Do the tax advantages favour directly buying shares over ETFs?

[landlord]

....thanks Sarenco

Are there US domiciled ETFs where the underlining assets are European stock to avoid the currency risk exposure?

Or even better are there any US domiciled ETFs where the underlying assets are European stocks and the fund is denominated in Euro to avoid both the currency risk exposure and the currency conversion fees?

 

[Sarenco]

I'm sure all the big ETF houses in the States (iShares, Vanguard, etc.) have US domiciled ETFs that only invest in equities issued by Eurozone companies but I would be very surprised if any of these ETFs issue share classes denominated in euro (bearing in mind that they are not authorised for sale in the EU).

Incidentally, I am not suggesting that you should avoid exposure to other currencies entirely - bear in mind that currency movements are a two-way street.

I would again advise caution before investing in US domiciled ETFs from a tax perspective - particularly as a US citizen.

 

[landlord]

Thanks that issue has been sorted now as I will be trading in my other half's name only (irish citizen).

 

[Sarenco]

Well that doesn't really resolve all tax issues with investing in US ETFs but I won't repeat my previous comments.

If you are determined to invest in a US domiciled ETF, you might consider something like the Vanguard Total World Stock ETF (VT) and be done with it.

Best of luck.

 

[landlord]

If you are determined to invest in a US domiciled ETF, you might consider something like the Vanguard Total World Stock ETF (VT) and be done with it.

I am still researching the pros and cons of these ETFs as well as other options for example UK Investment companys (trusts), that I believe you previously recommended.

Going back to that U.S. vanguard world ETF, so I can understand it a little better. The fund has an expense ratio of 0.17 (good?).
A risk factor of 4 (on a 5 point scale...seems high?), but what seems like a decent performance after 2009.

I still don't quite understand how currency exposure works.
The underlying assets of the fund are approx 50% U.S. shares and 20% European. 30% others.
However I guess to buy this ETF my online broker will have to convert my money to dollars.
As the dollar is very strong against the Euro now I might not be able to buy as many shares as I could have a few years ago. But my concern is, if I believe that the Euro in 10 years (when I might sell them) will strengthen significantly against the dollar, then my gains will have deteriorated when converted back to Euro. This will be the same issue as buying a sterling based ETF considering the strong pound.
How does the currency of the underlying assets make a difference to my gains over this 10 year period?

Also I can't figure out if this ETF pays dividends or re-invests the capital which I would prefer.

 

[Steven Barrett]

Hi Rory,

Thanks for the update. Is it possible for you to provide a link for this decision?

Also, it is not clear to me from your statement and example, if the decision only refers to funds that are regulated within the EU or if it also covers funds authorised to be traded on EU markets but regulated else where?

file:///C:/Users/Steven/Downloads/exchange-traded-funds-guidance-note.pdf

 

[Sarenco]

I am still researching the pros and cons of these ETFs as well as other options for example UK Investment companys (trusts), that I believe you previously recommended.

Going back to that U.S. vanguard world ETF, so I can understand it a little better. The fund has an expense ratio of 0.17 (good?).
A risk factor of 4 (on a 5 point scale...seems high?), but what seems like a decent performance after 2009.

I still don't quite understand how currency exposure works.
The underlying assets of the fund are approx 50% U.S. shares and 20% European. 30% others.
However I guess to buy this ETF my online broker will have to convert my money to dollars.
As the dollar is very strong against the Euro now I might not be able to buy as many shares as I could have a few years ago. But my concern is, if I believe that the Euro in 10 years (when I might sell them) will strengthen significantly against the dollar, then my gains will have deteriorated when converted back to Euro. This will be the same issue as buying a sterling based ETF considering the strong pound.
How does the currency of the underlying assets make a difference to my gains over this 10 year period?

Also I can't figure out if this ETF pays dividends or re-invests the capital which I would prefer.

All US funds are required to make dividend payments and US withholding tax and Irish income tax are applicable.

A total world index fund/ETF holds (or has exposure to) shares in, effectively, all publicly traded companies across the globe in proportion to their market capitalisation. This means you would hold a stake in literally thousands of companies and you would take no view as to what country/sector/company will outperform the global equity market - you simply rely on the market to make this judgment for you. It's really the ultimate form of passive investing.

Yes, currency risk means that if you hold securities (or a fund that holds or is exposed to securities) that are denominated in USD and the USD depreciates in value relative to the Euro, then the value of that those securities fall in Euro-terms. Of course, the opposite could happen - over the long-term currency exposure is really a zero-sum game.

Incidentally you don't have to use your broker to convert currency - if you do a search on here you will find plenty of posts on the cheapest ways to convert currencies.