# Combined UCITS-US ETF strategy



## Tastebuds (11 May 2016)

hi all,

There has been lots of discussion in this forum about pros and cons of US or ECITS based ETFs. My money is half in EUR - half in USD, and i was thinking of combining pros and cons of both ETF "domiciles".

As a reminder:

*US ETFs*: force to distribute dividends which are highly taxed (41%+PRSI+USC), wealth exposed to US Inheritance laws, currency exposure if you have your money in EUR
*UCITS ETFs*: you cannot offset profit and losses of your individual ETFs, High Exit tax (41%), 8 year deemed disposal rule.

The strategy:
*US ETFs*
Use TD warehouse to transfer my USDs into them without any currency conversion.
Then, use a Lazy portfolio "ala" bogleheads to get a diversified bond, US stock, international stock and property exposure. This is the one I am inclined to:

Vanguard Total Bond Market Index Fund
Vanguard Total Stock Market Index Fund 
Vanguard Total International Stock Index Fund 
Vanguard REIT Index Fund

*UCITS ETFs*
Use Degiro to invest my EURs
I am not too sure about what ETFs to invest in (i need more research). Maybe only 2 funds with Europe exposure. Maybe this one, and some bonds:
- iShares MSCI Europe UCITS ETF (Acc):

In summary, 2 brokers, 2 currencies, 2 different taxation regimes
FYI, I am married. So, the US ETF con of inheritance tax over 60K USD is a consideration 

What do you think?
What other UCITS ETFs wold you recommend?

Thanks


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## Boyd (11 May 2016)

Some have suggested the US inheritance tax can be avoided by using non-US broker. I'm not sure of validity of this claim.
If buying UCIT ETFs, the lack of loss relief makes them very very unappealing (I was buying monthly and gave up due to tax). You could be in situation where one is up 100k and one is down 100k but you have to pay 41k tax on the "profit".... ridiculous! Also, if buying monthly, the tax calculation is mind boggling. IMO these ETFs are useless for Irish residents.
As alternative, If you have SVR mortgage, have you considered paying it off early, thereby getting circa 3% guaranteed and risk-free (and tax-free) return?


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## Tastebuds (11 May 2016)

username123 said:


> Some have suggested the US inheritance tax can be avoided by using non-US broker. I'm not sure of validity of this claim.



Unfortunately, that claim is not valid 
_"Investing in a US corporation that is a domestic corporation presents not only a real investment opportunity, but also exposure to estate and gift tax. The stock of a US corporation is owned or “beneficially owned” or deemed beneficially owned by a non-resident alien at death if sitused in the US. Under this rule, the actual location of the certificates of stock is irrelevant. *This means that a non-resident alien is still subject to federal estate tax even when using a nominee or other agency arrangement.*"



username123 said:



			If buying UCIT ETFs, the lack of loss relief makes them very very unappealing (I was buying monthly and gave up due to tax). You could be in situation where one is up 100k and one is down 100k but you have to pay 41k tax on the "profit".... ridiculous!
		
Click to expand...

_
Yes, The loss relief is a killer. I guess the assumption would be to hope that when you do your first return at year 8, the ETFs are showing gains... but of course that is pure speculation



username123 said:


> As alternative, If you have SVR mortgage, have you considered paying it off early, thereby getting circa 3% guaranteed and risk-free (and tax-free) return?


I have a tracker mortgage, but your suggestion makes sense


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## woi_doi (14 May 2016)

Tastebuds said:


> As a reminder:
> 
> *US ETFs*: force to distribute dividends which are highly taxed (41%+PRSI+USC), wealth exposed to US Inheritance laws, currency exposure if you have your money in EUR
> *UCITS ETFs*: you cannot offset profit and losses of your individual ETFs, High Exit tax (41%), 8 year deemed disposal rule.



That's not quite right, dividends from US based ETFs would be taxed at your marginal tax rate 20%/40%. Disposals of course would encur 33% CGT as opposed to 41% UCITS. You would be investing in the ETF versions of those Vanguard Funds, VTI, VXUS, VNQ and BND. 

After a lot of consideration (2 years of thinking!) I myself do a slightly modified version of the Bogleheads passive investments, where I reduce the American Bonds Portion and added 9% of Vanguards Dividend Growth Stock VIG, 8% of their Emerging Market Bonds VWOB, and 8% of their Total International Bonds BNDX. I will be holding them for at least 16 years so at least two cycles of Revenue's wonderful roll-ups if I was buying UCITS, which has got to be the biggest insult to Irish investors ever - a real - just in case you think you're making money we'll reduce your pot by taking our cut now thank you!


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## Tastebuds (14 May 2016)

woi_doi said:


> That's not quite right, dividends from US based ETFs would be taxed at your marginal tax rate 20%/40%!



You are completely right. thanks for the correction!



woi_doi said:


> After a lot of consideration (2 years of thinking!) I myself do a slightly modified version of the Bogleheads passive investments, where I reduce the American Bonds Portion and added 9% of Vanguards Dividend Growth Stock VIG, 8% of their Emerging Market Bonds VWOB, and 8% of their Total International Bonds BNDX.



I know the feeling about the years of thinking  
Why did you choose those 3 bond products? I am asking because that is one of the things i was wondering about boggleheads lazy portfolios, that they are really american biased 



woi_doi said:


> I will be holding them for at least 16 years


Does the uncertainty of where the USD-EUR will be in 16 years matters to you? It is one one of things that annoy me in my strategy. This  very volatile variable that can go either way


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## Gordon Gekko (14 May 2016)

Tastebuds said:


> Unfortunately, that claim is not valid
> _"Investing in a US corporation that is a domestic corporation presents not only a real investment opportunity, but also exposure to estate and gift tax. The stock of a US corporation is owned or “beneficially owned” or deemed beneficially owned by a non-resident alien at death if sitused in the US. Under this rule, the actual location of the certificates of stock is irrelevant. *This means that a non-resident alien is still subject to federal estate tax even when using a nominee or other agency arrangement.*"_



Sorry, but you are incorrect. There is nuance to what I said which you seem to have missed.

If I hold US shares through a US broker and I die, the US broker won't distribute my assets without seeing a US grant of probate. The IRS get their pound of flesh.

However, if I hold US shares through an Irish broker and I die, the Irish broker can distribute my assets once they see an Irish grant of probate. And as the IRS has no visibility on the inheritance of the shares, they can't come looking for any tax. The most that they could see is shares moving from (say) Irish Broker Nominees Account 12345 to Irish Broker Nominees Account 12346, no different to a standard sale.

So although a US tax liability may arise, the IRS have no way of knowing about it and no way of collecting it. Therefore, the reality is that the tax never gets paid.

It's certainly an advert for not using a US broker.


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## Tastebuds (14 May 2016)

Gordon Gekko said:


> Sorry, but you are incorrect. There is nuance to what I said which you seem to have missed.
> 
> If I hold US shares through a US broker and I die, the US broker won't distribute my assets without seeing a US grant of probate. The IRS get their pound of flesh.
> 
> ...



Thanks a lot of for your comment. I definitely missed the importance of where the broker is based on (US or Ireland)

In this case, the US ETFs cons get down to currency exposure (out of control and prediction), and dividend redistribution (better if it was not the case but it is definetely less worse than the other EU ETF taxation problems)

Thanks


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## Sarenco (15 May 2016)

Of course there is no guarantee that Irish brokers will continue to permit Irish residents to evade US estate tax in this manner in the future.  The IRS isn't entirely powerless in this regard.


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## Tastebuds (15 May 2016)

Sarenco said:


> Of course there is no guarantee that Irish brokers will continue to permit Irish residents to evade US estate tax in this manner in the future.  The IRS isn't entirely powerless in this regard.



Good point

That is the difficulty of long term investment strategy, that you can only plan with the information that you have today

For example, the result of currency exposure investing in US ETF is really big. Who knows what the USD-EUR exchange rate will be in the future? It could go either way: it you need to sell your US ETFs and convert back to EUR in 20y time you could erase all your profits or make a huge profit...

also, exit tax vs CGT: who knows what the rates will be in 20y time...the rates changed a lot in the last 10y, or even if revenue will maintain the current taxation process for ETFs...

the 8 years disposal rule... are we the only country doing that nonsense? Because if we are, there is also a chance that come common sense will change that in the future...


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## woi_doi (15 May 2016)

Tastebuds said:


> You are completely right. thanks for the correction!
> 
> 
> 
> ...




I personally believe that the only way forward is by passive investment and keeping your ongoing costs down to the minimum. UCITS should be the way to go but our government have decided to make that unworkable for us. The investment fee calculator at Buyupside (can't post the link) is handy for working out the true costs of things, especially useful for investing on the other side of the pond. Of course you have to add in currency conversion but with passive investing this can be minimised. Vanguard in general seem to fit the bill for me but they aren't the only ones and due diligence is required by anybody investing anywhere - especially outside the US. The USD-EUR doesn't worry me in the least, it will go up and down and maybe the euro would disappear altogether (unlikely in my opinion). I like to think those pesky dividends that accrue and are taxed are my little bit of insurance against currency fluctuations, at worst they provide a few bob extra for my holiday fund. Who knows what is going to happen in the future regarding legislation. It could change for the better if our government wakes up and allows us to utilise the products that were designed for Europeans to our advantage but for now, I feel it's better to do something, rather than nothing.

I picked those funds based on reading Daniel R. Solin's book 'The Smartest Investment Book You'll Ever Read'. It's basically the Bogleheads notion of passive investing and changing your risk as you get older between shares and bonds. He advocates only looking at your investments twice a year (every six months or so) and then only to re-balance (if stocks get ahead of bonds etc then re-balance). To keep cost down he recommends buying whichever is the one that needs to be made up rather than selling and rebuying. He talks about different subtle variations but doesn't go into any details.

However Burt Malkiel (he of A Random Walk down Wall Street fame), speaking  to CNBC (can't post the link) does go into a little bit of the variation, and they caught my eye because they help people like us on this side of the pond. Especially if like me you have weighed up everything and decided that with a 16 year window, I can afford to be a little more aggressive and divert some of what I might have put into safe American bonds into things like emerging market bonds, high dividend yields, reits etc. Again, I have decided to embrace the dividends (no point in whinging about them, they are a fact of life). On a side note - if you are opting for a passive approach, once you do your research, give the CNBCs and Bloombergs a rest as you will be driven demented with their constant screams when things go down and I told you so when things go up!.

Actually the 'look at your portfolio only every six months rule' advocated by Solin, helped me not to be in a constant state of panic about my investments and helped my nervous first year, by helping me to have a modest gain last year when the market as a whole was down about 12%. I had bought when high initially and my six month top up was bought low. I don't know if you could call this a form of cost averaging, but it certainly gave me hope that my strategy (for me at least) was OK.


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## Tastebuds (15 May 2016)

Sarenco said:


> Of course there is no guarantee that Irish brokers will continue to permit Irish residents to evade US estate tax in this manner in the future.  The IRS isn't entirely powerless in this regard.



Evidence of that in here
http://www.cnbc.com/2015/11/03/why-foreigners-ignoring-this-tax-could-be-costing-us-billions.html


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## Tastebuds (15 May 2016)

woi_doi said:


> The investment fee calculator at Buyupside


thanks! That site has very useful calculators!




woi_doi said:


> However Burt Malkiel (he of A Random Walk down Wall Street fame), speaking to CNBC (can't post the link)


I read the random walk. That was my eye opener moment about passive investment. 

Is this the article you are referring to? http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html


thanks for your contributions to this thread woi_do. They have been very useful!


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## woi_doi (16 May 2016)

Tastebuds said:


> Is this the article you are referring to?



That indeed is the one - good google fu !

You can't buy the zero tax etf's that he mentions further down. They are a way for Americans to invest in their local services etc. without incurring tax. Imagine, they reward people for investing in their locality! We have a lot to learn as a country.


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## Tastebuds (17 May 2016)

woi_doi said:


> That indeed is the one - good google fu !
> 
> You can't buy the zero tax etf's that he mentions further down. They are a way for Americans to invest in their local services etc. without incurring tax. Imagine, they reward people for investing in their locality! We have a lot to learn as a country.



Wow, that is powerful...and unthinkable over here... 

Changing topics, did you also research online brokers? If yes, any preference?

Cheers


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## woi_doi (17 May 2016)

Tastebuds said:


> Changing topics, did you also research online brokers? If yes, any preference?
> 
> Cheers



Now that is a question and a half, and probably why you asked about what happens if a broker goes bust on another thread here on askaboutmoney?

If you are investing a sizeable amount of money and you want peace of mind then in my opinion, you have to go with a broker who has a big enough reputation to uphold that you wont be worried that they are doing something stupid with your money, like using your money to pay their losses  - they shouldn't be able to do that anyway, it should be ring-fenced. but it's always worthwhile checking what they actually do with your money. 

The thing that drives me mad in many ways is that once you have decided to passively invest in ETF's through a broker, rather than directly with the fund (for arguments sake we'll say it's Vanguard), the only evidence that you have actually invested your money and its current worth, is generally by logging in to your broker's website and trusting that the figures you see are actually a real thing (as opposed to ephimeral). In the US, you could actually buy into the funds directly (if you have over €100,000) and you could even get a nice piece of paper that you can hold in your hands as proof.

There are many brokers in Ireland who have stood the test of time and you can search them out and compare their fees. There are plenty of threads here on AAM outlining the pros and cons of each. TD Direct is also another way in and they have the backing of a worldwide organisation, so you could expect them to want to protect their reputation at all costs, (but financial institutions do fail regardless of size). Then there is DeGiro who for smaller amounts seem to be the cheapest way into buying ETF's with their current no charge for entry. Again though, you would have to check out TD Direct and DeGiro's full set of charges, because you pay per transaction with one and connection to each exchange for the other. Again plenty of people here have good and bad things to say about both.

Passive investing for buy and hold is all about keeping fees to the minimum, but it's always nice to know that your money is safe. Some jurisdictions have safety blankets (limited compensation) bigger than others, so maybe if you have a lot to invest and you are worried, then spread the risk around between brokers? Each person's needs are different, so you have to way it up and make a decision yourself based on the information you currently know. 

So no; I have no preference! Go for the one that your gut tells you is right for you based on your research, of which I am sure you have done - boggling and all.

Hey, who said investing from Ireland was easy?


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## Sherman (18 May 2016)

woi_doi said:


> Now that is a question and a half, and probably why you asked about what happens if a broker goes bust on another thread here on askaboutmoney?



This is exactly what concerns me about DeGiro in particular. While they are amazingly cheap, I just don't know whether I'm comfortable committing quite sizable amounts annually through them when purchasing ETFs. My investment horizon is likely a minimum of 15 years, and I guess the question I need to get comfortable with is 'will DeGiro/TDW/Davy etc. still be around in 15+ years when I go to cash out my ETF holdings?'. 

It's a pity that, increasingly, the only option available to retail investors is holding ETFs through nominee accounts - indeed, it looks like iShares unilaterally took that step earlier this year so that all ETFs it issues are now legally owned by a division of Citigroup Europe, with benefical ownership in theory passing through Citigroup, then your broker, and ultimately to you. Potential nightmare for the ultimate beneficial owner if anyone in that chain was to encounter solvency issues.

Oh for the ability to invest directly in Vanguard funds without having to hit the ludicrous €100k minimum threshold.


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## Tastebuds (19 May 2016)

Sherman said:


> Oh for the ability to invest directly in Vanguard funds without having to hit the ludicrous €100k minimum threshold.



I did not know that Vanguard had a min threshold to invest from Ireland? I contacted them before and I thought it was not possible at all


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## Tastebuds (19 May 2016)

woi_doi said:


> After a lot of consideration (2 years of thinking!) I myself do a slightly modified version of the Bogleheads passive investments, where I reduce the American Bonds Portion and added 9% of Vanguards Dividend Growth Stock VIG, 8% of their Emerging Market Bonds VWOB, and 8% of their Total International Bonds BNDX.



The video in the link http://www.cnbc.com/2013/11/26/lk-down-dangers-in-diversification.html did not play for me, but I re-read some chapters of the "Random Walk..." and yes,  he now suggests reducing the US Bonds portion and replace it by other safer investments like Dividend growth stocks and emerging market bonds. 

I won't get into dividend growth stocks myself, but my initial 40% bond allocation will by replaced by a 30% one that will look like this:
 -(BNDX) Vanguard Total International Bond ETF (10%) 
 - Vanguard Total Bond Market Index Fund (10%)
 - Emerging Market Bonds VWOB (10%)

In terms of stocks (60%), I will add (VGK) Vanguard FTSE Europe ETF (20%) to  and 

And in property (10%) i will combine a 5% of Vanguard REIT Index Fund with (VNQI) with a 5% of Vanguard Global ex-U.S. Real Estate ETF


I want my money in EUR in 16-20 years time, so I think this will give me a less US/USD biased portfolio, 


Thanks!


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## woi_doi (19 May 2016)

Looks like you're going to be pretty well diversified Tastebuds, so well done on working through what's right for you. My only quibble would be your choice of VTSMX over VTI - the TER for VTSMX is 0.16% while VTI is only 0.05%.

Anyway - good luck to us all. See you back here in 16-20 years time!


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## Tastebuds (19 May 2016)

woi_doi said:


> Looks like you're going to be pretty well diversified Tastebuds, so well done on working through what's right for you. My only quibble would be your choice of VTSMX over VTI - the TER for VTSMX is 0.16% while VTI is only 0.05%.
> 
> Anyway - good luck to us all. See you back here in 16-20 years time!



You are right. That was a copy-paste mistake.  was wrong too . They are all ETFs

- () Vanguard Total Stock Market Index Fund (30%)
- () Vanguard Total International Stock Index Fund (15%)
- (VGK) Vanguard FTSE Europe ETF (15%)

- (VNQ) Vanguard REIT Index Fund (5%)
- (VNQI) Vanguard Global ex-U.S. Real Estate ETF (5%)

- (BNDX) Vanguard Total International Bond ETF (10%)
- () Vanguard Total Bond Market Index Fund (10%)
- (VWOB) Emerging Market Bonds (10%)


Best of luck, and See you in around 16 years time.


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## PMU (19 May 2016)

Tastebuds said:


> You are right. That was a copy-paste mistake.  was wrong too . They are all ETFs
> 
> - () Vanguard Total Stock Market Index Fund (30%)
> - () Vanguard Total International Stock Index Fund (15%)
> ...


This is a good allocation, 60% equities, (30% US equities (VTI); 15% Global ex-US equities (VXUS); 15% Europe (VGK), (but why no specific allocation to emerging market equities? ); 10% property, evenly split between US and other.; then 30% fixed income.

However, if you have 15 - 20 years to go, why are you investing so much of your portfolio in fixed income, i.e. bonds? I know Malkiel provides for bonds in his allocations but this is written from a US perspective. Unless you need income why invest so much in bonds? The only reason for doing so, unless you need income, it is that by including such a high allocation to bonds the resultant portfolio meets you personal risk profile.  If so ,you should do it, but if not, and you want non-correlated returns and stability, why not look at SL GARS or equivalent, absolute return or non-correlated funds, timber, short term IE state deposits, or, perhaps, keep an eye open for a suitable entry point into commodities? Diversifying your portfolio by including uncorrelated assets is your only free lunch.

[[Disclaimer: The above is comment / observation and is not a recommendation to follow any particular investment strategy or to buy / not buy any particular fund or stock.]


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## Tastebuds (21 May 2016)

PMU said:


> This is a good allocation, 60% equities, (30% US equities (VTI); 15% Global ex-US equities (VXUS); 15% Europe (VGK), (but why no specific allocation to emerging market equities? ).



That is a good point. I did a scan of my whole suggested portfolio, and the real estate allocation is very high: 21%.
So, I might reduce the VNQ and VNQI allocation from 5% to 3% each, and consider adding 6% of VWO




PMU said:


> However, if you have 15 - 20 years to go, why are you investing so much of your portfolio in fixed income, i.e. bonds?



I am confortable with the 30% bonds allocation. Even, after doing a deeper research, the emerging bonds (10%) seems now quite risky to me. So, that 10% might get distributed differently


Thanks for your insights !


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