New to Investing, Based in Hong Kong

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Topic Author
JamesHongKong
Posts: 23
Joined: Mon Oct 13, 2014 9:34 pm

New to Investing, Based in Hong Kong

Post by JamesHongKong »

Hi everyone,

This is my first post and I apologise in advance for the fact I am almost totally inexperienced with anything to do with investing and that the post may be a bit long but I feel I need some advice.

A bit of background on me which I hope will be helpful. I am very soon (5 days in fact) to be 34 years old and will be married next year. I am British but live in Hong Kong with my fiancé and for the last 9 years we have very much lived in the now rather than planning for the future. That means we have not been saving and have been happy to use credit cards and income to fund a nice lifestyle for ourselves. I have my own small company which is doing well and provides a good income but I have not been making the most of this from a future planning perspective...until now!

We have reached a point where we have now cleared off our credit cards for the first time in 10 years and will be clearing the balance monthly and using them very sparingly going forward. We have student loan debts which are not large and do not need clearing urgently. We have cleared off another loan recently also. We have a car loan each month and rent a house in Hong Kong – these are our 2 outgoings moving forward. We do not own any property yet or have any investments.

From January 2015 onwards I would like to put money aside to invest. I have just read “How a Second Grader Beats Wall Street” and I really liked the simplicity outlined in the book. As a result I am now reading “The Bogleheads Guide to Investing” which seems to reiterate very similar points. I am pleased to see that I have met the criteria required to start investing.

I am attracted to the simplicity of the 2nd Grader Portfolio – 3 Index Funds or 5 (if you include a REIT fund and Precious Metals Fund) and intend to invest for the longer term 20-30 years.[/list]I am attracted to the simplicity of the 2nd Grader Portfolio – 3 Index Funds or 5 (if you include a REIT fund and Precious Metals Fund) and intend to invest for the longer term 20-30 years.

My budget:
  1. I would look to invest an initial lump sum of $25,000 USD
  2. Monthly investments of $1,900-$2,500 USD – I would probably start at the lower end and increase as income stability allows
  3. A further annual lump sum at the start of each New Year depending on the cash balance in my account which I would split between putting into investments and into savings for property (see next point)
  4. As an aside I will also be saving aside money monthly to save for property in the future (c. 2-5 years). This will probably be around $2,000-2,500 USD. I will want access to these funds in a shorter time-frame so less inclined to invest this.
I appreciate I have some good numbers to work with here and this should get me on the investing ladder, albeit after a late start.

And this is my main issue: where to start? I have outlined some of my main questions below:
  1. What I am reading so far is US centred – I am Hong Kong based. If I invest in say the 2nd grader funds, will I be subject to US taxes/costs or local taxes/costs? A real newbie question I know.
  2. My early research suggests Hong Kong taxes on investments are low, perhaps even zero. Is this correct? What implications does this really have for me?
  3. I am extremely conscious of keeping the costs of investing low – I cannot see how to directly invest with Vanguard for example (if in HK it directs you to contact a broker) – are there recommendations on how to invest directly if you are not based in the US?
  4. If I should go through a broker, where do I start? I see every transaction is charged and if I intend to invest monthly this will eat into the return – is there a way to minimise this?
  5. Should I structure a basic portfolio around a US market (as per the 2nd grader's) or take into account I am based in a different market and apportion things differently? This was touched on in the book but not in any real detail.
  6. I mention above I want to save for property but I would like easier access to these savings than for the longer term investment portfolio. Is there a better way I can make this money work for me rather than just set it into a low interest rate (very low in HK) savings accounts?
I also really feel I need some locally based advice on all this. However, I am very aware of there being a LOT of financial planning/services companies here and every person I have spoken to about them has warned me off the services for being generally poor and/or very costly. I do not want to lose all the returns I make by paying out fees for services/transactions – I want to keep these costs low. Therefore does anyone have any direct experience in doing what I wish to do whilst based in Hong Kong?

I would like to get things started but I feel I have hit a real road block in being able to actually pull the trigger effectively. I still intend to continue my research but really like the idea of 3-5 simple ETF's that I don't have to monitor all the time. I am very nervous (with this being expensive Hong Kong) that I will have to pay a lot in order to do so and my returns will be eaten up.

Thank you for reading my epic post and I really appreciate any advice you guys may be able to give!

Many thanks

James
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dratkinson
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Re: New to Investing, Based in Hong Kong

Post by dratkinson »

Sorry I can't help you, but I'm very interested in the answers you receive as I'd like to pass the information on to my Chinese penpal.

I have looked on the Hong Kong stock exchange (English side) and could find nothing that I recognized from which to build a global portfolio. Most of what I found were ETCs related to inside China, not much outside.


Welcome.
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

Hello and welcome.
You might want to look at the W8-BEN form, which is a form that brokerage firms use for nonresident aliens. Keep in mind that Vanguard, AFAIK, does not allow nonresident aliens to open an account. But many brokerage companies typically do and you can buy Vanguard ETF's that way. The way you fill out the forms has a bearing on how taxes are withheld if at all.

Here is a link to Interactive Brokers: https://www.interactivebrokers.com/en/?f=tax&p=nonUS

That link has some info on the W8 and the rules.

If you go this route, you would have access to super low cost Vanguard ETF's while paying only a dollar or so per transaction with a minimum of $10 a month commissions at Interactive Brokers (so if you spend $8 worth of commissions, you pay $10 for the month. If you spend $12 worth of commissions, you pay $12). Other companies may be better if you plan on doing less trades.

As far as portfolio, I would just do a global cap weighted portfolio.
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asset_chaos
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Re: New to Investing, Based in Hong Kong

Post by asset_chaos »

What I am reading so far is US centred – I am Hong Kong based. If I invest in say the 2nd grader funds, will I be subject to US taxes/costs or local taxes/costs? A real newbie question I know.
You most likely do not want to invest through brokerages in the US. You'll probably be better off finding out what your investment choices are in Hong Kong. Call HK brokerages or the HK stock exchange directly and ask which exchange traded index funds are available.
My early research suggests Hong Kong taxes on investments are low, perhaps even zero. Is this correct? What implications does this really have for me?
Sorry, I don't know anything about HK taxes.
I am extremely conscious of keeping the costs of investing low – I cannot see how to directly invest with Vanguard for example (if in HK it directs you to contact a broker) – are there recommendations on how to invest directly if you are not based in the US?
If Vanguard doesn't have a retail mutual fund buisness licensed to operate in your country, then you probably can't invest directly with them. But exchange traded funds available on the HK stock exchange may give you everything you want. Alternatively, if you can stand the currency risk, you may be able to open a direct account with Vanguard Australia. (I do not say this is definitely possible.) Also, there may be non-Vanguard exchange traded funds that serve your purposes. Don't feel that it's Vanguard or nothing; check all the options open to you.
If I should go through a broker, where do I start? I see every transaction is charged and if I intend to invest monthly this will eat into the return – is there a way to minimise this?
Sorry, I don't know anything about HK brokerages.
Should I structure a basic portfolio around a US market (as per the 2nd grader's) or take into account I am based in a different market and apportion things differently? This was touched on in the book but not in any real detail.
You should not structure your investments as if you were an American citizen. For stocks I recommend you start your thinking with the global stock market. Then ask yourself if there is anything in your home country tax laws or the costs of investing at home versus abroad that gives a compelling advantage to overweighting your home country. Knowing nothing about HK law, I can't offer any advice there. HK is about 1% of the global stock market, so any overweight to HK stocks increases industry concentration risk. But overweighting the home country market does reduce currency risk. You'll have to decide where to set that balance, and my advice is to choose a balance that you can stick with no matter what economic or political events happen in the world. Only after researching and making these decisions should you search for the lowest cost, most broadly diversified index fund(s) to invest in.
On bonds, if you plan to continue to live in HK, then I suggest trying to keep your bonds denominated in HK dollars. If you plan to move to the UK at some point, then perhaps your bonds should be split between HK dollars and UK gilts. Hard to say, except for the general advice to find the lowest cost, most broadly diversified bond fund(s) you can.
I mention above I want to save for property but I would like easier access to these savings than for the longer term investment portfolio. Is there a better way I can make this money work for me rather than just set it into a low interest rate (very low in HK) savings accounts?
Sorry, I can't say anything about that.

Congratulations on making a fine start on securing the financial future for you and your upcoming family. Best wishes.
Regards, | | Guy
Topic Author
JamesHongKong
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Joined: Mon Oct 13, 2014 9:34 pm

Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

You might want to look at the W8-BEN form, which is a form that brokerage firms use for nonresident aliens. Keep in mind that Vanguard, AFAIK, does not allow nonresident aliens to open an account. But many brokerage companies typically do and you can buy Vanguard ETF's that way. The way you fill out the forms has a bearing on how taxes are withheld if at all.
Thank you for your advice. I had actually being doing some research yesterday and come across various mentions of this form. I am somewhat confused (and concerned) as the suggestion is that any investment I make is likely to be charged at a 30% tax rate which will make investing in the ETF's I am most keen on not really that viable. I clearly need to get some local based advice from a financial planner.

I will also take a look at IB and perhaps talk to someone there. I am not sure Hong Kong has any tax treaties with the US.
As far as portfolio, I would just do a global cap weighted portfolio.
I'll need to look into this - I need to be honest and say I don't know what that actually means!

From more research that I have done I can see a lot of people are saying it is very expensive to invest in Hong Kong with there being high charges and fees associated with investing. Whilst tax out here on investments is in fact zero it seems (as with other things out here) that many of the savings are offset by higher costs!

I will keep exploring ideas and report back also once I have met with someone locally to discuss.

Thanks

James
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

JamesHongKong wrote:
You might want to look at the W8-BEN form, which is a form that brokerage firms use for nonresident aliens. Keep in mind that Vanguard, AFAIK, does not allow nonresident aliens to open an account. But many brokerage companies typically do and you can buy Vanguard ETF's that way. The way you fill out the forms has a bearing on how taxes are withheld if at all.
Thank you for your advice. I had actually being doing some research yesterday and come across various mentions of this form. I am somewhat confused (and concerned) as the suggestion is that any investment I make is likely to be charged at a 30% tax rate which will make investing in the ETF's I am most keen on not really that viable. I clearly need to get some local based advice from a financial planner.

I will also take a look at IB and perhaps talk to someone there. I am not sure Hong Kong has any tax treaties with the US.
As far as portfolio, I would just do a global cap weighted portfolio.
I'll need to look into this - I need to be honest and say I don't know what that actually means!

From more research that I have done I can see a lot of people are saying it is very expensive to invest in Hong Kong with there being high charges and fees associated with investing. Whilst tax out here on investments is in fact zero it seems (as with other things out here) that many of the savings are offset by higher costs!

I will keep exploring ideas and report back also once I have met with someone locally to discuss.

Thanks

James
Yea I don't think that HK has a tax treaty with the US. In any case, I know that ETF's are becoming more widely available in exchanges around the world.

By global cap weight, it means to let the market decide how much to allocate to each country, or at least not deviating too much. If it feels weird to put 45% in the US market (which by capitalization, would dictate as such), spread it around a bit instead... like more in Europe and Japan, for instance.

If you decide to stick with a broker for the HK stock exchange, here is a list:
http://en.wikipedia.org/wiki/List_of_Ho ... aded_funds

A possible option for a stock portfolio (this is not perfect global cap weighted)
30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
20% 2805.HK Vanguard FTSE Asia ex Japan Index ETF (This includes Hong Kong market)

These have expense ratios of 0.38% which is decent.

This gets you 70% of the way there. Then try to see what low cost options are available for the US market and put 30% in there.

Keep in mind that this is just for stocks. For bonds, maybe look at local savings accounts and CD's as well as bond index funds.

You will then have a pretty diversified portfolio that covers most of the world. Not as good as the options we have here in the states, but still not bad.

Inquire about commissions to trade ETF's and any account maintenance charges.
Topic Author
JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Yea I don't think that HK has a tax treaty with the US. In any case, I know that ETF's are becoming more widely available in exchanges around the world.

By global cap weight, it means to let the market decide how much to allocate to each country, or at least not deviating too much. If it feels weird to put 45% in the US market (which by capitalization, would dictate as such), spread it around a bit instead... like more in Europe and Japan, for instance.

If you decide to stick with a broker for the HK stock exchange, here is a list:
http://en.wikipedia.org/wiki/List_of_Ho ... aded_funds

A possible option for a stock portfolio (this is not perfect global cap weighted)
30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
20% 2805.HK Vanguard FTSE Asia ex Japan Index ETF (This includes Hong Kong market)

These have expense ratios of 0.38% which is decent.

This gets you 70% of the way there. Then try to see what low cost options are available for the US market and put 30% in there.

Keep in mind that this is just for stocks. For bonds, maybe look at local savings accounts and CD's as well as bond index funds.

You will then have a pretty diversified portfolio that covers most of the world. Not as good as the options we have here in the states, but still not bad.

Inquire about commissions to trade ETF's and any account maintenance charges.
This information is great! Thank you so much - I will definitely look into these ideas - I did like the idea of a split as per the "2nd Grader Portfolio" as it makes sense seeing as the markets are split in pretty much the same way globally! That said, it's always tempting to look at the local market where you live (in my case Asia) - the growth opportunities here generally are considered strong BUT volatility is high and I am looking for a long term stable low risk investment strategy.

For example, some years ago my HSBC Personal Manager called me in to discuss investment strategies with one of the investment team. Basically he was trying to convince me that I should be putting in XX each year in order to achieve XX after year XX. At the time (mid 2009) the Hang Seng Index was at around 12,000. I asked if it would be worth simply investing in the HSI then and he strongly advised against it as it would probably fall much further. However he did have some other suggestions which he felt would offer better returns. The HSI is now at 23,000 near enough. I appreciate hindsight is a wonderful thing but I mention it because the guy was indicating that the HSI was a "boring" investment anyway and there were better ways for me to make my money work i.e. he wanted me to pay him to take risks on my behalf. The whole meeting fell apart when I asked him about this amazing return after year XX and he started to drop in things such as "withdrawal fees" and "commissions" which basically made the return just above an average savings account interest rate! When I pointed this out he didn't have much to say.

This type of experience makes me incredibly wary of seeking advice - I need them to be looking after my best interests and not their own and that's almost impossible when their income is tied into the risks they take with other people's money. This is a slight aside (and possible rant) but I am going to predict that when I go to seek advice out here the response will be along the same lines. Thankfully (and with your help) I have a more robust set of questions to ask.

I will report back once I have had a couple of meetings so others have an idea of what to expect when it comes to Hong Kong.

I saw the Vanguard ETF's here in Hong Kong but would need to know more - they have been around for only 6 months and I don't really know how much they cover - their performance is impossible to measure really.

James
HurdyGurdy
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Re: New to Investing, Based in Hong Kong

Post by HurdyGurdy »

Hello James,
a search in the bogleheads website brings
https://www.google.com/search?q=hong+ko ... eheads.org

There may be a handful of knowledgeable people, perhaps enough to have a group.

Would these ETF be useful?
http://www.aastocks.com/en/stocks/etf/d ... code=03019
http://www.aastocks.com/en/stocks/etf/d ... code=03020

A better list of ETFs traded in the HKex:
http://www.hkex.com.hk/eng/market/sec_t ... isdetf.htm
I saw the Vanguard ETF's here in Hong Kong but would need to know more - they have been around for only 6 months and I don't really know how much they cover - their performance is impossible to measure really.
Since they are indexed, it would be enough to see what has been the behavior of the indexes they track:
FTSE Japan Index
FTSE Asia ex Japan High Dividend Yield Index
FTSE Developed Europe Index -- the wiki has http://www.bogleheads.org/wiki/FTSE_Dev ... rope_Index
FTSE Asia ex Japan Index
Topic Author
JamesHongKong
Posts: 23
Joined: Mon Oct 13, 2014 9:34 pm

Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Hello James,
a search in the bogleheads website brings
https://www.google.com/search?q=hong+ko ... eheads.org

There may be a handful of knowledgeable people, perhaps enough to have a group.

Would these ETF be useful?
http://www.aastocks.com/en/stocks/etf/d ... code=03019
http://www.aastocks.com/en/stocks/etf/d ... code=03020

A better list of ETFs traded in the HKex:
http://www.hkex.com.hk/eng/market/sec_t ... isdetf.htm

I saw the Vanguard ETF's here in Hong Kong but would need to know more - they have been around for only 6 months and I don't really know how much they cover - their performance is impossible to measure really.


Since they are indexed, it would be enough to see what has been the behavior of the indexes they track:
FTSE Japan Index
FTSE Asia ex Japan High Dividend Yield Index
FTSE Developed Europe Index -- the wiki has http://www.bogleheads.org/wiki/FTSE_Dev ... rope_Index
FTSE Asia ex Japan Index
Wow! Thank you very much for this, most useful. Those ETF's do look good, particularly based on their performance but I must remember not to be blinded by those sort of returns. I'm really bought into the idea of owning ETF's that own a lot (i.e. the world - hence the Vanguard Total Indexes for the US and International) with a lower risk but a more stable return over a longer period. I think it is time to sit down with someone and get the advice!
TedSwippet
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

Just a quick note... the DB X-tracker ETFs mentioned above use 'synthetic replication' to track the indices. You might be okay with that, but it is useful to be aware of the fact. In Europe, DB has been slowly increasing its range of physical ETFs.
HurdyGurdy
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Re: New to Investing, Based in Hong Kong

Post by HurdyGurdy »

TedSwippet wrote:Just a quick note... the DB X-tracker ETFs mentioned above use 'synthetic replication' to track the indices. You might be okay with that, but it is useful to be aware of the fact. In Europe, DB has been slowly increasing its range of physical ETFs.
This may be so -- however, and somewhat surprisingly, there does not seem to be too many other options. (There are regular [non-etf] funds, with very high expense rates).
Topic Author
JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Just a quick note... the DB X-tracker ETFs mentioned above use 'synthetic replication' to track the indices.
Ted - thank you for that. I sort of understand what that means but need to get my head around it more.

Ultimately I'm currently thinking about ideas based on what you guys have said. For example as a portfolio:

30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
20% 2805.HK Vanguard FTSE Asia ex Japan Index ETF (This includes Hong Kong market)
30% 3020.HK XDBMSCIUSA

I would like some sort of bond fund as a safeguard in there but will look at that shortly. I also like the fact the markets are dipping and feel I may be timing things quite well to start investing (albeit a 30 year view point makes any shorter term dips less important).

My main question with the above really is the cost. For example, if I assume a 10% return per year, what am I going to be paying out to the various places and what will my return actually end up being?

DB has a low expense ratio for example but when I read further there are other costs mentioned but I am not sure if they are included? There seems to be a ref amount and a management fee - but I thought management fees were part of the expense ratios! I am new to this so please stay with me as I try to get my head around things. Similarly, if I invest monthly will there be a commission on each monthly purchase and if so would I be better off buying once per year in a lump sum?

The key for me is to follow the equation in the 2nd grader book - 10-2=8 not 12 (as some money managers have tried to convince me so far)! By this I mean that I don't want to give away a large proportion of my return in fees/commissions but I feel (perhaps wrongly) that it simply isn't clear enough what I will be paying out.

Advice, as always, is much appreciated.
Topic Author
JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

This may be so -- however, and somewhat surprisingly, there does not seem to be too many other options. (There are regular [non-etf] funds, with very high expense rates).
This becoming more and more apparent as I do my research...my concerns over the cost of investing from here are looking justified at the moment. Starting to wonder a little what I should do.

Planning to speak to a financial adviser (or 15) in the next week or so and will report back.
swj05652
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Location: Hong Kong

Re: New to Investing, Based in Hong Kong

Post by swj05652 »

I am a Hong Kong resident and put all my investments into Vanguard ETFs.

I use HSBC as my broker, the biggest local bank. Their fee is not low ($18 per 1000 shares), but still reasonable. You can buy US etfs, including all Vanguard ETFs, through HSBC. Some guys recommend InteractiveBrokers, which is also a great, super-low cost Internet broker.

There is no tax in HK. So you don't have to pay to the HK government. Buy you need to pay US tax if you invest in US stocks/ETFs. There is 30% dividend tax, but no capital gain tax. There is not tax treaty between HK and US. However, many countries have tax treaty with US, (like China). So if you can prove that you are a "resident" in that country (you own a property and often live there, etc), you can benefit from the tax treaty.

BTW, I will not invest in HK local ETFs, any of them. Because they are focused on the local market, thus cannot diversify the risk.
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

swj05652 wrote:I am a Hong Kong resident and put all my investments into Vanguard ETFs.

I use HSBC as my broker, the biggest local bank. Their fee is not low ($18 per 1000 shares), but still reasonable. You can buy US etfs, including all Vanguard ETFs, through HSBC. Some guys recommend InteractiveBrokers, which is also a great, super-low cost Internet broker.

There is no tax in HK. So you don't have to pay to the HK government. Buy you need to pay US tax if you invest in US stocks/ETFs. There is 30% dividend tax, but no capital gain tax. There is not tax treaty between HK and US. However, many countries have tax treaty with US, (like China). So if you can prove that you are a "resident" in that country (you own a property and often live there, etc), you can benefit from the tax treaty.

BTW, I will not invest in HK local ETFs, any of them. Because they are focused on the local market, thus cannot diversify the risk.
Good to finally see a HK resident chime in the thread. :)

To JamesHongKong, a 30% haircut on dividends is not as bad as you think. Between fed and state tax, I pay 25% on my dividends. Dividends might make about 2%, so you'd see a 0.6% drag on returns. But you also see a big drop in ER (0.1% ER's vs god knows what in HK). And as swj05652 says, the bigger reason is diversification.

That said, keep looking. The HK based Vanguard ETFs are promising but not completely diverse. Also we all tend to have a little home country bias, so maybe throw in a Hang Seng ETF as a possible one to add if using the HK exchange.
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

swj05652,
A further look into the OP's choices leads me to wonder if ETF choices are improving enough to warrant a relook into HK based ETF's. The db x-trackers site shows a very diverse set of ETF's with ER's hovering around 0.30%. The OP already mentioned 3020.HK XDBMSCIUSA, which is a pretty low cost access to US markets.

Here is the list: http://www.etf.db.com/HKG/ENG/Product_Overview

You can build a very globally diversified portfolio from the list. One issue is the prevalance of synthetic ETF's, which carries a tad more counterparty risk which needs to be looked into (I think they are less of an issue than, say, ETN's, but at best, they are slightly inferior to Vanguard's ETF's which hold the underlying securities).

How about:
30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
15% 3009.HK DB X-TRACKERS MSCI EMERGING MARKETS INDEX UCITS ETF
25% 3020.HK DB X-TRACKERS MSCI USA UCITS ETF
10% maybe some HK hang seng index for a little local overweight.

The above is JUST equities... a bond portion should be added to it.

The Vanguard funds get good access to a large portion with "proper" ETF structure. The db-x-trackers give more diversified exposure to emerging markets as well as a US market with slight counteryparty risk (I think the UCITS indicates a limited counteryparty risk capped at 10%?).

With the tax savings of going local, would the above be better than going with a US-based broker?

This thread is interesting because it really shows how lucky we are the states to have access to great investment products. Though HK seems like it is not so bad either.

Some reading on synthetic ETF's: https://pressroom.vanguard.com/content/ ... c_ETFs.pdf
A highlight from there: Exposure to a third-party failure can be limited and will vary by fund. There are also regulations restricting the amount of counterparty risk to which a fund can be exposed. Under Europe’s UCITS rules, for instance, a fund’s exposure to counterparties may not exceed a total of 10% of the fund’s net asset value.
Topic Author
JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Good to finally see a HK resident chime in the thread. :)
+1 to that! Thanks SWJ for your input - I really need to work out the likely total cost based on my investment plan (an initial lump sum and monthly contributions) for using the HSBC brokerage - that would certainly be the easiest option for me as they are my bank and I already have an investment account - I just need to open a US trading account. But I did look through things briefly the other day and it wasn't clear what all the costs would likely be. It's all well being able to invest on a 0.2 ER ETF but I got the impression that on top of this, things would quickly add up. What is your experience here if you don't mind me asking?

Also, curious as I saw the 30% dividend tax but I was initially led to believe that this was a tax on everything. What has been your cost experience with this in the recent years?
The HK based Vanguard ETFs are promising but not completely diverse.
How about:
30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
15% 3009.HK DB X-TRACKERS MSCI EMERGING MARKETS INDEX UCITS ETF
25% 3020.HK DB X-TRACKERS MSCI USA UCITS ETF
10% maybe some HK hang seng index for a little local overweight.

The above is JUST equities... a bond portion should be added to it.

The Vanguard funds get good access to a large portion with "proper" ETF structure. The db-x-trackers give more diversified exposure to emerging markets as well as a US market with slight counteryparty risk (I think the UCITS indicates a limited counteryparty risk capped at 10%?).

With the tax savings of going local, would the above be better than going with a US-based broker?
This looks to be a valid and potentially sensible investment option for me, thank you! I am a little unclear about the risk associated with the synthetic ETF's still but will look into it. Your last question is exactly what I need to find the answer to.

I will need to look at some theoretical calculations on this relating to my plan. e.g. initial $25K US lump sum and monthly $1,900-2,500 US. It's going to be a bit of a calculation, not helped by not fully understanding the costs for the DB X-TRACKERS in full (ERs all inclusive or additional costs?). I also need to work out what the brokerage charges are for this route if any.

In essence I need a comparison of using a HSBC type route to invest in US stocks which will see my return eaten into with taxes and brokerage fees vs the HK ETF route outlined above with the associated costs but without the taxes. It looks like my weekend is going to be fun.... :wink:

Really appreciate the input so far guys - hopefully this thread will be helpful to others in the future too. I will be meeting a couple of advisers in the next week so will let you all know the outcome of these.

James
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

James,

The expense ratios for the db-xtrackers is the TER, which is the total expense ratio. With every mutual fund and ETF, there is also internal trading costs but they should be negligible with these ETFs. If you look at the fact sheet, you will see that it has tracked its index pretty much perfectly over the life of the fund, and that is net of expenses. DB bank actually has a favorable securities lending policy that gets a little bit of income into the fund to offset the expense ratio. All that considered, you can pretty much see these ETFs from DB to be on par with Vanguard in regards to cost. At least not enough of a difference to be concerned.

They are the second largest provider of ETFs in terms of assets under management in Europe, second to iShares.

So on that front, I think they are good options. The only additional cost is the actual brokerage company's commission fees every time you trade. In the US, we are spoiled and get anything from free trades to only a few bucks per trade. But even up to $20 or trade is not exactly a dealbreaker if that is the best you can get in Hong Kong. All that means is you would set larger rebalancing bands, to reduce the number of transactions you make every year.

As far as the synthetic nature of the fund, that would be up for some debate, and I hope others will chime in. But, my feeling is that it is not a big issue. When people mention counterparty risk, it is not like it is a corporate bond from a single institution where you might lose all of your money. It is that it uses swaps and derivatives to gain exposure to the markets, which requires collateral to protect from counterparty risk. In the event of the catastrophic, it may lead to complications but you are limited to 10% counterparty risk due to regulations, and as far as I know, the arrangements are fully collateralized so it should not result in any actual loss to the fund anyway. DB publishes the collateral basket, marked to market, on a daily basis and I think overcollateralizes (an amount higher than the net assets of the fund).

Just the fact that it needs to be explained due to the complexity of it all makes Vanguard or other ETFs that hold the underlying securities to be superior, but it doesn't make the db xtrackers to be bad or anything. But again, I hope others will chime in on synthetic ETFs.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

All that considered, you can pretty much see these ETFs from DB to be on par with Vanguard in regards to cost.
Thanks again for your continuing input - it really has been extremely helpful. I do like the look of these ETFs so I'm going to focus on getting more information on them alongside researching my original plan relating to the US based ETFs.

Incidentally the $18-20 mentioned previously I believe is in $HKD which is around $2.30 US...not a big amount at all but I am mindful that there are perhaps some other costs with HSBC - I have a friend who may be able to tell me more actually it turns out so will let you know!

This is quite exciting for me and I'm enjoying learning so much - you've all been incredibly helpful so far! Enjoying the "Boglehead's Guide to Investing" also which I'm reading alongside posting on this forum.

James
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

Have you looked at Vanguard UK ETFs? For example VUSD.LN, an S&P500 tracker, 0.07% TER, physical replication, and not US domiciled so no undesirable US tax entanglements.
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Re: New to Investing, Based in Hong Kong

Post by dratkinson »

On second page of: http://www.etf.db.com/HKG/ENG/Product_Overview

Do I understand this correctly, the world in one ETF?

3019 DB X-TRACKERS MSCI WORLD INDEX UCITS ETF (synthetic)

Product details:
http://www.etf.db.com/HKG/ENG/ETF/LU045 ... hetic-ETF)



Is above he same ETF as listed by HurdyGurdy?
http://www.aastocks.com/en/stocks/etf/d ... code=03019

Is aastocks a stock broker? And DB the ETF provider? Trying to understand what I'm seeing?
d.r.a., not dr.a. | I'm a novice investor; you are forewarned.
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

Yep, looks like aastocks is a HK stockbroker. The ETF you mentioned is not exactly an All world ETF, because it excludes emerging markets. It is an all world developed market ETF. But yeah, you could combine that with an emerging market ETF at about 80/20 ratio and make it cover all equities. And yep, DB is the provider, similar to Barclay (later Blackrock) with iShares.
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Re: New to Investing, Based in Hong Kong

Post by HurdyGurdy »

From http://www.aastocks.com/en/AboutUs/CompanyInfo.aspx?, it appears that AAstocks' business is to provide data and analysis, a la Bloomberg or Morningstar, rather than being a broker itself. But I may be wrong.

I still do wonder why are there so few USA or World ETFs in the HKEX list:
http://www.hkex.com.hk/eng/market/sec_t ... isdetf.htm

Could Deutsche Bank have a special deal with the Chinese authorities to be the sole provider of such ETFs? Notice how Vanguard HK itself does not offer USA/World etfs: https://www.vanguard.com.hk/portal/inve ... tments.htm

Blackrock only has ETFs covering Asia,
http://www.aastocks.com/en/stocks/etf/s ... &issuer=15

HSBC the same,
http://www.aastocks.com/en/stocks/etf/s ... &issuer=13

Same for State Street Global Advisors (SSgA),
http://www.aastocks.com/en/stocks/etf/s ... 1&issuer=1

"Deutsche Bank Platinum", instead, has that USA and World:
http://www.aastocks.com/en/stocks/etf/s ... 1&issuer=8

---
Notice also that it uses the "MSCI Total Return Net World Index", not a regular MSCI World Index or MSCI ACWI Index.
http://www.msci.com/products/indexes/to ... l#TOTALRET

---
On it being "synthetic", does this sound a bit concerning?
from the aastock page (http://www.aastocks.com/en/stocks/etf/d ... code=03019)

"ETF Investment Objective
Objective:The ETF seeks to provide investment results that, before fees and expenses, closely correspond to the performance of the MSCI Total Return Net World Index (the “Index”). Strategy: The ETF adopts a “synthetic replication” investment strategy, pursuant to which the ETF will enter into an unfunded swap transaction with Deutsche Bank AG to achieve its investment objective. Effectively, the ETF will receive from Deutsche Bank AG, through the unfunded swap, an exposure to the economic gain/loss in the performance of the Index. In return the ETF will, under the unfunded swap, provide Deutsche Bank AG an exposure to the economic gain/loss in the performance of a portfolio of assets which the ETF will purchase (“Asset Portfolio”, as described hereafter) with the net proceeds of any issue of its shares. The ETF will own the Asset Portfolio. The Management Company will manage the ETF with a single counterparty net exposure of no more than 5% of the net asset value of the ETF. In other words, the net value of the Asset Portfolio, marked to market at the end of each trading day, shall be no less than 95% of the value of the net asset value of the ETF. Where the ETF’s net exposure to Deutsche Bank AG is approaching or exceeds 5% at the end of a trading day, Deutsche Bank AG will make cash payment to the ETF to limit the net exposure of the ETF to Deutsche Bank AG to no more than 5% of its net asset value. The ETF will not invest in any structured products or financial derivative instruments other than the unfunded swap. It will also not enter into any repurchase agreements, stock lending transactions or other similar over-the-counter transactions."

If it was a Whole World ETF, at a decent expense rate, I'd put all my money there. But there's stuff that I don't quite get.

-----
Added: is it the case that the safety of the one ETF available in Hong Kong that invests in the World (and same for the USA one) depends on the safety of this one company, Deutsche Bank? :shock:

Why don't you ask Vanguard if they plan to offer USA and World ETFs, and see what they say.
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

HurdyGurdy wrote:

Added: is it the case that the safety of the one ETF available in Hong Kong that invests in the World (and same for the USA one) depends on the safety of this one company, Deutsche Bank? :shock:
.
Nah, like I explained in an earlier post, UCITS regulation limits counterparty risk to 10%, The statement you included indicates a single counterparty exposure does not exceed 5%. Also, most importantly, DB overcollateralizes at an amount over the NAV and publishes the collateral on a daily basis. Collateralized products have been recommended in other asset classes (such as CCF's) on this forum. It should be safe.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

It should be safe.
Thanks for the updates guys - I agree that the DB Trackers (after doing some further research) appear to be safe enough. It looks like I will be going ahead in the next few weeks once I figure out the best way to do it cost wise and once I have had some further advice.

One thing worth noting is that a friend of our who works at HSBC whilst he does know some people who could give advice, he does not rate any of them and has warned me to be really careful with financial advisers out here...a recurring theme I am finding. It looks like I will go it alone!

James
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corner559
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Re: New to Investing, Based in Hong Kong

Post by corner559 »

Check this out...

https://global.vanguard.com/portal/site/home

Here's a link to the HK site...

https://www.vanguard.com.hk/portal/home.htm

I know the offerings are limited, but might be worth a look.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Check this out...

https://global.vanguard.com/portal/site/home

Here's a link to the HK site...

https://www.vanguard.com.hk/portal/home.htm

I know the offerings are limited, but might be worth a look.
Thanks for that - I have had a look through and they are pretty limited. I have included a couple of them in my theoretical portfolio as suggested by Overleaf previously. Hopefully Vanguard can open up their offerings out here in time. DB seem to have a much wider range.
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

JamesHongKong wrote:
It should be safe.
Thanks for the updates guys - I agree that the DB Trackers (after doing some further research) appear to be safe enough. It looks like I will be going ahead in the next few weeks once I figure out the best way to do it cost wise and once I have had some further advice.

One thing worth noting is that a friend of our who works at HSBC whilst he does know some people who could give advice, he does not rate any of them and has warned me to be really careful with financial advisers out here...a recurring theme I am finding. It looks like I will go it alone!

James
I think the financial advisor at HSBC will do more harm than good for you at this point. Actually, financial advisors at banks and credit unions are notoriously bad, all across the board. You just need to find a broker, check the commissions, and dive in when you are ready. I think the biggest area you need to consider is the bond portion of your portfolio. You can consider bank CD's too. Not sure what HK has to offer in these areas but it is recommended to take risk on the equities side and stay safe on the bond side. Short to intermediate duration with high credit quality is what you want to look for.

It is highly recommended to read a book or two before diving in though, because you need to be very comfortable with your decisions and understand the risk. Check out William Bernstein's Four Pillars book or Investor Manifesto. These are US centric but the general principles of equity risk apply. Hopefully are HK folks can chime in on the bond portion considerations.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

It is highly recommended to read a book or two before diving in though, because you need to be very comfortable with your decisions and understand the risk. Check out William Bernstein's Four Pillars book or Investor Manifesto. These are US centric but the general principles of equity risk apply. Hopefully are HK folks can chime in on the bond portion considerations.
You have read my mind! I'm just starting to do the research on the bonds side of things - planning on a 10% bond investment, possibly 20% of entire investment.

I'm actually looking at your suggestions of:
30% 3101.HK Vanguard FTSE Developed Europe Index ETF
20% 3126.HK Vanguard FTSE Japan Index ETF
15% 3009.HK DB X-TRACKERS MSCI EMERGING MARKETS INDEX UCITS ETF
25% 3020.HK DB X-TRACKERS MSCI USA UCITS ETF
10% maybe some HK hang seng index for a little local overweight.
Think this is a good starting point for me although I may swap over to a heavier weighting in the USA ETF vs the Developed Europe i.e. just swap around the 30% and 25%.

I'm getting about ready to start things - the plan being I take the plunge in November/December. You are right about the advice side of things - I need to find a decent broker and understand the costs involved. I'm most worried about my monthly investment costs as I will be splitting this between possibly 6 places and each transaction will incur a fee. I need to speak to a broker for them to outline what this would end up being percentage wise. To be honest, I did a VERY rough calculation and it looks like it could be around a 0.72% monthly cost on top of the TER (so around 1% total) - this is a bit more than I was hoping to give away (following the keeping costs low mantra) so am prepared to shop around. The alternative is that I invest a lump sum quarterly thus driving down the cost of fees to a 1/3 of that - total cost likely to be more 0.45-0.70% in that scenario.
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

You can also use the above mentioned All World Developed ETF, which will combine US, Europe, and Japan. Add the emerging market and hong kong ETF and you will only have 3 equity ETF's instead of 5, which will reduce transaction costs. Remember though that as your balance grows, the one-time commission when buying will not be too bad, and you are keeping the annual expense ratio down which is far more important. And as the market fluctuates, you will not always be buying all of them every month. Oftentimes, new money will just be topping up whatever is down relative to the rest of the portfolio so you might only make one or two trades per month.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

You can also use the above mentioned All World Developed ETF, which will combine US, Europe, and Japan. Add the emerging market and hong kong ETF and you will only have 3 equity ETF's instead of 5, which will reduce transaction costs. Remember though that as your balance grows, the one-time commission when buying will not be too bad, and you are keeping the annual expense ratio down which is far more important. And as the market fluctuates, you will not always be buying all of them every month. Oftentimes, new money will just be topping up whatever is down relative to the rest of the portfolio so you might only make one or two trades per month.
Thanks for that - I plan to play around a bit with the final make up of the portfolio - a simpler one would be preferred certainly.

Your point about the cost side is entirely valid too, as is the comment about only topping up where necessary in order to keep things balanced. Thanks for your advice as always.

James
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Re: New to Investing, Based in Hong Kong

Post by corner559 »

You may also want to check out Charles Schwab. They allow expats abroad open brokerage accounts through which you could purchase ETF's.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

You may also want to check out Charles Schwab.
Thank you, I will take a look.

I just spent lunchtime looking into the brokerage costs with various companies. HSBC seems incredibly expensive so far. I am looking at Interactive Brokers but a little unsure what I'm getting into - seems potentially complex but will look into it further.
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

corner559 wrote:You may also want to check out Charles Schwab. They allow expats abroad open brokerage accounts through which you could purchase ETF's.
Does Schwab have an HK branch? The problem with using a US-based broker is that it would require the W8 form, and tax implications.

A few things I am not clear on:
- I know Interactive Brokers has an HK branch. And it seems it is often recommended as the cheapest online broker for HK residents. I am assuming that the HK branch is NOT a US broker and JamesHongKong would have no issues with tax forms, etc?
- if the above is true, could he even invest in ETFs listed on US stock exchanges, since pretty much every global stock exchange is available through Interactive Brokers? Or with this trigger tax consequences because it is a US-based ETF, despite being purchased from an HK based broker?

JamesHongKong,
Interactive Brokers is probably the cheapest you will find. Their platform is intended for serious traders so it will seem daunting, but I am sure you can figure it out fairly quickly. The US based website has demo accounts you can practice with... Hopefully the HK site does too?
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

Well this kinda answers my question: http://hongkong.geoexpat.com/forum/155/ ... 52086.html

Seems it doesn't really matter where you hold the account. Any investment in US companies will result in the withholding tax on dividends. I guess it is no big deal, and just part of the cost of diversifying into US companies.

My hunch: go with Interactive Brokers. You will never be needing access to anything more, since they have everything covered. And it's cheap. If you are worried about overpaying US taxes on dividends, maybe underweight the US a bit. This would mean instead of using the all world ETF, go back to the original split of having a separate ETF for US, Europe, Japan, emerging market, Hong Kong, etc. This way you can keep the US percentage under control and not be at the whim of market cap weighting.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

If you are worried about overpaying US taxes on dividends, maybe underweight the US a bit.
Thanks oneleaf - I have worked out that IB from a cost perspective, including all stamp duties etc in HK would work out at a total of around 0.19% on top of the TER percentage for each ETF - therefore you are probably right about them being the cheapest. Going to have a play on a demo account.

You have thrown something else into the mix which has slightly confused me - the DB DBMSCIUSA ETF is a Hong Kong based ETF covering the US markets isn't it? Is it still subject to the dividend tax as I have tried finding information on this - I understand if I invest in US ETF's, such as Vanguard, through a broker that allows it, that I will incur taxes but I'm a little confused by this being an ETF offered and traded in Hong Kong and what that means?

Just when I thought we were getting somewhere....haha :D
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

oneleaf wrote:...Seems it doesn't really matter where you hold the account. Any investment in US companies will result in the withholding tax on dividends. I guess it is no big deal, and just part of the cost of diversifying into US companies.
Not entirely.

If a resident of HK holds a US domiciled ETF then they will pay 30% of dividends as tax to the US, no matter what the ETF itself invests in. For an ETF that holds US stocks you might consider that reasonable -- if you held the stocks themselves the outcome would be the same -- and yet, it can be mitigated. Buy an Ireland domiciled ETF that holds US stocks and this same HK resident pays only 15% in US tax. This is because the ETF itself internally pays the treaty rate on its US holding, and that rate will be 15%. The end investor in HK has no more to pay. Dividend tax halved, then.

Now, if a resident of HK holds a US domiciled ETF that invests in only non-US stock, then that investor will still pay 30% of dividends to the US purely because of the ETF's domicile. These non-US stock dividends will however be received by the ETF after dividend tax, if any, in their own country. Clearly an even worse idea than the above. These non-US stocks could be in countries that don't tax dividends at all. Imagine what happens if our HK investor buys a (possibly hypothetical) US domiciled ETF that itself only holds HK stocks; the 30% of dividends paid to the US is a simple deadweight loss.

Also, no mention upthread of US estate taxes. These kick in at $60k for non-citizens and non-residents holding 'US situs assets' (no unlimited marital deduction). Holdings in a US domiciled ETF, even if the ETF itself holds nothing in the US, are 'US situs' for the estate tax. The US estate tax for non-resident aliens is the real man-eater here, and all by itself a good reason for non-US citizens to avoid holding US domiciled ETFs.
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Is the DB Tracker ETF not a Hong Kong domiciled ETF and therefore not subject to dividend tax? I'm a little confused now. And how would tax be worked on a World ETF like the DB one when there are 25 countries including the US in the ETF? I'm also still a little unclear on the dividend tax - this surely cannot be 30% of everything and if not, typically what could I expect? Perhaps someone could give me a quick example say with a $100,000 US investment based on the DB USA and DB World ETF's? I think this may be the only way I can get my head around it.

Many thanks

James
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

The DB Tracker all appear to be domiciled in Luxembourg according to the prospectus. Any idea what this would mean?
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

TedSwippet wrote:
oneleaf wrote:...Seems it doesn't really matter where you hold the account. Any investment in US companies will result in the withholding tax on dividends. I guess it is no big deal, and just part of the cost of diversifying into US companies.
Not entirely.

If a resident of HK holds a US domiciled ETF then they will pay 30% of dividends as tax to the US, no matter what the ETF itself invests in. For an ETF that holds US stocks you might consider that reasonable -- if you held the stocks themselves the outcome would be the same -- and yet, it can be mitigated. Buy an Ireland domiciled ETF that holds US stocks and this same HK resident pays only 15% in US tax. This is because the ETF itself internally pays the treaty rate on its US holding, and that rate will be 15%. The end investor in HK has no more to pay. Dividend tax halved, then.

Now, if a resident of HK holds a US domiciled ETF that invests in only non-US stock, then that investor will still pay 30% of dividends to the US purely because of the ETF's domicile. These non-US stock dividends will however be received by the ETF after dividend tax, if any, in their own country. Clearly an even worse idea than the above. These non-US stocks could be in countries that don't tax dividends at all. Imagine what happens if our HK investor buys a (possibly hypothetical) US domiciled ETF that itself only holds HK stocks; the 30% of dividends paid to the US is a simple deadweight loss.

Also, no mention upthread of US estate taxes. These kick in at $60k for non-citizens and non-residents holding 'US situs assets' (no unlimited marital deduction). Holdings in a US domiciled ETF, even if the ETF itself holds nothing in the US, are 'US situs' for the estate tax. The US estate tax for non-resident aliens is the real man-eater here, and all by itself a good reason for non-US citizens to avoid holding US domiciled ETFs.
This is great info! It is funny that even the geoexpat hong kong forum where there are a lot of investors don't really understand this. There are many non-US people investing in the US stock exchange from HK that would be better off with ETF's domiciled in other countries.
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

JamesHongKong wrote:Is the DB Tracker ETF not a Hong Kong domiciled ETF and therefore not subject to dividend tax? I'm a little confused now. And how would tax be worked on a World ETF like the DB one when there are 25 countries including the US in the ETF? I'm also still a little unclear on the dividend tax - this surely cannot be 30% of everything and if not, typically what could I expect? Perhaps someone could give me a quick example say with a $100,000 US investment based on the DB USA and DB World ETF's? I think this may be the only way I can get my head around it.

Many thanks

James
It is normal for foreign entities to take some tax off the dividends, and in the case of the All-World one, the portion of dividends that come from the US would have 15% taken from it.

Here is my understanding:
Let's say 2% dividend yield on average for all countries.
On $100k investment, that is $2k annually.
The All World ETF is 60% US (since it is dev market only and no emerging market)
$1200 of the $2000 dividend yield comes from the US.
15% of that goes to US taxes, so you pay $180.

My understanding of TedSnippet's post is that if this ETF is US domiciled, you would pay 30% on the entire $2k, which would be $600.

The $180 is reasonable and should be considered a cost of diversification. The latter $600 is too much since you are overpaying US taxes. Also the estate tax thing is a biggy.

This is why you would choose the db x trackers over investing in Vanguard ETF's from the US.

However, the 4 Vanguard HK based ETF's should be HK domiciled.

I think the db x-trackers we have looked at are considered HK-domiciled, not Luxembourg. I think it is where it is listed that matters?

edit: for completion, here is the tax analysis for the MSCI US ETF (db xtracker listed on HK)
$100k investment with 2% div yield: $2000 annual dividends.
Since it is all US, 15% of that goes to the US... so $300 annually.

If this was a US domiciled ETF (like the ones we buy), it would be 30% of the $2k, so $600.

Biggest question: Would IB (InteractiveBrokers), who is a US broker, but with an HK branch, allow you to avoid overpaying US taxes if you stick only with the HK listed stuff like the 4 Vanguard ETF's and the db x-trackers?
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

oneleaf wrote:I think the db x-trackers we have looked at are considered HK-domiciled, not Luxembourg.
No, they are domiciled in Luxembourg.
oneleaf wrote:I think it is where it is listed that matters?
Again, no. ETFs are very often listed on the exchanges of multiple countries but domiciled only in one (and sometimes domiciled in a country on whose exchange they are not listed!). Domicile is what counts; more specifically, the US arrogates to itself the right to tax all dividends from any ETF that is domiciled in the US, no matter what that ETF holds internally, whereas Ireland and Luxembourg, to name but two other countries, do not.
oneleaf wrote:Biggest question: Would IB (InteractiveBrokers), who is a US broker, but with an HK branch, allow you to avoid overpaying US taxes if you stick only with the HK listed stuff like the 4 Vanguard ETF's and the db x-trackers?
My guess -- yes. IB will not withhold US taxes on non-US holdings by non-US citizens. If the domicile (or other tax residency) of the investor is not US and the domicile of the stock (or ETF) that they hold is not US then IB, even as notionally a US broker, is not required to withhold US taxes.

Now... as a matter of practicality, some US brokers simply won't sell non-US ETFs at all (Schwab, for example), because their primary customers are all US citizens and SEC rules work to prevent US citizens and others living in the Land of the (formerly) Free from holding non-US mutual funds. But that's a brokerage policy/commercial decision rather than a regulatory mandate.
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oneleaf
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Re: New to Investing, Based in Hong Kong

Post by oneleaf »

TedSwippet,
Thanks, your posts are pretty much the best info I have found on this subject. A few years back, I looked into all this because a family member who is not a US person asked about it. I was quickly overwhelmed with the rules!

So other than the incorrect HK vs Luxembourg domicile, is my tax assessment in the previous post (comparing a US domiciled one to a Luxembourg domiciled all world ETF, based on $100k investment and average 2% dividend yield) correct?

It seems the simple path for JamesHongKong is:
- IB account: probably good choice.
- db x-trackers: domiciled in Luxembourg, so good choice in terms of low cost and tax aspect.
- Vanguard HK ETF's: not sure.... Here is the website: https://www.vanguard.com.hk/portal/inve ... tments.htm
I checked the fact sheets and did not see any reference to its domicile. Would you know if it is HK domiciled?
TedSwippet
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

oneleaf wrote:... is my tax assessment in the previous post (comparing a US domiciled one to a Luxembourg domiciled all world ETF, based on $100k investment and average 2% dividend yield) correct?
Probably close enough. The non-US components of the dividend might get different levels of withholding from their own countries for US versus non-US domiciled ETFs, but that's going to be in effect incalculable. And because the US is more than half of a world fund overall the US withholding tax part is going to dominate anyway.

Beside all of this, the US estate tax is a strong message to non-resident aliens who do not live in one of the countries that has an estate tax treaty with the US to stay well away from US domiciled ETFs.
oneleaf wrote:It seems the simple path for JamesHongKong is:
- IB account: probably good choice.
Probably. Several other non-US posters here have reported good experiences with them.
oneleaf wrote:- db x-trackers: domiciled in Luxembourg, so good choice in terms of low cost and tax aspect.
Either Luxembourg or Ireland. Either is good. Both are popular domiciles for non-US ETFs, and with good reason.
oneleaf wrote:- Vanguard HK ETF's: not sure.... Here is the website: https://www.vanguard.com.hk/portal/inve ... tments.htm
I checked the fact sheets and did not see any reference to its domicile. Would you know if it is HK domiciled?
Vanguard is oddly coy about where these HK funds are domiciled. I guess a quick phone call or email would clear that up, though. The other option is Vanguard UK's Ireland-domiciled ETF range, readily purchased in London and on a handful of other EU exchanges.
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JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Here is my understanding:
Let's say 2% dividend yield on average for all countries.
On $100k investment, that is $2k annually.
The All World ETF is 60% US (since it is dev market only and no emerging market)
$1200 of the $2000 dividend yield comes from the US.
15% of that goes to US taxes, so you pay $180.

My understanding of TedSnippet's post is that if this ETF is US domiciled, you would pay 30% on the entire $2k, which would be $600.
Ted and Oneleaf - thank you both for that information, it's really helpful.

From the information you have provided (Ted), am I right therefore in assuming if I open a brokerage account with IB here in Hong Kong and trade in the DB ETFs (domiciled in Luxembourg) that I will not be liable to pay a US dividend tax at all?

That's pretty much the last bit of information I need before I go ahead. I'm structuring a couple of ideas with regards to portfolios as outlined below:

Simple Portfolio

HK: 3019 X DBMSCIWORLD - 60%
HK: 3009 X DBMSCIEM - 12%
HK: 2800 TRACKER FUND (for Hang Seng Index) - 8%
HK: 2819 ABF Hong Kong Bond Index Fund - 20%

The bond side needs more research but that is just an initial example which seems well rounded and safe for the HK market.

Expanded Portfolio

HK: 3101 Vanguard FTSE Developed Europe Index ETF - 20%
HK: 3126 Vanguard FTSE Japan Index ETF - 16%
HK: 3009 X DBMSCIEM - 12%
HK: 3020 X DBMSCIUSA - 24%
HK: 2800 TRACKER FUND (for Hang Seng Index) - 8%
HK: 2819 ABF Hong Kong Bond Index Fund - 20%

This one is perhaps unnecessarily more complicated than I perhaps need but if someone has a particular thought as to why it is a better option for me, please feel free to chime in.

From the 2nd grader book, I also did like the idea of having a whole world REIT ETF alongside perhaps a Precious Metals one too - I may add these at a later date though and I would probably go for the simple portfolio in that case.

Going to have a play with the IB demo account at some point and really look into the bond side of things also.

James
leonard
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Re: New to Investing, Based in Hong Kong

Post by leonard »

Do you have access to any sort of tax advantaged accounts that have annual contribution limits?

If so, you will not want to wait until January 2015 to get started, because you might miss out on 2014 limits.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
Topic Author
JamesHongKong
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Re: New to Investing, Based in Hong Kong

Post by JamesHongKong »

Do you have access to any sort of tax advantaged accounts that have annual contribution limits?

If so, you will not want to wait until January 2015 to get started, because you might miss out on 2014 limits.
I'm not too sure this applies to the HK market - the tax on investments is pretty much zero and income taxes are low - I will have a look into it though but may be lucky enough to not have this as an issue to worry about!
BritAbroad
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Re: New to Investing, Based in Hong Kong

Post by BritAbroad »

Hi James, I'm in a very similar position to you... 30 years old, Brit living in Hong Kong. I've been investing for three or four months now using a combination of a UK ISA, HSBC monthly investment plan and Interactive Brokers for ETFs. I often get phonecalls from financial advisors and similarly have not been impressed. If you fancy having someone to bounce ideas off (I think I'd find it useful) let me know, I'm in the Olympic area. Chris
HurdyGurdy
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Re: New to Investing, Based in Hong Kong

Post by HurdyGurdy »

James, as a British subject, why not invest using UK institutions? http://www.bogleheads.org/wiki/UK_investing (if you have considered and rejected it, please tell us your reasons).
TedSwippet
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Re: New to Investing, Based in Hong Kong

Post by TedSwippet »

JamesHongKong wrote:...am I right therefore in assuming if I open a brokerage account with IB here in Hong Kong and trade in the DB ETFs (domiciled in Luxembourg) that I will not be liable to pay a US dividend tax at all?
To be pedantic, the ETF itself will internally(*) pay 15% US dividend tax on your behalf (only on dividends it receives from US stocks), and you will then have nothing more to pay personally.

(*) To be really pedantic, the ETF will receive dividends from the US stocks it holds with 15% already withheld by whatever US stock trader or clearing system it chooses to use. The effect is that you receive 85% of the dividend paid by US stocks.

You should confirm this elsewhere though before committing. Remember that I'm just some random bloke on the internet, and no more to be trusted than any other stranger. In particular, while I don't live in the US I also don't live in HK, so most of what I know revolves around the dangers of investing into the US from outside, rather than the particulars of investing into anywhere from HK.
HurdyGurdy wrote:James,... why not invest using UK institutions?
Not James, but I'll jump in and take a stab. Thanks to ever increasing layers of regulation and bureaucracy from governments around the world, UK brokers and fund managers are increasingly unwilling to take clients who are not UK residents. They're not alone; US brokers are behaving likewise.
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