First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

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Happydad
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First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Happydad » Mon Aug 20, 2018 6:50 am

Hello
I live and work in Switzerland and I've decided (finally) to better invest my savings. I plan to open an account with an online broker (probably IB, because of the small fees compared to Swiss brokers) and create a simple, long-term passive portfolio for retirement with ETFs. I'm really a beginner and I'd really like to get some advice from the community.
Some background information fon non-Swiss experts: Switzerland taxes dividends at 35%, but has no capital gain taxes. In case of US-domicilied funds, Switzerland has a tax treaty with the US that lowers the dividend tax withholding to 15%, which can be "discounted" in the Swiss tax declaration from the 35%. I've also done some research and it seems that I don't have to worry about US estate tax until a few millions, because of the CH-US estate treaty. Finally, currency exchange rates/fees seem to be reasonable with IB.
I’m considering “lazy” portfolios I found discussed in many places. FYI, my Swiss pension funds and some cash will remain out of this investment. At the moment, a “3 funds” type or a “Ferri’s core four” type portfolios make sense to me. I’m a very beginner, so I wouldn’t really modify anything without advice. However, most of the portfolios suggestions I've found are US-focused, so I'm wondering whether the suggested funds/mix need to be different for a Swiss resident or not.
I have a few questions and I'd appreciate your opinions:
1) I have a lump sump which I could invest right away. After that, every month/querter I could add the monthly savings from my salary. Is it reasonable to invest the lump sum all at once today and access the market quickly, or shall I dilute this investment over 1 year (dollar averaging cost)?
2) In Switzerland, would it make sense to adopt the ETF portfolios recommended in the US (and buying them in USD), or do I need to protect myself against currency fluctuations (I earn in CHF)? For example, a 3-fund portfolio I often saw recommended is:
– VTI – Vanguard Total Stock Market ETF (55-60% of the stock portion of the portfolio?);
– VXUS – Vanguard Total International Stock ETF (40-45% of the stock portion?) (or alternatively VEU?);
– BND - Vanguard Total Bond Market ETF (in case I need bonds in my mix on top of my local pension funds).
Does this portfolio need to be modified for Swiss investors? Is it ok in USD or is it better to have the International and/or the Bonds in CHF?
3) Would it be worth considering a small percentage into a 4th, real-estate ETF, such ans VNQ - Vanguard REIT ETF? In case, is it better to have a European one?

Thanks everone!

typical.investor
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by typical.investor » Mon Aug 20, 2018 11:36 pm

Hi and welcome!

Q1: Long term, lump sum is slightly better.! You don’t say your time line, nor how much. If a short term drop wouldnconcern you, and DCAing would help you get in, that’s what it’s there for.

Q2: Most people try to hold more of the currency they will spend in retirement. Understand that the currency in which the fund is denominated is irrelevant to currency exposure. If you buy an etf holding US stocks, you are holding USD. It doesn’t matter if you bought in CHF. The underlying holdings matter.

Anyway, you need US domiciled funds (traded on US exchanges) for US tax reasons, so probably have to buy in USD.

Q3: Total Market Funds will include REITS already so you wouldn’t need either one.

Schwab is another option. http://international.schwab.com/public/ ... intro.html

IB has a monthly trading fee below a certain amount and service is geared towards those who know how to trade already. IB is a good though...and often recommended but ... not sure if it still is an option.

Recent EU regulations made it impossible for brokers to offer the US domiciled funds you need. Not sure if IB is really an option anymore. Schwab is limited in accepting new customers because they are a US broker which means your country of residence decides if you can be their client. (Switzerland looks ok). That means they don’t follow EU rules completely and maybe can still offer US domiciled funds.

Please let us know what you find out. Once you know your broker and what they can offer, then you can decide on funds. Schwab has good ETFs but the international portion is in three ETF so slightly less convenient or a possible bonus if you tax loss harvest in taxable.
Last edited by typical.investor on Tue Aug 21, 2018 12:05 am, edited 1 time in total.

Kaktus
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Kaktus » Mon Aug 20, 2018 11:39 pm

Thats a heavy taxing of dividends! I would say you will have to read some litterature suitable for Swiss citizens. The different fees change the whole calculatuon for us who are not US citizens, compared to the standard recipees on Boglehead.
2 I do not worry about currency fluctuations. I worry about fees charged for exchanging currencies back and forth.
1 It depends on your personal, finaansial situation
3 To me this is curious. I see real estate as any other business. When you buy an index fund representing the whole stock market in a certain region or country it will include real estate corporations. So why complicate things. Is real estate in the US known to be a very safe business, run by only honest companies with very long term perspective?

Best of luck with your start up phase!

TedSwippet
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by TedSwippet » Tue Aug 21, 2018 6:09 am

Happydad wrote:
Mon Aug 20, 2018 6:50 am
I've also done some research and it seems that I don't have to worry about US estate tax until a few millions, because of the CH-US estate treaty.
I think you are probably right on this point, but before committing fully it may be worth taking the time for a close read of this article, just to be doubly certain that there really are no unexpected US estate tax landmines strewn across your intended path.
Happydad wrote:
Mon Aug 20, 2018 6:50 am
In Switzerland, would it make sense to adopt the ETF portfolios recommended in the US ...
A recent EU directive, PRIIPs, is making it hard-to-impossible for EU residents to buy US domiciled ETFs. While Switzerland isn't in the EU, it often adopts EU laws and regulations to participate in the EU single market, so maybe look into that for yourself.

If US domiciled ETFs are off the table for you for any reason then Vanguard's and/or iShares Ireland domiciled range of ETFs should do the job perfectly well. Potentially a touch less tax-efficient depending on your circumstances -- specifically, these may be slightly less tax efficient where an ETF holds either predominantly or only US stocks -- but at least widely available on European exchanges and with coverage of all of the major global stock market and bond market indexes.

Valuethinker
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Valuethinker » Tue Aug 21, 2018 6:57 am

typical.investor wrote:
Mon Aug 20, 2018 11:36 pm


Anyway, you need US domiciled funds (traded on US exchanges) for US tax reasons, so probably have to buy in USD.
Why do you conclude that?

Poster is *not* a US citizen. Why would he/ she want US domiciled funds?

Valuethinker
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Valuethinker » Tue Aug 21, 2018 7:11 am

Happydad wrote:
Mon Aug 20, 2018 6:50 am

2) In Switzerland, would it make sense to adopt the ETF portfolios recommended in the US (and buying them in USD), or do I need to protect myself against currency fluctuations (I earn in CHF)? For example, a 3-fund portfolio I often saw recommended is:
– VTI – Vanguard Total Stock Market ETF (55-60% of the stock portion of the portfolio?);
– VXUS – Vanguard Total International Stock ETF (40-45% of the stock portion?) (or alternatively VEU?);
– BND - Vanguard Total Bond Market ETF (in case I need bonds in my mix on top of my local pension funds).
Does this portfolio need to be modified for Swiss investors? Is it ok in USD or is it better to have the International and/or the Bonds in CHF?
Hello. I am not aware of EU domiciled funds which are denominated in CHF. I am thinking ETFs here. The cheapest way to invest for most in Europe is Exchange Traded Funds which are domiciled normally in Ireland or Luxembourg, and then listed on the main European exchanges. You open an online stockbroking account and work from there.

You can synthesize a Vanguard like portfolio using Vanguard Europe ETFs and ishares ETFs (there are other providers, I just happen to know these 2).

Basically you need:

- a global equity fund - this should include USA and so you won't need 2 funds
(an Emerging Market Fund - if the above does not include EM; roughly speaking this should be 10-20% of total equities, I would suggest 15% or below; if you can't make that work, it's not essential that you have this)

The value of the fund will swing with exchange rate changes relative to its reporting currency. Say that is EUR. You don't need to worry *except* when you change CHF into EUR to buy units, and when you take cash out (EUR to CHF) for living expenses.

Most global equity funds do not hedge currency. Their currency is just a currency of reporting (denomination). Bond funds are usually different - they do hedge currency.

- a bond fund - your choice here is either to directly own Swiss government bonds (I assume it's fairly easy to do that as a Swiss resident) - the Swiss Federal Government is assumed to have no credit risk (triple AAA borrower) and there is no currency issue, they pay back in Swiss francs. Or you own a global government bond fund and unless it hedges back into CHF you have exchange rate volatility.

If you go the direct route then each year, say, you buy more bonds of the Swiss 10 year (years to maturity). Over the long run your returns will be the average yield on the Swiss government 10 year bond. Some years, when interest rates rise, you will lose, some years, when they fall, you will win. You could buy "across the yield curve" ie a range of maturities - nothing wrong with that (less volatility, potentially) but in the long run it should all even out.

Otherwise a global government bond ETF (which is currency hedged) will give you roughly the yield & return of the risk free bond in that currency (ie the bond issued by the strongest government in that currency: US for USD, Germany for EUR etc.). So if hedged into Euros then nearly zero (because German government bonds are yielding very nearly zero). If USD then 2.5-3.0%. It's really down to whichever currency gives you the lowest FX transaction charges.
3) Would it be worth considering a small percentage into a 4th, real-estate ETF, such ans VNQ - Vanguard REIT ETF? In case, is it better to have a European one?

Thanks everone!
If you don't commit 10% into such a fund, it will have little or no impact on your final portfolio value. 5% just is not worth it.

It adds complexity. The 2008-09 experience was that real estate funds were *more* volatile than equity index funds in general. There are REITs in the US and other indices (Australia, Hong Kong etc.). So I think it can probably be ignored.

typical.investor
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by typical.investor » Tue Aug 21, 2018 7:25 am

Valuethinker wrote:
Tue Aug 21, 2018 6:57 am
typical.investor wrote:
Mon Aug 20, 2018 11:36 pm


Anyway, you need US domiciled funds (traded on US exchanges) for US tax reasons, so probably have to buy in USD.
Why do you conclude that?

Poster is *not* a US citizen. Why would he/ she want US domiciled funds?
Good catch. My advice is for US citizens.

I should refrain from posting when unable to sleep from jet lag and needing something to do! I think it was labeled expat before though which confused me.

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BeBH65
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by BeBH65 » Tue Aug 21, 2018 10:30 am

There have been a few threads on Switzerland before.
Maybe you can recreate a new strawman with all the info that you gathered until now.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

Happydad
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Happydad » Tue Aug 21, 2018 10:52 am

Thanks everybody for the comments so far, I really appreciate!
I'll clarify a few aspects emerged in the discussion, hoping they generate even further suggestions. Again, please forgive my very basic understanding of the investment world. BTW, with long-term investment I mean I don't plan to dis-invest for at least 12-15 years, but just buying a bit more regularly.
A) Dividend tax rate in Switzerland: I need to be more precise. Swiss tax authorities withhold 35% on Swiss dividends, but don't withhold anything on foreign dividends. So for US-domiciled dividends it's only the 15% (US-CH treaty) withheld by the US tax authorities that is applied. In both cases, the withheld amount can be claimed back if your taxable income is above a certain minimum. To my knowledge, the real tax hit happens because in Switzerland the gross dividends are summed to the total personal income (salary, etc) and therefore taxed at one's marginal rate, which is progressive and also depends on the region you live. It could be 20%, but it could be also 40%. At least, no capital gain taxes here.
B) I checked with IB whether I'm allowed to buy US-domiciled ETFs (thanks for pointing out the new regulation!). The rule applies to the European Economic area, but Switzerland is not part of it, so I'm apparently still entitled to buy them if I want. IB seems to be the recommended broker by many in Switzerland, because it has no custody fees and no inactivity fees above a certain asset threshold that I should be able to match. Moreover, their trade fees are extremely low (you can have a tiered instead of a fixed fee per transaction) and, above all, their currency exchange rates seem to be among the most competitive in the world (basically no fee). It's true IB's user interface seems designed for more experienced traders, so in case I will need to learn the 3 basic operations I need to do.
C) If I understand well what I read from different sources on the web, a US-domiciled ETF has normally a lower TER compared to the exact same Ireland-domiciled ETF. That would be the main advantage for a Swiss resident of buying the US version. In particular, for ETFs that track only purely US stock indexes, choosing a US domiciled should be better, since the underlying currency is anyway USD. For ETFs that track only non-US stock indexes, it probably doesn't matter where the ETF is domiciled. For global ETFs (US + non-US) it may still be a bit better a US-domiciled version because US is still around 50% of the total market).
D) Swiss government bonds today have a negative yield up to 10 years (two years ago it was negative up to 50 years!), so I'm not sure if it's a good "investment", although pretty solid. Maybe I should thing to bonds of the Eurozone. I need to understand if my existing pension funds and the cash I keep available can act as the bond part in my portfolio, in that case maybe I don't need to buy the 3rd ETF, or maybe buy it for just 10-20% of the portfolio.
E) Based on the comments received so far, adding REIT ETF to the 3 fund portfolio doesn't sound very useful.
F) I heard that investing a lump sum at once may be slightly better than DACing, if I don't panic with short sudden market decreases.
G) My main worry remains that in 15-20 years I may need my money (slowly) back in CHF and I'm not sure how big the hit (positive or negative) of the exchange rate will be, if most of my ETF investments have a different underlying currency. Is it something I can forget about over a long period of time? In any case, it seems the Swiss stock market is too small compared to the rest of the world (and dominated by 3-4 companies) to create an unbiased "shield" in underlying CHF in my portfolio, isn't it?
H) I'm very interested in hearing your expert opinions for the 3 Vanguard ETFs I mentioned, or others that could compose a good portfolio. For the bond one, is it worth considering a EUROzone or a Global one instead of a US one? TER may be higher though.

Thanks!

TedSwippet
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by TedSwippet » Tue Aug 21, 2018 12:30 pm

Happydad wrote:
Tue Aug 21, 2018 10:52 am
A) Dividend tax rate in Switzerland: I need to be more precise. Swiss tax authorities withhold 35% on Swiss dividends, but don't withhold anything on foreign dividends. So for US-domiciled dividends it's only the 15% (US-CH treaty) withheld by the US tax authorities that is applied. In both cases, the withheld amount can be claimed back if your taxable income is above a certain minimum. To my knowledge, the real tax hit happens because in Switzerland the gross dividends are summed to the total personal income (salary, etc) and therefore taxed at one's marginal rate, which is progressive and also depends on the region you live. It could be 20%, but it could be also 40%. At least, no capital gain taxes here.
Better than the UK, then. Top dividend rate of 38.1% and with a potential 20% capital gains tax on top.
Happydad wrote:
Tue Aug 21, 2018 10:52 am
B) I checked with IB whether I'm allowed to buy US-domiciled ETFs (thanks for pointing out the new regulation!). The rule applies to the European Economic area, but Switzerland is not part of it, so I'm apparently still entitled to buy them if I want. IB seems to be the recommended broker by many in Switzerland, because it has no custody fees and no inactivity fees above a certain asset threshold that I should be able to match. Moreover, their trade fees are extremely low (you can have a tiered instead of a fixed fee per transaction) and, above all, their currency exchange rates seem to be among the most competitive in the world (basically no fee). It's true IB's user interface seems designed for more experienced traders, so in case I will need to learn the 3 basic operations I need to do.
Thank you for confirming that this problem with US domiciled ETFs is restricted to the EU only. What happens in the UK when it exits the EU next year is anybody's guess. I doubt any of the parties involved have given this any thought at all so far.
Happydad wrote:
Tue Aug 21, 2018 10:52 am
C) If I understand well what I read from different sources on the web, a US-domiciled ETF has normally a lower TER compared to the exact same Ireland-domiciled ETF. That would be the main advantage for a Swiss resident of buying the US version. In particular, for ETFs that track only purely US stock indexes, choosing a US domiciled should be better, since the underlying currency is anyway USD. For ETFs that track only non-US stock indexes, it probably doesn't matter where the ETF is domiciled. For global ETFs (US + non-US) it may still be a bit better a US-domiciled version because US is still around 50% of the total market).
It sounds like you have understood things here correctly. A US domiciled ETF holding US stocks could be the best way forwards, since the 15% US tax may be directly recoverable against Swiss tax (providing your Swiss rate exceeds 15%), whereas an Ireland domiciled ETF holding the same stocks would lose the 15% US tax internally, and so very likely not recoverable against Swiss tax. For an ETF holding non-US stocks though, where the Swiss rate is below 15% a US domiciled ETF would be a disadvantage, since the 15% paid to the US on a US domiciled one cannot be fully recovered, whereas an Ireland domiciled ETF would not be paying anything internally to the US in the first place.
Happydad wrote:
Tue Aug 21, 2018 10:52 am
F) I heard that investing a lump sum at once may be slightly better than DACing, if I don't panic with short sudden market decreases.
Statistically yes, but to be honest the edge is slight if you don't DCA over a large number of years. I DCAed over four years, and while with hindsight I would have been better off with a single lump-sum at the start -- and four years was too long anyway -- I don't regret this all that much. For me, the comfort of a smooth transition from cash to fully invested was worth some inefficiency.
Happydad wrote:
Tue Aug 21, 2018 10:52 am
G) My main worry remains that in 15-20 years I may need my money (slowly) back in CHF and I'm not sure how big the hit (positive or negative) of the exchange rate will be, if most of my ETF investments have a different underlying currency. Is it something I can forget about over a long period of time? In any case, it seems the Swiss stock market is too small compared to the rest of the world (and dominated by 3-4 companies) to create an unbiased "shield" in underlying CHF in my portfolio, isn't it?
Currency futures are pretty much un-knowable. You could argue that currency risk in stocks is compensated over the long term. The same is probably not true of currency risk in bonds, though. Here it seems more useful to stick within or close to your own currency (where 'close' means other currencies where changes in their value will directly affect your own spending power).

Valuethinker
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Re: First investment portfolio advice (ETFs) for a Swiss resident (non-US citizen).

Post by Valuethinker » Tue Aug 21, 2018 12:39 pm

Happydad wrote:
Tue Aug 21, 2018 10:52 am

G) My main worry remains that in 15-20 years I may need my money (slowly) back in CHF and I'm not sure how big the hit (positive or negative) of the exchange rate will be, if most of my ETF investments have a different underlying currency. Is it something I can forget about over a long period of time? In any case, it seems the Swiss stock market is too small compared to the rest of the world (and dominated by 3-4 companies) to create an unbiased "shield" in underlying CHF in my portfolio, isn't it?

Thanks!
Just in brief.

As you get within 10 years of retirement you will need to think about moving more assets into CHF.

Swiss stockmarket is not a hedge on exchange rates. These are global companies their profits and share prices will move around with exchange rates. And it's far too concentrated a market.

Bonds that pay in CHF are a hedge. So too are pensions.

Given the closeness to the Eurozone, for now, holding EUR assets is reasonable. Or you can split 50/50 USD and EUR. Remember the currency a fund reports in does not matter *except* in terms of FX charges that you have to make when you put money into the fund or take it out (from CHF).

Exception is a bond fund that hedges into a currency. In that case, you would want CHF. I agree that if you have CHF pension, that means you can afford to have less bonds and more equities.

If you can find a global equity fund that works from a tax perspective, then that's all you need. If it does not cover emerging markets then you could have 2 funds (ETFs). This assumes you are not going to hold bonds, for now. My recommendation though is that everyone should hold 20% in bonds - it makes holding your nerve during a stockmarket bear market (and rebalancing into equities at ever cheaper prices) that much easier. I accept that if you have significant pension income expected that's less important.

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