An alternative to an ETF to avoid 8 year deemed disposal?

[jpmackey]

Is this the best available option as it updates your pie?

Hard to say any one method is the best, depends.

For me, I want to be risk averse and am quite content with matching the return of the big indices. The best solution to do so is typically ETFs, but they are taxed awkwardly and unfairly in Ireland. So, I set up a pie on 212 that mimics the top 50 or so of the S&P index with the weightings adjusted accordingly. So for example, if Apple are say 12% of the S&P 500, I give them 12 divided by the sum of the top 50 weightings, thus they come out at about 13%, which is what I set them to in my pie.

Do this for all of the top 50 and you have a diversified portfolio that closely mimics the returns of the S&P500 and ETFs that track it, with just 33% plain old CGT on disposal to worry about.

You can set the pie to always try to rebalance to your given weightings, or to continually split your future inputs as per the weightings each time. I go with the former as I believe that best aligns with the tracked index, although I’m not sure it matters much.

 

[ClubMan]

That's very interesting @jpmackey. Are there any significant downsides to this? Do any other brokers such as Degiro facilitate a similar approach?

 

[Corola]

If you only let it readjust to your target weightings when you buy stocks it's pretty clean. But if you were frequently rebalancing by selling stocks it becomes very messy tax wise.

You would end up with a long list of transactions if buying monthly but it's not particularly onerous to add them up.

 

[jpmackey]

That's very interesting @jpmackey. Are there any significant downsides to this? Do any other brokers such as Degiro facilitate a similar approach?

Honestly I can’t think of any significant downsides. I don’t think other brokers offer it; I was previously using Trade Republic and actually switched to 212 because of this “pie” feature.

If you only let it readjust to your target weightings when you buy stocks it's pretty clean. But if you were frequently rebalancing by selling stocks it becomes very messy tax wise.

You would end up with a long list of transactions if buying monthly but it's not particularly onerous to add them up.

Not sure about that. Even set to “rebalance”, it states that this feature adds less of your payments in to over-weighted stocks and adds more to under-weighted. So it is only buying, not selling, thus CGT on disposals don’t come into it. You can then only dispose manually when desired.

Nevertheless, as long as an app gives me the ability to export all transactions to excel, I can work my magic.

 

[Corola]

Even set to “rebalance”, it states that this feature adds less of your payments in to over-weighted stocks and adds more to under-weighted.

There is a manual rebalance as well but it's not really practical to use it since you realize gains and losses. It's better to only do it when buying, as you are doing.

 

[jpmackey]

There is a manual rebalance as well but it's not really practical to use it since you realize gains and losses. It's better to only do it when buying, as you are doing.

Ah, I didn’t spot that manual rebalance feature before. Might be handy when doing big disposals to generate income in future.

 

[Brendan Burgess]

Trading 212 explains what a "pie" is here.

Pies & AutoInvest - Introduction

The primary goal of ‘Pies & AutoInvest’ is to assist you in achieving your financial objectives by solving two significant challenges in investing: Maintaining a diversified portfolio: ‘Pies &...

helpcentre.trading212.com

If I understand it correctly, it works as follows.

I invest €10,000 in the "Mimic the S&P 500 pie"
I design a pie as follows:
Say, I pick the top 25 shares in the S&P.
Apple: 7%
Microsoft: 6.5%
Amazon: 3%
etc.

If Apple rises, trading 212 will automatically sell some Apple shares and buy shares in the others to keep the Apple at 7%.

If I invest another €1,000, Trading 212 will automatically spend €70 on Apple, €6.50 on Microsoft etc.

The supposed advantages are as follows:
1) I will have a diverse portfolio which gets rebalanced continuously
2) I will own shared directly instead of owning an ETF with the tax disadvantages of an ETF.

When it is confirmed that I understand it correctly, I will give my views on it.

 

[Johnny apples]

Buying and selling on IBKR comes at a cost, so rebalancing would come at a cost per transaction unless these pie products are treated differently

 

[RonnieShinbal88]

How do people hedge the Eur/USD currency risk from investing in dollar denominated stocks when doing this?
Some ETFs seem to do this for you (e.g. the iShares S&P500 Eur Hedged UCITS, not recommending this as haven't done any research on it, it's just one that popped up).


Just looking over the last 20 years the US dollar has been worth anything in the range of 1.03 euro down to 0.65 euro.

 

[ClubMan]

There are several existing threads on Reddit discussing this in case they are of any use:

reddit trading212 pies etf deemed disposal Ireland - Google Search

 

[Brendan Burgess]

So, it looks as if I have understood it correctly, as I am sure you would be quick to correct me, If I had got it wrong.

1) I don't like owning ETFs because of the tax complications and inefficiencies
2) I do like owning shares directly
3) Owning US shares directly is problematic. If you have more than $60k on your death, your estate will face estate taxes of up to 40% on the estate - not just the gains. Not a problem if you are investing €10k. Not a problem if you sell them before you die. But if you expect to still have your portfolio when you die, this is a real problem.

 

[Brendan Burgess]

For me, I want to be risk averse and am quite content with matching the return of the big indices.

So for example, if Apple are say 12% of the S&P 500,

I am not sure what you mean by this.

If you are risk averse, then matching a big index doesn't, in itself, reduce your risk.

If the S&P falls by 35% and your directly owned portfolio falls by 35%, then it's little consolation that you have matched the S&P.

I have argued elsewhere that it is not necessary to hold 1,000 stocks to gain adequate diversification. You seems to agree with this as you are content to hold 50. But why would you hold 50? Because you somehow think that having 2% of your portfolio in one share is about enough.

So you throw diversification out the door when you have 12% of his portfolio in Apple.

If I were doing this pie thing, and thought that 50 was the ideal number for diversification, and had €100,000 to invest, I would simply buy €2,000 worth each of the top 50 shares. My returns will be different from the S&P, but so what? They might be higher or lower. But it would be more diversified and less risky.

 

[Brendan Burgess]

This does not look to me to be well diversified. It looks more like a bet on technology.

It looks like 33% of my portfolio is in technology. For someone looking for diversification, that is too much.

Berkshire Hathaway is an interesting share. It's inherently diversified. I might well be happy to have 20% of my portfolio in it. It would mean that I indirectly own maybe 20 other companies. Of course, even with that diversification, it could go badly wrong. For example, when Buffett dies, it might take a big hit. Or it might fall from its current level not because there is anything wrong, but just because the market currently overvalues it.

 

[Brendan Burgess]

So my conclusion

Pick the number of shares you are comfortable with for diversification e.g. 5, 10, 20 or 50.
Buy close to that number when you are first investing e.g. if you are happy with 20 shares, buy 15.
When you are next investing buy a 16th share.
If you need to liquidate some of your portfolio, sell some of the shares which have done best. (Believe me, this is not easy to do - it's much more tempting to sell the laggards.)
If you don't need to liquidate your portfolio, but one or two shares have gone way up compared to the others, consider selling some off. But don't be too trigger happy. If you have 20 shares at 5% each of your portfolio and one increases to 7%, live with it. Wait until it exceeds 10% before reducing it back to 5%.

 

[Brendan Burgess]

How do people hedge the Eur/USD currency risk from investing in dollar denominated stocks when doing this?

An interesting question.

If 100% of your wealth was in US currency assets, this would definitely be a concern.
But if only 10% of your wealth, it's less a concern.

Most of the companies in the Top 10 are well diversified in the currencies of their sales. For example, Apple sells its products in $, €, stg, Chinese Yuan. So if the dollar falls in relation to the euro - Apple's dollar revenues should rise increasing the $ share price while the euro value of your shares should change in the opposite direction.

 

[Brendan Burgess]

So you do not need the pie approach of Trading 212. If you have a De Giro account, just buy the 15 or 20 shares and forget about automatic rebalancing.

 

[Corola]

If I were doing this pie thing, and thought that 50 was the ideal number for diversification, and had €100,000 to invest, I would simply buy €2,000 worth each of the top 50 shares.

It's easy to build a diversified portfolio when you have €100,000 to invest.

But for new/young investors just starting out with a few hundred euro per month, it's impractical and costly to split small sums between many different companies. It would take many years to buy 50 companies if buying one per month.

So the pies are a shortcut to instantly have adequate diversification on small investments. That's why ETFs are so popular in other jurisdictions for small investors.

 

[ClubMan]

Thanks for the analysis @Brendan Burgess - I was curious about this Trading212 pie approach as a possible alternative to ETFs but I guess that a manually assembled basket of shares and you outline may be just as appropriate and maybe simpler to manage.

 

[jpmackey]

Trading 212 explains what a "pie" is here.

Pies & AutoInvest - Introduction

The primary goal of ‘Pies & AutoInvest’ is to assist you in achieving your financial objectives by solving two significant challenges in investing: Maintaining a diversified portfolio: ‘Pies &...

helpcentre.trading212.com

If I understand it correctly, it works as follows.

I invest €10,000 in the "Mimic the S&P 500 pie"
I design a pie as follows:
Say, I pick the top 25 shares in the S&P.
Apple: 7%
Microsoft: 6.5%
Amazon: 3%
etc.

If Apple rises, trading 212 will automatically sell some Apple shares and buy shares in the others to keep the Apple at 7%.

If I invest another €1,000, Trading 212 will automatically spend €70 on Apple, €6.50 on Microsoft etc.

The supposed advantages are as follows:
1) I will have a diverse portfolio which gets rebalanced continuously
2) I will own shared directly instead of owning an ETF with the tax disadvantages of an ETF.

When it is confirmed that I understand it correctly, I will give my views on it.

Nearly correct, except;
If doing only top 25, you need to re weight the components, not copy their S&P weighting.
And the they won’t automatically sell over-represented components unless you do a manual rebalance.

 

[Fortune]

It's easy to build a diversified portfolio when you have €100,000 to invest.

But for new/young investors just starting out with a few hundred euro per month, it's not practical and costly to split small sums between many different companies. It would take many years to buy 50 companies if buying one per month.

So the pies are a shortcut to instantly have adequate diversification on small investments. That's why ETFs are so popular in other jurisdictions for small investors.

There are some online brokers who allow fractional share purchases. This would solve the issue of a young investor needing to diversify small amounts.