Need help in choosing online broker for non-US citizen

Have a question about your personal investments? No matter how simple or complex, you can ask it here.

Need help in choosing online broker for non-US citizen

Postby Quarantine » Tue Feb 01, 2011 8:57 am

After researching for days for online brokers that support non-US citizens, I have narrowed down my selections to a few online discount brokers (if this isn't a good idea for some reason, let me know!). Since index funds (subset of mutual funds) are only applicable to the Bogleheads philosophy (if I got that right) which I intend to follow closely, I'll be listing only the relevant points.

I'm very new to investing, much less investing in index funds, so do bear with me and my rather deficient knowledge.

1) Trademonster
- Mutual Funds: $15 to Buy; $0 to Sell

An online review (that may or may not be biased to Trademonster) stated:

"I never remember hearing about a broker charge $0 to sell a security unless it was related to stock trading. TradeMonster must be one of the only discount brokers to offer $0 mutual funds trades to its clients. Imagine buying Mutual Funds through TradeKing or Etrade, and having to pay 2 commissions just to buy and sell. You can make double the trades with TradeMonster and still break even compared to most competitors."


What does this mean exactly? Compared to Zecco below, would Trademonster be better in terms of fees?

There are no inactivity fees with Trademonster. But there's a $2000 minimum opening account balance requirement - which I think I would be able to fulfill.

2) Zecco
- Mutual Funds: $10 per transaction (both buy and sell)

I'm personally attracted to Zecco because it doesn't require any minimum amount to open an account, and it has also no inactivity fees for someone who just wants to buy and hold and will do minimal buying/selling throughout a year.

I'd also thought of investing directly with Vanguard (whose index funds I plan to invest in), but apparently they charge $35 for mutual funds and there's a "$20 annual maintenance fee for regular accounts with less than $50,000".

I'd appreciate your insights and comments!
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby lazyday » Tue Feb 01, 2011 9:33 am

Will you be using a non-U.S. mailing address?

I'm a U.S. citizen, so have not tried to find a broker that allows non U.S. citizens, or accounts from outside the U.S.

But I have noticed that financial companies became more restrictive after 9/11/2001, to avoid movement of terrorist money. This might make things harder for some people.

If I am correct, then your first task might be to find which brokers would allow you to be a customer, before choosing the cheapest or best service broker.
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Postby Quarantine » Tue Feb 01, 2011 10:07 am

Both Trademonster and Zecco do allow non-US investors to open an account with them (although with slightly more hassle as I'd have to fax a lot of documents over, but that's to be expected), which was why I narrowed my selection down to the both of them. (Maybe there are other online brokerage firms that support non-US investors, but these two are the ones I'm aware of at the moment).

And yes, I will be using a non-US mailing address.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby lazyday » Tue Feb 01, 2011 10:48 am

OK, glad you've already checked that. :)

I hope some people in a situation like yours will comment, but if you find a broker that will allow you as a customer, I think you will be able to buy index ETFs. I am not sure about traditional mutual funds.

For example, Vanguard has the fund "Total World Stock Index" which can either be bought as:
VTSWX, the traditional mutual fund, or
VT, an ETF

For non-US citizens, outside the US, I believe that Vanguard does not allow direct customers to purchase the traditional mutual fund version, VTSWX.
I do not know if a broker allows purchase of VTSWX (outside US). If not, the ETF, VT, is probably a good choice.
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Re: Need help in choosing online broker for non-US citizen

Postby lazyday » Tue Feb 01, 2011 10:51 am

Quarantine wrote:An online review (that may or may not be biased to Trademonster) stated:

"I never remember hearing about a broker charge $0 to sell a security unless it was related to stock trading. TradeMonster must be one of the only discount brokers to offer $0 mutual funds trades to its clients. Imagine buying Mutual Funds through TradeKing or Etrade, and having to pay 2 commissions just to buy and sell. You can make double the trades with TradeMonster and still break even compared to most competitors."


What does this mean exactly?

The person seems surprised that it is free to sell traditional mutual funds at Trademonster. And since you can sell free, that means if you buy and sell at that broker, your total fee ($15 + $0) for the buy and sell combined, is less than at some other brokers.
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Re: Need help in choosing online broker for non-US citizen

Postby lazyday » Tue Feb 01, 2011 11:01 am

Quarantine wrote:Need help in choosing online broker

I've seen mixed (good and bad) reviews of Zecco, and haven't heard of Trademonster.

I have heard good reviews of Fidelity, Schwab, and Vanguard. And for over $25,000, Wells Fargo "Wellstrade". I don't know if any of those allow non-US accounts.

By the way, Fidelity charges $75 to purchase a traditional mutual fund, and $0 (free) to sell.

If you have over $25,000 at Wellstrade, with the right kind of account, then it is free to buy and sell both ETFs and traditional mutual funds.

If trading costs are a big concern, and the account is less than $25,000, then another broker to consider might be TD Ameritrade, because they allow free trading of some Vanguard ETFs. Other ETFs not on their list for free trades cost about $10 to buy or sell.
Again, I don't know if they will allow you as a customer.

In case you haven't already seen it, a good site for discussion of brokers:
http://boards.fool.com/discount-brokers-100146.aspx
If that link doesn't work, at fool.com click on
Boards
and then click
Financial Products & Services
and then click
Discount Brokers
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Postby TedSwippet » Tue Feb 01, 2011 11:06 am

Before opening a US based brokerage account, make certain that holding US mutual funds or ETFs makes sense for your own personal tax situation. US brokerages and US funds are (no surprise here) designed to make best use of the tax regime in the US. They may be appropriate for you too, or maybe not.

Watch out especially for local harsh tax treatment of "offshore" funds, US tax on dividends, and the US estate tax. This last one is especially nasty, as it applies to the balance of any US holdings above $60k. See if you are able to use (non-US) accumulating funds to avoid paying either US or local dividend taxes.

Can you open a local brokerage account and use that to trade US stocks? If yes, and if Vanguard ETFs are still the right answer for you, this would at least avoid difficulties opening a US brokerage account from outside the US.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Re: Need help in choosing online broker for non-US citizen

Postby lazyday » Tue Feb 01, 2011 11:15 am

Quarantine wrote:I'd also thought of investing directly with Vanguard (whose index funds I plan to invest in), but apparently they charge $35 for mutual funds and there's a "$20 annual maintenance fee for regular accounts with less than $50,000".

The $35 fee is for funds from companies other than Vanguard. There is no fee if buying or selling a Vanguard traditional mutual fund, except for when trading too frequently, or with just a couple of funds like the international small cap, which has a small trading fee, which is added into the fund assets to make up for costs from your trade. That would happen even if you bought the same traditional mutual fund from a broker.

The $20 annual fee can be avoided if you choose email instead of paper mailings.

However, from posts I've seen in the past, I would be surprised if Vanguard would allow a non-US citizen from overseas to buy traditional mutual funds directly. You can try though, I might be wrong.
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Postby rob » Tue Feb 01, 2011 11:19 am

I would avoid funds like the plague..... There are too many tax traps for that in a lot of countries [They can be treated as offshore trusts and that is a mess - even simple stuff like different financial year cutoffs are a hassle but a number of countries (including the US) basically assume your trying to cheat the tax system]....

ETF's should be ok since they are most likely treated as any other stock.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
User avatar
rob
 
Posts: 1762
Joined: Mon Feb 19, 2007 7:49 pm
Location: Here

Postby lazyday » Tue Feb 01, 2011 11:23 am

rob wrote:ETF's should be ok since they are most likely treated as any other stock.

Kind of funny, because many if not most ETFs are open end mutual funds. :)

Makes life easier though.
lazyday
 
Posts: 1963
Joined: Wed Mar 14, 2007 11:27 pm

Postby TedSwippet » Tue Feb 01, 2011 12:15 pm

rob wrote:ETF's should be ok since they are most likely treated as any other stock.


ETFs can be tricky in some places. UK, for example.

http://www.ft.com/cms/s/2/bbf1d820-8b7e-11df-ab4d-00144feab49a.html#axzz1CirF8xtb

Wealth managers and analysts warn that most ETFs listed on US or European exchanges, and up to a quarter of the few hundred listed on the London Stock Exchange (LSE), do not have “distributor” or “reporting” status, so creating a significant tax disadvantage for UK investors.

Without this designation, gains from ETFs are taxed as income in the hands of investors, rather than the less-penal capital gains tax (CGT) rates of 18 or 28 per cent which normally apply to investment funds and shares.
Last edited by TedSwippet on Tue Feb 01, 2011 1:11 pm, edited 1 time in total.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Quarantine » Tue Feb 01, 2011 12:51 pm

In case you haven't already seen it, a good site for discussion of brokers:


Thanks! Haven't seen it before, will look into it. :)

Can you open a local brokerage account and use that to trade US stocks? If yes, and if Vanguard ETFs are still the right answer for you, this would at least avoid difficulties opening a US brokerage account from outside the US.


Actually there's one local broker that does cross-border training, but unfortunately there are exorbitant charges involved and it's much cost-efficient to open an account directly with a US broker.

The $35 fee is for funds from companies other than Vanguard. There is no fee if buying or selling a Vanguard traditional mutual fund, except for when trading too frequently, or with just a couple of funds like the international small cap, which has a small trading fee, which is added into the fund assets to make up for costs from your trade. That would happen even if you bought the same traditional mutual fund from a broker.

The $20 annual fee can be avoided if you choose email instead of paper mailings.

However, from posts I've seen in the past, I would be surprised if Vanguard would allow a non-US citizen from overseas to buy traditional mutual funds directly. You can try though, I might be wrong.


Oh I didn't know that! I'll see if Vanguard allows non-US citizens to buy mutual funds directly from them, but I won't hold my breath lol.

I would avoid funds like the plague..... There are too many tax traps for that in a lot of countries [They can be treated as offshore trusts and that is a mess - even simple stuff like different financial year cutoffs are a hassle but a number of countries (including the US) basically assume your trying to cheat the tax system]....


I'll definitely have to look into that and see if I'll run into any problems with our local tax laws.

As for other taxation concerns, Malaysia doesn't have a capital gains tax (except for real property gains) and I did some quick googling to confirm that - sorry I didn't put this up in my opening post! Also for foreign investors in the US markets, there's a 30% withholding tax, but my googling research tells me that I need to file a W8-BEN with my US broker to negate that. I was also on a Live Chat with a Zecco representative who confirmed that.

But between both Zecco and Trademonster, judging solely by the fees they charge to buy/sell mutual funds - which would you choose? I'm not knowledgeable enough to know if it's an advantage to be able to sell mutual funds for free but pay a little more to buy into a mutual fund (Trademonster) or be charged $10 to either buy/sell a fund (Zecco).
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby Quarantine » Tue Feb 01, 2011 1:01 pm

rob wrote:ETF's should be ok since they are most likely treated as any other stock.


I actually haven't considered ETFs prior to this since I know almost nothing about it, but after doing some bit of reading on the Net.. now I'm not sure if I should buy ETFs instead since most of them track indexes just like.. index funds?

Oh decision, decision.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby TedSwippet » Tue Feb 01, 2011 1:25 pm

Quarantine wrote:...Also for foreign investors in the US markets, there's a 30% withholding tax, but my googling research tells me that I need to file a W8-BEN with my US broker to negate that. I was also on a Live Chat with a Zecco representative who confirmed that.


Are you certain? The W8-BEN reduces US withholding to treaty rates only where there's a tax treaty in force between the US and the other country. According to

http://www.irs.gov/businesses/internati ... 39,00.html

there isn't US/Malaysia tax treaty. In which case the US would tax your dividends at 30%. And even treaty countries usually don't get the US tax reduced below 15%.

Personally I wouldn't rely on a Zecco live chat representative for international tax advice.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Re: Need help in choosing online broker for non-US citizen

Postby Lucio » Tue Feb 01, 2011 1:41 pm

Etrade has a Singapore office.

I would not do business with a broker that does not have a local presence (or relatively local, as in the case of Singapore). Preferably, a broker in a well-regulated domicile.

You may save a little money by doing business with a foreign discount broker only to incur much greater tax or opportunity costs in the future. Consider the problems that a Malaysian investor may have experienced during 1998. For how long was the ringgit inconvertible? What would capital controls do to your investments? The reverse is also possible: your foreign held funds are held up by some crisis or another.

Good luck.

Lucio
Lucio
 
Posts: 286
Joined: Wed Apr 08, 2009 11:31 pm

Postby Quarantine » Tue Feb 01, 2011 1:46 pm

TedSwippet wrote:
Quarantine wrote:...Also for foreign investors in the US markets, there's a 30% withholding tax, but my googling research tells me that I need to file a W8-BEN with my US broker to negate that. I was also on a Live Chat with a Zecco representative who confirmed that.


Are you certain? The W8-BEN reduces US withholding to treaty rates only where there's a tax treaty in force between the US and the other country. According to (link)

there isn't US/Malaysia tax treaty. In which case the US would tax your dividends at 30%. And even treaty countries usually don't get the US tax reduced below 15%.

Personally I wouldn't rely on a Zecco live chat representative for international tax advice.


Ouch didn't know that - guess I'm back to the start again.

Lucio wrote:Etrade has a Singapore office.

I would not do business with a broker that does not have a local presence (or relatively local, as in the case of Singapore). Preferably, a broker in a well-regulated domicile.

You may save a little money by doing business with a foreign discount broker only to incur much greater tax or opportunity costs in the future. Consider the problems that a Malaysian investor may have experienced during 1998. For how long was the ringgit inconvertible? What would capital controls do to your investments? The reverse is also possible: your foreign held funds are held up by some crisis or another.

Good luck.

Lucio


That is true, guess I'll re-visit that option and research into it.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby Quarantine » Tue Feb 01, 2011 2:16 pm

Also putting this question out there, if I'll be subjected to a 30% dividend and "short-term capital gains" tax by investing directly in US mutual/index funds, would it make any monetary sense to invest in US index funds at all? If not, what other alternatives would I have?

To quote the IRS:

There is no 30% tax on certain interest-related dividends from sources within the United States that you receive from a mutual fund or other regulated investment company. The mutual fund will designate in writing which dividends are interest-related dividends.


Does anyone know what this means.. in layman's words?
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby TedSwippet » Tue Feb 01, 2011 3:00 pm

Quarantine wrote:Also putting this question out there, if I'll be subjected to a 30% dividend and "short-term capital gains" tax by investing directly in US mutual/index funds, would it make any monetary sense to invest in US index funds at all?


Only if the cost of your local alternatives is more than total tax drag the US places on your investments. You may be able to offset some of the US taxes against your own local taxes. Then again, maybe not.

Quarantine wrote:If not, what other alternatives would I have?

To quote the IRS:

There is no 30% tax on certain interest-related dividends from sources within the United States that you receive from a mutual fund or other regulated investment company. The mutual fund will designate in writing which dividends are interest-related dividends.


Does anyone know what this means.. in layman's words?


I'll take a stab. A dividend from a money market fund would be 100% interest-related. A dividend from a stock index fund that is fully invested in shares would be 0% interest-related. A dividend from a mixed fund, target retirement say, would be somewhere between.

What the IRS is probably trying to say here is that if some part of your fund dividend comes from interest on cash rather than dividends from shares, they won't tax that part. You're planning to buy stock index funds, so this won't help you.

In practice many funds don't bother to report the percentage because they have few if any non-resident holders.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Quarantine » Wed Feb 02, 2011 12:00 am

TedSwippet wrote:Only if the cost of your local alternatives is more than total tax drag the US places on your investments. You may be able to offset some of the US taxes against your own local taxes. Then again, maybe not.


I'm not exactly sure how to compare and calculate the cost of investing in local index funds vs US funds.. so tell me if this isn't the right way:

Local index funds
There are two so-called "index funds" in Malaysia that I'm aware of.

Public Index Funds (PIX) - initial buy-in fee of 5.5% and an annual management fee of 1.5%. This doesn't sound like a low-cost index fund at all.

OSK-UOB KLCI Tracker - 1% buy-in charge, a 1% redemption charge and most importantly a 1.5% annual management fee. Slightly cheaper than PIX but the costs are still high.

There are NO capital gains tax or dividend taxes in Malaysia.

US index funds
I'll just take one for comparison sakes:

Vanguard 500 Index Fund - no purchase or redemption fees and an annual management fee of only 0.15%.

There is a 30% withholding tax on dividends for foreign investors like me.

--

So in summary, it's expensive to invest in local index funds (which has only TWO, a very miserable amount compared to the robustness and variety in the US) but there's no capital gains tax.

It's extremely cheap to invest in US index funds like Vanguard, but there's a 30% withholding tax on dividends.

Can you point me to the right direction as to how I can compare and calculate the costs, especially that pertaining to the 30% withholding tax?
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby rob » Wed Feb 02, 2011 12:10 am

TedSwippet wrote:ETFs can be tricky in some places. UK, for example

Oh yeah for sure ETF's are not a panacea..... Like I say "most likely"..... International tax issues are a real PITA and different by country and treaty.
| Rob | Its a dangerous business going out your front door. - J.R.R.Tolkien
User avatar
rob
 
Posts: 1762
Joined: Mon Feb 19, 2007 7:49 pm
Location: Here

Postby Quarantine » Wed Feb 02, 2011 12:31 am

I saw an article about ETFs (not sure if it's applicable to mutual funds as well), and this part is of interest:

US-domiciled ETFs are subject to withholding tax of 30 per cent on dividends, reduced to 15 per cent for investors filing a W-8BEN form.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby Quarantine » Wed Feb 02, 2011 1:58 am

Since I can't read Chinese and this is sourced from a Taiwanese blog post (source: greenhornfinancefootnote [dot] blogspot [dot] com/2007/08/withheld-tax-considered-as-fund-costs.html), here's a Google Translate version - see if you guys can make sense of it and his calculations?:

For comparison in this article, I will deliberately put U.S. financial products based on the unfavorable comparison. In other words, the dividend will be taxable U.S. registered funds are taken into account, as the cost of a Fund (Fund expense), tax increases and then the formation of the Fund's own expenses the total cost, direct and domestic sale of foreign fund managers costs compared.

Readers will be able to see, even in such an unfair basis for comparison, the United States registered fund is still a significant advantage. If the offshore funds sold in Taiwan itself, the taxation of dividends by a foreign government has taken into consideration, that the offshore fund will lose even more. Offshore fund lost the biggest reason is that the manager of 1.5% of this fee is too high.

So we take a look at the stock market's dividend yield is now international (Dividend yield) is very high. Global stock markets, we can divide it into four blocks, namely the United States, Europe, Asia-Pacific mature markets and emerging markets.

I invest with Vanguard index funds in these areas interest rate to estimate the distribution. (Index-type funds with interest, dividends, capital gains and not the ingredients.) Based on June 30, 2007 are as follows: Investment American Vanguard Total Stock Market Index Fund dividend yield of 1.62%, investment in Europe Vanguard European Stock Index Fund dividend yield of 2.57%, the investment market in the Asia-Pacific mature Vanguard Pacific Stock Index Fund 2.17% dividend yield, investment in emerging markets Vanguard Emerging Stock Index Fund 1.67% dividend yield. (Note: The best way, should be used to index itself Dividend yield is calculated, rather than index-based funds with interest rate calculation. Because the fund with Faji investors, is already used by Governments tax Hou benefits. but I did not major area source Index Dividend yield. so the use of this alternative algorithm.)

We do not understand the foreign governments take the dividend yield on the number of classes. 30% of the U.S. government seems quite heavy, we will use the class to estimate 30% of this figure. So, being deprived of 30% of tax is 30% of these dividends, we can arrange them into the table below.

-image removed because apparently I still can't post images yet. what a bummer. To replicate the table to the best of my ability (or you can look it up from the link above):

Index name | 2007 dividend yield | Dividend multiplied by 30%
VTSMX | 1.62% | 0.486%
VEURX | 2.57% | 0.771%
VPACX | 2.17% | 0.651%
VEIEX | 1.67% | 0.501%

The first row of the table was translated to me by a friend.

This tax rate will be as long as placement classes, so we can put it as a continuing cost of investment to the same fees and fund managers, to an annual expenditure.

We multiplied by 30% of the value of dividends plus the proportion of the Fund's total annual cost to the formation of the fund's costs. To the index funds as an example.

Index name | Dividend multiplied by 30% | Overall exp.* | Overall cost of dividend withholding tax*
VTSMX | 0.486% | 0.19% | 0.676%
VEURX | 0.771% | 0.27% | 1.041%
VPACX | 0.651% | 0.27% | 0.921%
VEIEX | 0.501% | 0.42% | 0.921%

*My friend wasn't sure what these mean, but he thinks that they both (the categories with the asterisks) mean, respectively, "the year's overall expenditure" and "the year's overall cost"

If you bought through overseas brokers, not the index funds, the higher the total cost of moving funds active, you can replace the other figures the annual total cost and they can calculate the cost.

We can see that, after tax plus 30%, the highest annual total cost of the investment funds in Europe, more than 1% of the number. The lowest was in U.S. funds, only 0.676 percent. These figures are all less than the domestic sale, investment in these areas the most common overseas fund manager fees, 1.5%.


Some of the translation done by Google is unclear at best, but I think a rough gist of the text can be understood.

I'd appreciate it if you guys could explain his calculations and tables to me so I'd be able to replicate what he has done as well and see if it's still more advantageous for me to invest in US index funds, even with the 30% withholding tax.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby TedSwippet » Wed Feb 02, 2011 5:39 am

The article's saying that the effective annual expense of holding a US based fund is the actual fund's annual expense plus 0.3 times the fund's dividend (the 30% lost to US taxes). So if a fund charges 0.5% annually and pays 3% in dividends, it will cost 0.5%+0.9% = 1.4% to own it.

You can use that figure to compare against alternatives that aren't subject to US taxes. Or if you're considering funds from other countries that would also tax your dividends, you can repeat this with that country's dividend tax rate.

Remember that your options are not just either Vanguard or PIX/KLCI. Look at EU domiciled funds and ETFs to see if you can find things that track the indexes you are interested in but which don't have US tax issues. There are index ETFs in the EU with annual charges around or below 0.25%.

Consider what might happen to your funds in the future. The US applies its estate tax to anything held by foreigners who die holding US sited assets -- funds, stock, real estate. Foreigners get a $60k exemption, but the US could take 18-35% of the remainder in tax. Die with $1M in US investments and you could be looking at a US tax bill in excess of $250k. If you give your US assets to a (non-US) relative or friend you might even be liable for US gift taxes.

Finally, as if this was not bad enough already, FATCA is scheduled to start applying 30% withholding of the gross sale proceeds of stock and fund sales by foreigners, starting at the end of next year. It's withholding, not actual tax, so you should be able to get it back, but not without some considerable delay and likely difficulty.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Quarantine » Wed Feb 02, 2011 11:42 am

TedSwippet wrote:The article's saying that the effective annual expense of holding a US based fund is the actual fund's annual expense plus 0.3 times the fund's dividend (the 30% lost to US taxes). So if a fund charges 0.5% annually and pays 3% in dividends, it will cost 0.5%+0.9% = 1.4% to own it.

You can use that figure to compare against alternatives that aren't subject to US taxes. Or if you're considering funds from other countries that would also tax your dividends, you can repeat this with that country's dividend tax rate.

Remember that your options are not just either Vanguard or PIX/KLCI. Look at EU domiciled funds and ETFs to see if you can find things that track the indexes you are interested in but which don't have US tax issues. There are index ETFs in the EU with annual charges around or below 0.25%.

Consider what might happen to your funds in the future. The US applies its estate tax to anything held by foreigners who die holding US sited assets -- funds, stock, real estate. Foreigners get a $60k exemption, but the US could take 18-35% of the remainder in tax. Die with $1M in US investments and you could be looking at a US tax bill in excess of $250k. If you give your US assets to a (non-US) relative or friend you might even be liable for US gift taxes.

Finally, as if this was not bad enough already, FATCA is scheduled to start applying 30% withholding of the gross sale proceeds of stock and fund sales by foreigners, starting at the end of next year. It's withholding, not actual tax, so you should be able to get it back, but not without some considerable delay and likely difficulty.


Thanks for the explanation Ted! Investing in the US as a foreigner looks less and less appealing by day because of all these taxes - it's funny that they're literally trying to drive away genuine foreign investors instead of encouraging them.

I'll look into these EU domiciled funds - thanks! Actually, I should also probably see if there are any online EU discount brokers that accept foreign investors or not too.

Are there any other investment sites that cater to EU audience/domiciled funds? I discovered monevator [dot] com which seems to be a good start, but just wondering if you know of any others.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby Lucio » Wed Feb 02, 2011 11:51 am

Quarantine wrote:I'll look into these EU domiciled funds - thanks! Actually, I should also probably see if there are any online EU discount brokers that accept foreign investors or not too.

Are there any other investment sites that cater to EU audience/domiciled funds? I discovered monevator [dot] com which seems to be a good start, but just wondering if you know of any others.


Look around for UCITS funds available in Malaysia or Singapore.

Lucio
Lucio
 
Posts: 286
Joined: Wed Apr 08, 2009 11:31 pm

Postby Quarantine » Wed Feb 02, 2011 12:26 pm

Lucio wrote:
Quarantine wrote:I'll look into these EU domiciled funds - thanks! Actually, I should also probably see if there are any online EU discount brokers that accept foreign investors or not too.

Are there any other investment sites that cater to EU audience/domiciled funds? I discovered monevator [dot] com which seems to be a good start, but just wondering if you know of any others.


Look around for UCITS funds available in Malaysia or Singapore.

Lucio


Are they hedge funds Lucio?

Also Ted, I tried searching for online UK brokers that accept foreign investors but couldn't find any. :/

I feel like I'm at my wits end trying to invest in a low-cost broad-based index fund. Since my initial investment would be just $10k, maybe I should worry about the estate tax later? >_<

Currently contemplating if I should just invest in my American partner's name instead.
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby TedSwippet » Wed Feb 02, 2011 12:51 pm

Quarantine wrote:Also Ted, I tried searching for online UK brokers that accept foreign investors but couldn't find any. :/


Why do you need a UK broker here? What you need is a local broker who will give you access to EU exchanges. Much simpler to manage and maintain.

Note that you can buy EU funds that track the S&P 500 index. Using EU funds rather than US ones doesn't mean you don't invest in the US, just that you do it indirectly, which gives you added protection from US tax laws.

And at the risk of jumping in ahead of Lucio here... UCITS is just a way to indicate funds that meet the regulations for being sold across the whole of the EU. A sort of EEC "seal of approval", if you like. Nothing at all to do with hedge funds.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Quarantine » Wed Feb 02, 2011 1:23 pm

TedSwippet wrote:Why do you need a UK broker here? What you need is a local broker who will give you access to EU exchanges. Much simpler to manage and maintain.

Note that you can buy EU funds that track the S&P 500 index. Using EU funds rather than US ones doesn't mean you don't invest in the US, just that you do it indirectly, which gives you added protection from US tax laws.

And at the risk of jumping in ahead of Lucio here... UCITS is just a way to indicate funds that meet the regulations for being sold across the whole of the EU. A sort of EEC "seal of approval", if you like. Nothing at all to do with hedge funds.


There's only one online Malaysian broker here that does cross-border trading (itradecimb dot com dot my), and even so, they only have access to the Singapore Stock Exchange, HKSE, NYSE, and the NASDAQ. No EU exchanges. :(

Actually I'm not even sure if they have access to overseas mutual funds - it looks like all they're concentrating on is foreign stocks and ETFs.

About the UCITS funds, ah I see.. I tried googling for such funds sold here and could only find some Islamic UCITS funds domiciled in Dublin that were sold recently. But they don't seem like index funds to me. :/

I don't know if I'd accumulate up to $60k in index funds atm since I only have about $10k to spare (to do dollar-cost averaging would open a whole new can of worms since I'll prolly only get to invest maybe $300 each time, and the online broker's charge of $10-15 each time would definitely eat a chunk of it).

I dunno, I'm close to throw in the towel. >_< Maybe I should just start with Zecco and think of plans in the future when I'm close to the $60k mark. The withholding tax is inevitable I suppose - but things (policies, taxes) might change 10 years down the line since this is a long-term investment?

Curious, with Vanguard index funds.. do they automatically reinvest the dividend for you, or does this lie in the hands of the broker we choose?
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby TedSwippet » Wed Feb 02, 2011 2:18 pm

Quarantine wrote:There's only one online Malaysian broker here that does cross-border trading (itradecimb dot com dot my), and even so, they only have access to the Singapore Stock Exchange, HKSE, NYSE, and the NASDAQ. No EU exchanges. :(


So what about this? An S&P 500 index ETF that trades as I17 on the SGX:

http://sg.ishares.com/product_info/fund/overview/SGX/IVV.htm

Actually I'm not even sure if they have access to overseas mutual funds - it looks like all they're concentrating on is foreign stocks and ETFs.


But ETFs are funds. The beauty of them is that because they trade like stocks you can buy them much more easily than ordinary mutual funds (as you're discovering).

...to do dollar-cost averaging would open a whole new can of worms since I'll prolly only get to invest maybe $300 each time, and the online broker's charge of $10-15 each time would definitely eat a chunk of it


This is ETFs' Achilles heel. Better to wait until you have a decent sized chunk saved up and then invest in one go. Ideal DCA might be monthly or so, but going to quarterly or even annually should be fine in the long run.

And you may be able to find discounted broking. Even in the UK, not generally noted for cheap financial services, you can find trading as low as £1.50 (around US$2.25) if you accept being part of a bulk trade with no control over timing; not a problem at all for a buy and hold investor.
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby TedSwippet » Wed Feb 02, 2011 2:33 pm

Also, there's a list of ETFs available on the SGX here. It looks pretty comprehensive to me, with some decent choices. You could buy just one world index ETF and you'd be done.

http://portal.iocbc.com/download/etf/SGXetflist.pdf
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Lucio » Wed Feb 02, 2011 2:34 pm

Quarantine wrote:Actually I'm not even sure if they have access to overseas mutual funds - it looks like all they're concentrating on is foreign stocks and ETFs.


Good enough.

Try these Singapore and Malaysia listed ETFs:
Code: Select all
ISIN            Name
LU0455009851    db x-trackers MSCI World Index
FR0010446914    Lyxor MSCI World
MYL0800EA002    ABF Malaysia Bond Index
MYL0820EA000    FTSE Bursa Malaysia
MYL0822EA006    CIMB FTSE ASEAN 40 Malaysia


The ISINs that begin with "MY" are Malaysian. The "LU" refers to Luxembourg, while "FR" is France. More or less, this tells you which country's regulatory and tax scheme will apply to the funds.

That gives you options for non-Malaysia stock, domestic stocks and one domestic bond fund. If you want foreign bonds, I would use a US dollar denominated bank account at a reputable international bank (i.e., use cash dollars instead of bonds, but don't hold them at MayBank or the like).

The Lyxor and db x-trackers use swaps (derivatives) for a portion of the portfolio; they do not fully replicate the index by owning all of the stocks. This adds some additional risk, but it seems like your best option at the moment.

The iShares fund that Ted Swippet helpfully found may cause problems: it's a Singapore listing of a US domiciled fund. That may or may not cause you USA tax trouble.

Lucio
Lucio
 
Posts: 286
Joined: Wed Apr 08, 2009 11:31 pm

Postby TedSwippet » Wed Feb 02, 2011 2:57 pm

Lucio wrote:The iShares fund that Ted Swippet helpfully found may cause problems: it's a Singapore listing of a US domiciled fund. That may or may not cause you USA tax trouble.


Thanks for picking that up. The iShares I'm used to are all domiciled in Ireland or elsewhere in the EU. Plainly this one is less suitable than the EU ones found on the SGX.

The general rule then would be: avoid US brokers, US mutual funds, US domiciled ETFs, and US exchanges. Does that about cover it?!
TedSwippet
 
Posts: 739
Joined: Mon Jun 04, 2007 5:19 pm

Postby Quarantine » Wed Feb 02, 2011 6:48 pm

I can't thank you guys enough for all these wonderful suggestions. I can't look into them in detail just yet as I'm in a hurry to leave on a short vacation, so I'll go through them when I'm back.. or if I can get a good Internet connection in my hotel. :)

I also discovered this blog post yesterday - it's about Singapore, but I think it would apply to me as well (again I only skimmed through it): andrewhallam [dot] com/2010/10/singaporeans-investing-cheaply-with-exchange-traded-index-funds/
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Postby Quarantine » Thu Feb 03, 2011 10:25 am

TedSwippet wrote:The general rule then would be: avoid US brokers, US mutual funds, US domiciled ETFs, and US exchanges. Does that about cover it?!


Oh le sigh, I wish our local markets are more developed and therefore could offer better and cost-efficient financial products.

Curious - I've been reading many comments about how Malaysian and Singaporean ETFs have very low trading volume and thus are "unattractive". Would this low trading volume in the ETFs affect a buy-and-hold investment style, if any?
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia

Exempt from capital gains tax

Postby minion » Fri Aug 05, 2011 4:33 am

Hi, there.
I have been researching some informations on tax exemption. You can be exempt from U.S. tax only if your country has signed tax treaty with U.S. To my knowledge, none of the countries with 0% capital gain tax, has such a treaty with U.S.
So no Singapore, nor Malaysia residents can use W8-BEN form.
List of tax treaties can be found on IRS site. Sorry no www since I'm new member and forum don't allow posting such information.
minion
 
Posts: 9
Joined: Fri Aug 05, 2011 4:17 am

Postby Quarantine » Fri Aug 05, 2011 4:35 am

Thank you minion, much appreciated for the info!
Quarantine
 
Posts: 166
Joined: Mon Jan 31, 2011 7:29 am
Location: Malaysia


Return to Investing - Help with Personal Investments

Who is online

Users browsing this forum: 22twain, aorin, dcraider, Exabot [Bot], FreemanB, Google [Bot], knr143, RedDog14 and 73 guests