vent 😛
(and let’s not start talking about real estate, because as a landlord, sometimes I read things that make me think that the people writing against RE investing must be the MOST AWFUL TENANTS OF ALL TIMES THEMSELVES – caps lock for emphasis – ) 😀
Disclaimer: I don’t mean this as an attack to anyone, it is more of a frustration-based comment…I completely understand if Mr. Rip decides to remove it 🙂
Hi Cescoz, first of all, today Big ERN published another post on the Yield Illusion, did you read it?
Your question about withdrawing: I think Big ERN’s model is to withdraw from your total return. The two scenarios (normal 60/40 vs Yield Shield) are considered on their total return, so you withdraw from it, it doesn’t really matter if you’re withdrawing from principal or using dividends.
Let me put it in another way: your picture of “just taking dividends and not care about stocks fluctuation” is naive, and I say this even though it’s similar to mine. It implies that high yield assets have lower volatility which apparently has not been the case in the past.
Let me try to explain better: say your high yield portfolio gives you 4% dividends, ok? You might naively think “wow, the 4% rule is going to work by definition! I will never touch the principal, just use the dividends!”
But then a bear market happens, and while Growth stocks lose 30% your high dividend stocks lose 50% (bu they issued 4% dividends). Do you think you’re going to be ok? did your stocks “promise” to keep issuing growing dividends? Wow, cool. Do you think they would keep doing this during a recession? Yes? Well, you lucky that you weren’t around when Ponzi and Madoff were looking for investors 😀
Btw, Gamestop (NYSE:GME) was issuing 9% dividends last year (https://seekingalpha.com/article/4202172-gamestop-risky-9-percent-dividend-stock-generate-20-percent-annual-returns), take a look at historical stock prices in last 5 years 😀
Hi Mr. RIP!
Thanks for the kind words and the shout-out! Great summary! And also a very convincing response to the other commenter (cescoz)! I’m also glad you confirmed that you put in the link to my post in your comment and they edited it out. I don’t think people would believe me otherwise!
That EY document is great! Not that we will get above $5.5m here anytime soon but this is the best summary of the U.S. estate laws I’ve seen so far.
Keep up the great work!
Thank you for your kind words ERN, honored to have you here 🙂
thanks a lot for the reply to my rant comment 🙂
I will answer now in a calm way and I will start with a disclaimer:
I am a complete investing-noob. I am trying to understand this stuff, but on one hand I have a built-in very low risk tolerance and distrust in the entire “market” thing (comes from the family); on the other hand, there are a ton of content producers out there, they all produce very nice analysis with very nice charts, they always provide all the data and somehow it seems to me that (even with historical data!!!) they all manage to get the results THEY want (forgive the italian-motto: mi pare che tutti tirino l’acqua al proprio mulino, con quei bellissimi grafici).
Now, let’s discuss a bit more in depth, and when I say discuss I mean “I will give you some links for you to read” 😀 I am sure you will appreciate them.
My opinion on the discussion is the following: of all the forms of investments discussed, it all comes down to a) personal preference b) personal psychology c) personal understanding of your strategy d) personal goals.
You can make a general statement all you want, but that statement will ring “true” only to those people that will have an underline “psychology” similar to the person writing the article (this can be seen especially when discussing real estate investing vs other types of investing), regardless of the numbers. Because, in any specific situation, someone can make an example with numbers proving that their opinion is “objectively” true.
Now, for the links: if you want to have a look at a dividend investor, you can read this guy: https://www.dividendgrowthinvestor.com/
He has been blogging for more than 10 years now; he has all sorts of articles, from company analysis to investing psychology, to investing goals. Now, his predicament, in short, is that if you carefully pick the companies, have enough diversification and you are patient, the total return of dividend investing are higher than a regular (S&P 500) index fund.
(there were some links here, but the website appears to be blocking them…?)
And notice however that he also says that a mixed approach might be better for the average investor, recognizing that there is quite a lot of work to put into dividend investing (work that you don’t do if you just pick high yield companies, or if you just pick a dividend fund, I might add)
About your comment about bear markets and losses: the example you make can be turned around by saying that if you picked the so-called dividend aristocrats/champions (or, in short, companies that raised dividends even during the 2008-2009 crisis), you could show that dividend investing is actually better than growth, because those strong dividend payers didn’t suffer through one of the worst crisis ever, right?
(I could also make the example of me investing in real estate, and getting a net cash-flow of more than 12.000 euro per year with one apartment, plus a value increment of more than 50% on the purchase price, but it seems pointless since it is one example, just like your gamestop stock pick 😉 )
Summary of my comment: as long as you have your goals clear, a strategy you understand and trust and the psychology to follow it, most of the “regular” form of investing can (and in fact, I can always find someone providing data to support them) give positive results in the long term.
I think last post by ERN answered this comment too: https://earlyretirementnow.com/2019/03/06/yield-delusion-swr-series-part-31/
Hello Mr Rip
The US do not participate to AEoI (excl. FATCA) 🙂
For various reasons, most likely you won’t be able to do anything in your 2 if not 3 last scenarios. Estate planning is actually a thing.
Hi Franz, thank you for your comment!
Let me get it right: if the US do not participate to AEoI, doesn’t it mean that it’s even simpler to “sell your assets and transfer your money out” even in scenario 3 and 4?
Why do you say I won’t be able to do anything in my last 2 or 3 scenarios? Let’s say I pass away during sleep, and my wife the day after uses my app to sell all assets, sell USD for CHF, then wait 4 days that trades are settled and then transfer CHF into our joint CHF account. What can go wrong?
The US are only interested in US persons outside the country (FATCA). In theory most agreements foresee reciprocity (i.e. the US reporting account holders to foreign countries) but in practice it is hardly enforced… Anyway Switzerland is one of the few countries with no reciprocity : )
AEoI is for the rest of the world. The AEoI regime captures foreign financial accounts, not your underlying assets. For example, let’s assume you are a Swiss tax resident with an IBKR account (unless mistaken their european customers are booked in the UK) and you are invested in US stocks. IBKR will report you to the UK tax authorities who will then pass the information to the Swiss tax authorities (and potentially other tax authorities as well, depending on you). The latter will get numbers (account balance, income, etc.), sure, but they will never know whether you are more of an AAPL, GOOGL or MSFT kind of guy.
As for your death scenarios (sad thing), the estate opens de facto with your death (certified by a doctor, he will know when you died) and from there things go legal (involving local authorities, courts, notary, etc.), meaning all of your scenarios are basically fantaisies from an IT guy (no offense) : )
It would imply that your wife would have full (illegal- not declared to the Bank) access over your accounts (red flag by itself, is it not?) and the capacity to act (what if she dies with you? Physically or psychologically incapacited? Not the person who find you dead? etc.). This is also assuming you die peacefully during the night at home withhout her having to call the doctor to assist your passing (very unlikely). She would then have to get a solid grasp over herself, leave your dead body rotting and liquid all your assets in a minute (we are allegedly talking millions here) withhout raising any flag (probably 0% chance). How hard and how long do you think it will take the authorities and all third-parties to question this little scheme? And that’s the best scenario, assuming everyone plays their part… which is hardly the case when money is at stake. How realistic is this scenario do you think?
The good thing is that the US estate tax is very theoritical. Might worth digging it in if you are talking dozens of millions but otherwise I would simply neglect it. Never heard of it being enforced in Swizterland for non-US persons…
Thanks for the detailed comment!
First paragraph: I don’t fully understand the implications of what you said. What has FATCA to do with me? I think nothing, right (I’m not a US citizen/permanent resident)? What are the implications of AEoI on my IBKR account? You said IB send info to CH Tax Authority (does it send anything about me to IRS as well? I know IB withholds 15% on US funds dividends on my behalf so I guess it does), then CH tax authority doesn’t send my data to US (you said no reciprocity). So does it mean US won’t know I’m invested in US stocks? It seems strange, since US is withholding 15% of my dividends on US funds. I don’t understand if US knows/doesn’t know what I’m currently invested in.
And for death scenarios: I would add to previous question “as a function of time”, because I could be daytrading and buying 1M of AAPL, hold it for a fraction of a second, then buying 1M of NESN (Nestle)… if I get an heart attack while daytrading does it really matter which stocks I held at the time of death? I mean:
– scenario 1: I have an earth attack right after having purchased 1M AAPL stocks. Will my heirs pay 40% on it?
– scenario 2: while falling on the ground I sell 1M AAPL stocks and then at time of death I own 1M USD cash. Will my heirs pay anything?
– scenario 3: before dying I issue a limit SELL order on my stocks that gets executed AFTER my death. Will my heirs pay anything?
I mean, as a “nerd” I would like to know what are the rules. I think any rule set here have bugs, and that’s because an estate tax for non resident is bullshit. once I know the rule, I can set up my algorithm 🙂
Anyway, it’s “pourparler”, since CH/US exemption is cool and if I move out I would think twice before having my family rely on “bug exploiting” 🙂
Dear Mr RIP,
FYI, the good news about the US estate tax is that with Trump the exemption has doubled. It was already 11.18 Millions in 2018 and it has increased to 11.4 Millions in 2019. After Trump, who knows.
So, you can sleep even better at the moment! 🙂
Haha good point, but still 60k only for foreigners, am I right? 🙂
How big of an impact the switch from EU domiciled to US domiciled ETF will have on your portfolio? Will you save more money and be more flexible on how to use the dividends once you receive them (as CSSPX is accumulating and VOO distributing the div’s). I’m trying to understand the benefit of the switch and is it worth it to do it myself, as I have invested in CSSXP ETF and after reading your analysis, started to consider the move.
I think I put actual numbers and motives above: “Thanks to the move I expect to recollect more than $1k withholding tax, get lower TERs, lower purchase/sale costs, smaller buy/sell spread and slightly better performances.”
About the use of dividends: it’s just cash. Dividends end up in IB cash accounts, which are considered cash in my Net Worth document, so just regular cash in my rebalance strategy. Nothing different compared to a regular savings.
About doing the move yourself please analyze all the aspects and be quantitative.
I will save ~1k in taxes this year, because I have ~300k USD invested in US stocks (VOO, VB, VYM). Look at your numbers.
A close friend of mine, with similar numbers compared to mine, preferred to keep investing in CSSPX.
Performance-wise (total returns) over last 5 years, VOO 49.67% (annualized 8.40% per year), CSSPX 48.02% (annualized 8.16% per year).
CSSPX only reinvests 85% of the dividends, since the 15% withheld by IRS is lost forever – and that’s essentially the performance difference: on a 2% Yield (S&P 500), 15% is 0.3%, i.e. the difference between CSSPX and VOO.
As a partial good news, you only pay Swiss income tax on the already taxed dividend, so you pay your marginal tax rate on 85% of the real dividend, that’s why the “swiss taxable amount” columns in the spreadsheet are lower for CSSPX.
Run your numbers. Factors that would make me in favor of switching to VOO:
– if you plan to stay in CH for a while: I’d say 3+ years.
– if you’re still earning and investing a lot: lower fees and spread with VOO.
– if your volume makes the withholding worth claiming: what’s your threshold? 300 CHF? Then if you have 100k+ USD invested in CSSPX then make the move. Every 100k you have invested in S&P500, you’re losing 300 USD per year in withholding tax.
Hello Mr. RIP,
Thanks a lot for the insightful reply. I will run the numbers and see if it’s worth doing it.
Have nice a Sunday!
Had a very good one indeed 🙂
Let me know what you decide, and the rationale behind!
Thank for the post! How is it that IB allows you to purchase US ETFs if you are a Swiss tax resident with a Swiss address–Non US investors, and even US investors who lack a US address are registered under the UK arm of IB. And this does not give trading permissions for USA ETFs or Mutual Funds.
Speaking as an ex-pat American citizen with an IB account and dual tax residencies in USA and the Netherlands.
Also, could you elaborate on the foreign witholding?
On the availability of US ETFs on IB I recommend you to read this amazing post by The Poor Swiss: https://thepoorswiss.com/swiss-investors-lose-access-us-domiciled-etfs/
About foreign withholding, foreign to what? I’m resident in Switzerland, so for me “foreign” is everything but Switzerland. Do you mean “non US”?
Great post and great link. I am so lucky to find such blogs as I am a swiss resident trying to invest in ETF in an efficient way.
So basically this means there is a very good chance you will not be able to buy VOO from 2020 ? Only hold the ones you already have ?
Apparently in Switzerland you might be allowed to keep investing in US funds (like VOO) if you’re a “high net worth individual”, i.e. at least 500k CHF invested amount. Which I happen to have 😀
The only problem is that it’s not clear whether one will be considered “professional investor” by default and have to pay taxes on capital gain. Need to clarify that with steueramt/IB/tax advisor before drawing conclusion
Thank you for your post. I am in Netherlands and am considering also to invest in VOO. But it seems the only way to do this in IB is to change my category to “professional investor”. I however cannot find any information on how that will change my tax situation.
Please keep us updated in this.
Netherlands regulations are different from Swiss regulations, so I’m not sure I’d be able to help on this.
IB will adapt to country specific regulations and I might be allowed to keep investing in VOO while you won’t.
Hello again RIP,
My country doesnt have a tax treaty with the US, so IB will auto charge me for the tax on dividends. I dont have an option to refund/deduct anything at my country.
Which S&P 500 ETF is better in this case (because as you said in the article 15% more tax on dividends CSSPX vs VOO)
Hi Slavko, first it’s not IB that’s charging you 15% but the IRS. IB only act as “withholding agent”.
Second, even if your country doesn’t refund you that 15% it won’t refund you the 15% IRS is withholding to any of the other funds anyway.
So, if your country had a tax treaty with US (like Switzerland has) you can benefit from investing a US domiciled fund. If your country doesn’t have a tax treaty then you can’t benefit from a US domiciled fund, but that doesn’t mean the US domiciled fund is a worse alternative. It still has lower TER, higher capitalization, lower spread, lower trade fees.
So the question is: does your country prevent investing in US domiciled funds? Is your country in the PRIIP/KID thing? In that case you can’t invest in US domiciled funds.
Then CSSPX is the best one for S&P500, according to my research 🙂
Yes did some more research and made my mind.
Macedonia is non-EU so we’re allowed to invest into US domiciled ETFs (lucky).
I understood if i invest into US domiciled ETF the withholding dividend tax will be 30%. On the other side if i invest into IE domiciled ETF the withholding dividend tax will be 15% (if im not missing something?).
I want to do it the lazy way and invest into US total stock market (VTI) with 77% into S&P500. as you mentioned lower TER, higher capitalization, lower spread, lower trade fees etc. CSSPX is ok but then have to chose other for mid/low caps, and the options are limited there. Higher TER etc etc.
I think i will stick to VTI for now.
Thanks a lot!!!
30% withholding is for US resident. As Macedonian resident you should be able to file a W8-ben form and only get 15% withholding tax from IRS.
Hmm.. how is W8-ben form filled? when do i have to fill it? if you can tell in a few words. I will then go to chat and ask for more details. Thanks!
IB handles that for you. I don’t know about other brokers.
In IB one of the steps to setup your account is W8-ben / W9 form filling.
btw. my country doesnt have tax treaty with the US.
Checked on chat :/
“However if your country in not in the list than you do not have a tax treaty and in that case 30% will be withheld on dividends”
Ok, didn’t know that. Thanks for sharing!
You did not include Lyxor ETFs and they have two interesting ETFs:
1. Lyxor Core Morningstar US (DR) UCITS – Dist: US Large+Midcap with 0.04% TER (recently introduced)
2. Lyxor Core MSCI World (DR) UCITS ETF – Acc: MSCI World with 0.12% TER
Both, according to my findings, have the lowest TER from UCITS.
I tried to filter for parameters I care about, and Lyxor ETFs are usually very small and not physically replicating the index they track.
The list is already very long and maybe not helpful for newcomers 🙂
I might add them in future versions, thanks for signaling 😉
I see that currently I am not able to buy a lot of ETFs or funds when using IB (e.g. VYM, VYMI, VBR…). IB says not available for retail clients. I guess this is related to Mifid II. Is there any way around it?
Exante should have them available even for retail clients.
Ideally I would stay with IB. I was with IB UK. With Brexit my account was moved to Hungary. I was thinking to go to IB US if possible or use other vehicles to invest. Any experience going these ways?
Please, read the reviews of this Broker here: https://www.forexpeacearmy.com/forex-reviews/12870/exante-Forex-Broker-Reviews
Sadly IB accounts moved to the European subsidiaries of IB Inc don’t have access to US domiciled funds for retail customers.
I’ve explored it here: https://retireinprogress.com/interactive-brokers-thanks-brexit-screw-you/
Check also the comments.
Sadly I don’t think you can do much 🙁
Thanks. I did some research last night. There are some brokers who would offer access to those funds, but to be honest I am not comfortable to go to a broker I never heard of. If possible I would like to stick to IB, either to go back to IB UK or to IB US. Have you tried to go to IB US? Is there any disadvantage by going to IB US?
I see another possibility to be a professional investor. This is the loophole left by the EU mafia for “rich” people. Rich by EU standards, not by Swiss. I understand this is around 500k.
500k doesn’t mean you’re “professional investor”.
With 500k IB will consider you “affluent”, and able to handle complex instruments.