Etfs versus direct shares

[Zenith63]

Brendan has for years advised to buy I think 10 big hitters and hold forever. At this stage I agree with holding a portfolio of shares but a much larger amount.

Make sure to factor your own time and peace of mind into the calculations.

If you’re trying to replicate a world index or even just a US index, you will need to spend time each year determining if your basket of shares needs to be rebalanced and dealing with dividends and cross border taxation etc.

Unless you can really disconnect from it, you will most likely end up paying a bit of attention to the performance of the companies in your basket. You might enjoy this, but many people find it stressful, particularly in bad years, of which there will be many. You might get lucky with your basket of 10 to 20 shares, but you also might not and suffer the stress of watching a stock/vertical/region you’ve invested in drop significantly and stay there.

Balancing all this and the uncertainty of the future taxation of esoteric stuff like US ETFs and Investment Trusts, I personally decided the set-and-forget nature of a single ETF was well worth the potential extra cost. Will I end up with the biggest possible pile of money at the end of my life? Maybe not. Does that matter? Definitely not (to me).

 

[KOW]

Make sure to factor your own time and peace of mind into the calculations.

If you’re trying to replicate a world index or even just a US index, you will need to spend time each year determining if your basket of shares needs to be rebalanced and dealing with dividends and cross border taxation etc.

Unless you can really disconnect from it, you will most likely end up paying a bit of attention to the performance of the companies in your basket. You might enjoy this, but many people find it stressful, particularly in bad years, of which there will be many. You might get lucky with your basket of 10 to 20 shares, but you also might not and suffer the stress of watching a stock/vertical/region you’ve invested in drop significantly and stay there.

Balancing all this and the uncertainty of the future taxation of esoteric stuff like US ETFs and Investment Trusts, I personally decided the set-and-forget nature of a single ETF was well worth the potential extra cost. Will I end up with the biggest possible pile of money at the end of my life? Maybe not. Does that matter? Definitely not (to me).

Last few sentences of your post is most probably where the head is a lot of the time.

 

[LLB123]

What about buying the ETFs now offered by Revolut if you want to avoid an expensive fund manager.

 

[Sarenco]

How does having an investment manager defeat the primary attraction of diversification relative to a single stock or concentrated stock portfolio?

The primary attraction of ETFs is that they can be purchased on an exchange through a discount broker at minimal cost.

Plenty of other investment products achieve diversification relative to a single stock, etc.

But then, of course, you know all that.

 

[Marc]

The Economist put it this way recently

“The investing experience is strewn with pitfalls, even aside from the vagaries of the markets. When left entirely to their own devices people tend to hold too much cash, and to be too hasty to sell up when markets dip.

Barely anyone has the time or inclination to work their way through the mind-boggling complexities of a tax code. This is what makes advice useful to the clients who want to preserve and grow their hard-earned fortunes"

My observation on threads like this is that nobody in Ireland has an investment problem as such. Anyone can figure out that the best way to invest is to buy an index fund. You don’t need an adviser for that.

Everyone however has a tax problem and that’s where the real value of working with an adviser lies.

Approx 1 in 5 people reading this are foreign nationals (or are married to one) and can therefore avail of the remittance basis of taxation and potentially pay no Irish tax on their investments.

For an equity portfolio returning 10%pa this is worth around 4% pa before advice costs and therefore advice is always worth paying for in that situation.

Another sizeable percentage of people will have children. Here investment portfolios can be structured by way of a gift and or loan to a family partnership meaning that all capital growth is in the names of the children passing capital onto the next generation free from capital acquisitions tax. For these people, advice is worth around 3%pa before costs and again certainly worth paying for.

Finally, the idea that picking a handful of stocks at random is remotely the same as buying a globally diversified index fund is utter nonsense.

I’ve been buying U.K. investment trusts for over 30 years and in addition to a range of US ETF portfolios we have constructed a closet index portfolio from U.K. investment trusts which is designed to track the FTSE All World index. Historically, this has more than covered our costs giving global diversification and tax efficiency.

Annualised returns over the last 10 years before advice costs

Competent financial advice isn’t something to be feared.

For illustrative purposes only. Not a recommendation for a particular investment.

Marc Westlake CFP, TEP, APFS, QFA, EFP
Chartered, Certified and European Financial Planner
Registered Trust & Estate Practitioner
Everlake

 

[Gordon Gekko]

Who is ‘we’ though?

How big is your research team?

Who is making the investment calls, is it you?

 

[AJAM]

BRK does not operate like a proxy for an index fund - not even close.

Something like 40% of BRK’s underlying share portfolio is held in a single stock.

I’m not saying it’s necessarily a bad investment, but BRK is nothing like an index fund.

But you need to keep in mind the BRK is not just it's share portfolio. It fully owns more than 65 different companies that don't show up in the underlying share portfolio, including truly massive companies like Berkshire Energy, Gieco, BNSF.

To hammer home this point look at the trailing 5 year Beta for Berkshire vs Apple (the 40% stock that Berkshire owns)
BRK-B Beta (5Y Monthly) 0.87
AAPL Beta (5Y Monthly) 1.27

Meanwhile look at the 5 Year returns for Berkshire vs the S&P500 SPY index
BRK-B (5Y Returns) 67.84%
AAPL Beta (5Y Returns) 53.15%

Berkshire is not an exact match for a US ETF, but it is a very acceptable alternative, which over the last 5 years (and indeed the last 25 years), has delivered higher performance with lower risk.

 

[Sarenco]

Berkshire is not an exact match for a US ETF, but it is a very acceptable alternative, which over the last 5 years (and indeed the last 25 years), has delivered higher performance with lower risk.

The original claim was that BRK operates like a proxy for an index fund.

It doesn’t even remotely act like an index fund. For starters, it holds interests in numerous privately held companies and there is no index of privately held companies.

Again, I’m not saying it has been, or will in the future prove to be, a bad investment.

But it’s nothing like an index fund.

 

[ClubMan]

there is no index of privately held companies.

That's debatable:

S&P Listed Private Equity Index

The S&P Listed Private Equity Index comprises the leading listed private equity companies that meet specific size, liquidity, exposure, and activity requirements. The index is designed to provide tradable exposure to the leading publicly-listed companies that are active in the private equity space.

www.spglobal.com

 

[galway_blow_in]

I use two investment trusts ( JAM and ATT ) so as to avoid the unfavourable tax treatment of ETF,s in this country

I do have some individual stocks but like most people, I’m not smart enough to beat the market over a number of years

 

[Gordon Gekko]

People seem to want to have their cake and eat it. They want certainty around tax treatment and diversification but don’t want to pay fees.

 

[Sarenco]

That's debatable:

It’s really not.

You’ve posted a link to an index of listed PE managers (Blackstone, Apollo, KKR, etc.) with only 79 constituents.

Not even remotely representative of the universe of private, unlisted, companies across the globe.

 

[AJAM]

An index doesn't have to cover the universe of investment options.
The Dow Jones index is an index, but it's not anything like the S&P500.
Yet despite the massive difference between the 2 indexes they almost mirror each other on long term performance.

 

[AJAM]

People seem to want to have their cake and eat it. They want certainty around tax treatment and diversification but don’t want to pay fees.

Yes, most countries in the world already have this with ETF's

 

[joe sod]

Approx 1 in 5 people reading this are foreign nationals (or are married to one) and can therefore avail of the remittance basis of taxation and potentially pay no Irish tax on their investments.

Can you explain this aspect briefly. Is it the case that income and gains are taxed based on the taxation of the home country of the foreign national provided they are tax compliant there? Surely it can't be the case that they escape investment taxation altogether simply because they are a foreign national?
For example if I'm a German national then do I pay the German tax and revenue inform the German tax authorities of the fact that I have declared this on my irish tax return. This is all very interesting

 

[Sarenco]

An index doesn't have to cover the universe of investment options.

Correct.

The S&P tracks ~500 of the ~3,000 US listed stocks. However, it captures north of 80% of the total US market by capitalisation and the long term performance of the S&P is virtually identical to the long term performance of the total US market.

In other words, the S&P is representative of the total US listed equity market.

In contrast, the index posted by @ClubMan above is not even remotely representative of the (vast) global, unlisted equity market.

 

[Steven Barrett]

Yes, most countries in the world already have this with ETF's

Which also don't have gross roll up...which is what caused all these issues in the first place. Before that, it was net roll up and the taxation was deducted within the fund (this is with life companies) and the value you saw, was the value after tax. Gross roll up was the cause of deemed disposal. Then of course there is the high tax rate that governments have refused to reduce.

But you would still have people complaining of paying tax on investments each year.

Can you explain this aspect briefly. Is it the case that income and gains are taxed based on the taxation of the home country of the foreign national provided they are tax compliant there? Surely it can't be the case that they escape investment taxation altogether simply because they are a foreign national?
For example if I'm a German national then do I pay the German tax and revenue inform the German tax authorities of the fact that I have declared this on my irish tax return. This is all very interesting

If you are non Irish domicile, you only pay tax in Ireland on the money you bring in. If you keep it outside of Ireland, you don't have to pay tax to the Irish Revenue.

of course, you also have to spend it outside of Ireland too.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[joe sod]

you are non Irish domicile, you only pay tax in Ireland on the money you bring in. If you keep it outside of Ireland, you don't have to pay tax to the Irish Revenue.

of course, you also have to spend it outside of Ireland too.

Thanks for that , so in the ETF case I'm a German national living in Ireland but I own an ETF in a German custody account . To make it simpler I bought this before I arrived in Ireland.
Now I sell it and make a 60% capital gain, I don't need to pay any irish taxation as I'm not not bringing it to Ireland as you have explained. However surely I must pay the German capital gains tax, surely it can't be the case that I also don't need to pay German tax either?

 

[Farma1]

surely I must pay the German capital gains tax, surely it can't be the case that I also don't need to pay German tax either?

It can be the case. Just "google remittance basis tax" or "non-domiciled" and it will confirm. We can debate the rights and wrongs of this all day long but if you want to do so, do on another thread rather than derail this one.

Probably done to attract high net worth foreign individuals (who can choose where they live 183 days a year) to base themselves in Ireland - that way Ireland gets the benefit of usually a good chunk of income tax, their spending and VAT etc which it wouldn't get if they chose to live elsewhere. Also possibly linked to favourable corporation tax rates as another carrot for the multinationals as it helps in bringing foreign workers into the country.

What it does do is highlight that Ireland needs to sort out investing for its own citizens, as with low deposit interest rates and penal/complicated tax its tough to do outside of pensions.

 

[Marc]

Thanks for that , so in the ETF case I'm a German national living in Ireland but I own an ETF in a German custody account . To make it simpler I bought this before I arrived in Ireland.
Now I sell it and make a 60% capital gain, I don't need to pay any irish taxation as I'm not not bringing it to Ireland as you have explained. However surely I must pay the German capital gains tax, surely it can't be the case that I also don't need to pay German tax either?

It’s not that simple unfortunately