Index Fund Investment from a Person in a Small European Country (Bulgaria)

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a.nikolov
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Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by a.nikolov » Wed May 30, 2018 5:56 am

I live in Bulgaria (Europe) and I recently looked into investing opportunities. I want to invest monthly (about $150-200, increasing the amount each year, possibly maxing at $1000/monthly in 10 years), but just when I decided to start I found out I cannot do it by simply opening an American brokerage account. Because apparently I cannot do that from Bulgaria. This had me quite surprised, because all the investment books I've read do not mention a thing about European issues. I guess I was just not their target audience.

Here is what you need to know:
1. I am 24 and I want to invest into index funds. I want to contribute $150-200/month. In the worst case I guess I can save up for quarterly or yearly contributions (Vanguard actually advise that for some reason, although this doesn't fit into the dollar-cost averaging strategy).
2. Everything I can find in my native language is not helpful at all. They all talk about CFDs and ETFs. I guess I can invest in ETFs, but the $7 transaction cost is too high. Add that to the currency exchange fees I will have to go through (which although not that large are still there) and things are not looking pretty for monthly investments.
3. I have looked through this forum and have searched extensively online, but to no avail. I cannot find a straightforward guide to investing into index funds as an European, and an Easterner at that.
4. I have found some advice that I should invest into European ETFs, rather than American index funds. Honestly, I know nothing about these and how their averages are going to affect me. My initial goal was to even have a lifecycle fund with Vanguard, but sadly, I don't think this is possible in any way at all as an European.

My questions:
1. Can you give me a viable strategy for passive investing that takes into consideration my situation? What should I do?
2. Can I even find index funds to invest in and not ETFs? Will they be profitable, if they are strictly European? Can you give example of such funds?
3. Is there any way possible for me to invest in a lifecycle fund in Vanguard (or any other reputable place)?
4. Are there European brokers that would work with small sums and accept Bulgarians? I know this is a specific question, but Bulgarian brokers all require me to invest $15,000 initially, which is totally out of my reach. I can probably save up to $3000, but that is about it.

Really, the situation here in Europe really crushed my motivation. I am debt free, I pay for my wife's tuition, I manage to save about $400 a month, and I am also working on a side business. Investing is the next logical step, because my money is currently depreciating in a jar. I would be glad for ANY kind of information, even if it does not pertain to the questions above.

Thank you for reading all the way through.

asianexpat
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by asianexpat » Wed May 30, 2018 8:40 am

I may relate to you to some extend, since i am an asian expat, lives in middle east. I have to be really careful and take into account tax matter. I am no way experience in personal investment, but my favorite books are those written by Andrew Hallam, Burton Malkiel, and Benjamin Graham and of course JC Bogle. It seems that you have already good plan in mind but unsure about brokerage option.

In terms of investment practice, in my case, it was mainly possible after i found out about Saxo Bank (Danish bank and quite reputable). It has more than enough market options to choose. Although, the transaction cost is probably considered so so and no way able to beat the Interactive Broker. It accommodate considerably low initial funding though, as low as 2k$ (please check with them directly just in case i am wrong), and i was quite shocked that the process to open an account was straightforward and almost too good to be true.
Just like most people, I am in favor of vanguard (Global stocks – Vanguard FTSE All-World ETF (VWRL) that where i am investing now.

In my case, to minimize my expense on transaction fee, i waited a bit until i have 2k $ or more to fund my account and buy the index/etf, so that i dont lost money in transaction fee. Or perhaps, until my portfolio is larger to open a better option of broker account. The fact that Saxo allows 6 month period with no transaction without penalty, it really suits my need, since I do sometimes need 6 months period due to my income bracket. If i dont have the sufficient funding before 6 months, then i had to spent a bit extra on transaction fee by doing small trading to keep the account open to avoid the 100$ penalty fee. So far, this has been perfectly fit my need. For sure, there are other option of brokerage than Saxo, I am just saying one possible option that works for me.

a.nikolov
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Joined: Wed May 30, 2018 5:38 am

Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by a.nikolov » Thu May 31, 2018 2:35 am

Thank you for your response!

It seems though that Saxo Bank is targeting active investors. Am I wrong about that? Also when I dug a bit deeper, they charge $15 per ETF trade, which is even worse than I thought.

imperia
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by imperia » Thu May 31, 2018 3:04 am

Degiro seems like good choice for you, but it seems thay do not accept Bulgarians(but thay have office on Sofia).
Contact them and there is also possibility to open bank account in some other EU country and than use degiro.

https://www.bogleheads.org/wiki/Nonresi ... sion_table

Bulgaria has tax treaty with US, and dividend witholding tax for Bulgarian is just 10%, so you are lucky.
Bulgaria has not estate tax treaty so keep your investment below 60.000$.

Valuethinker
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by Valuethinker » Thu May 31, 2018 4:27 am

a.nikolov wrote:
Thu May 31, 2018 2:35 am
Thank you for your response!

It seems though that Saxo Bank is targeting active investors. Am I wrong about that? Also when I dug a bit deeper, they charge $15 per ETF trade, which is even worse than I thought.
Here's the good news. You buy 1 or 2 ETFs, once a year. EUR 15 will not seem so much, then.

ETFs. Most of us in Europe (well, I am in the EU for another 9 months! ;-)) buy ETFs domiciled in Ireland but traded on the main stock exchanges (London SE in my case).

I usually use either Vanguard or ishares, but there may be tax reasons to consider using ETFs which use synthetic index replication rather than physical. The difference is whether the ETF holds actual physical stocks in proportion, or uses derivatives (forwards, futures & swaps) to get the same performance as the index (but without owning the underlying investments). This is about withholding taxes particularly with USA.

Generally you want to avoid instruments listed in USA - can give you messy inheritance tax issues (if over $60k assets).

Whether you choose Accumulating or Distributing funds depends upon your own tax position in your country. If you do a search here on "Bulgaria" you may find an earlier post on this.

Your asset allocation strategy is easy:

- save up cash until you have a minimum size to buy an ETF

- buy a total world equity index fund (denominated in EUR but it won't matter because the fund will not hedge its currency exposure)

- when you have more money, add a global government bond index fund (hedged into EUR)

In your early years, the fluctuating percentages between the 2 funds won't matter, but I would suggest long run you want to be something like 30% bonds 70% equities. But you can tolerate very wide bands in your early savings years - say between 20% and 50% bonds.

buylowbuyhigh
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by buylowbuyhigh » Thu May 31, 2018 4:59 am

I would also recommend Interactive Brokers, it is what I use from Finland. If it is available to you I wouldn't look elsewhere. They used to have a minimum deposit of $10k and $3k for 25 year olds or younger. Now it seems to be only $2k for all individuals. They also charge a monthly minimum fee of $10, which is reduced to $3 for someone at most 25 years old and to $0 for accounts over $100k. This includes trading fees up to the minimum monthly fee. My trade fee for one monthly ETF purchase is ususally a couple of $, and same for currency exchange if needed.

If there aren't any reasonable index mutual funds from Bulgarian banks/fund houses, Ireland/Luxembourg domiciled ETFs may be the best option. I have got the impression that investing in foreign mutual funds is difficult, but ETFs are a blessing especially in Europe as you can acces them in multiple exchanges. Only thing is to check if you should use accumulating or distributing ETFs (depends on Bulgarian taxation) and then look up the standard recommendations in this forum. I'm using accumulating ETFs, for example the iShares Core MSCI World ETF (IWDA/SWDA/EUNL) is one of the best cornerstones for a global index portfolio. Add BONDS, emerging markets and small caps depending on account size and need. IWDA/VWRL+cash could be all you need and still beat many more experienced investors.

To me it seems that all brokers are aimed for active traders (modulo Vanguard), since that is how they make their profit. Interactive Brokers certainly has a lot of different things available, but you can just ignore them and simply buy your monthly index ETFs.

a.nikolov
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by a.nikolov » Thu May 31, 2018 10:47 am

Thank you so much for your input. ETFs are the way to go it seems. I have found a Bulgarian who was kind enough to give me some free advice. Turns out I can go with Interactive Brokers, but only through another broker in Bulgaria. The minimum investment is $5k though.

About the taxing situation - it appears Bulgaria is all over the place on that one. I understood one thing - it is basically pointless to invest in USD. I should only use EUR and only buy ETFs traded in Europe. The bureaucracy here crushes any dreams of trading US ETFs due to the way taxation filing works.

The good news is that I have found a place to look for more information specifically from Bulgarians. The bad news - I can only hope for something like 5% average profitability, not 8% as I have been led to think, unless I decide to invest in dividend stocks, but the risk there is high.

P.S. There is a 5% dividend tax in my country and supposedly 10% capital gains tax (although some people claim that it has to be 0%, but I am not counting on that). How does that affect my decision in choosing between accumulating and distributing ETFs? I suppose I should choose accumulating, since I won't be getting dividends?

Valuethinker
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by Valuethinker » Thu May 31, 2018 4:22 pm

a.nikolov wrote:
Thu May 31, 2018 10:47 am
Thank you so much for your input. ETFs are the way to go it seems. I have found a Bulgarian who was kind enough to give me some free advice. Turns out I can go with Interactive Brokers, but only through another broker in Bulgaria. The minimum investment is $5k though.

About the taxing situation - it appears Bulgaria is all over the place on that one. I understood one thing - it is basically pointless to invest in USD. I should only use EUR and only buy ETFs traded in Europe. The bureaucracy here crushes any dreams of trading US ETFs due to the way taxation filing works.

The good news is that I have found a place to look for more information specifically from Bulgarians. The bad news - I can only hope for something like 5% average profitability, not 8% as I have been led to think, unless I decide to invest in dividend stocks, but the risk there is high.

P.S. There is a 5% dividend tax in my country and supposedly 10% capital gains tax (although some people claim that it has to be 0%, but I am not counting on that). How does that affect my decision in choosing between accumulating and distributing ETFs? I suppose I should choose accumulating, since I won't be getting dividends?
Some countries make you pay tax even if dividends are not distributed so you hold distribution funds otherwise you hold accumulation funds.

Depends on your tax system.

You can invest in USD denominated ETFs listed in Europe. If that is just the currency of reporting then it does not matter. What, post mifid II, is that most European brokers cannot sell you a us listed etf. Legally cannot under eu law.

W equity funds it does not matter what currency they report in, USD or EUR or GBP. It only matters where the underlying investments are. For a global equity fund about 55 per cent will be US stocks.

With bond funds they usually hedge the currency. I would recommend hedge into euros fund because that currency will have highest correlation w Bulgarian currency. A global investment grade government bond fund that hedges into euros will give greatest stability in values.

Marchev
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by Marchev » Thu Jun 14, 2018 6:36 am

Hi, Nikolov! Another Boglehead from Bulgaria here :) Having mentioned the minimum investment of $5k, I assume you are talking about Karoll? Please note that FFBH also offer access to IB with a minimum investment of $2k / 2k EUR.

When it comes to choosing an index fund, I'm in the same position as you. I have basically come to the conclusion that UCITS ETFs offered on EU exchanges are the way to go. iShares S&P 500 EUR Hedged UCITS ETF (Accumulating) is what I am currently considering.

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BeBH65
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by BeBH65 » Fri Jun 15, 2018 12:25 am

Hello Marchev,

Welcome to the forum.

You are considering in investing in US Large cap and this hedged to the Euro; why?
- US Large cap is about 1/2 of the world market; why are you excluding the other half?
- it is generally considered that hedging equity is not effective: equity is a lot more volatile then currency and hedging has a considerabel cost.
BeBH65. (only an investment enthusiast, not a financial adviser, perform your due diligence).

silverex
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Re: Index Fund Investment from a Person in a Small European Country (Bulgaria)

Post by silverex » Fri Jun 15, 2018 8:12 am

Considering your requirements, the following could be the cheapest way.

I assume Bulgarian lev is your income and expense currency, and lev is pegged to euro, so it will be a general recommendation for euro investor.

1) Open Degiro.ie account, as there is no Degiro for Bulgaria. Don't worry about ".ie" bit, as it's still a Dutch company with NL IBAN bank account. You'll get English interface this way, and ability to use SEPA to transfer money from your account to Degiro and back. Choose Custody account type.

Degiro does not accept Bulgarian bank accounts, but you can open a free-tier (no card) account from bunq (they have NL IBAN).

Degiro does not have a minimum amount for a portfolio, have a modern, simple website interface and apps. (Interactive Brokers is so confusing in comparison!) And all ETF trades cost € 2.00 + 0.02%, with some ETF/exchange combinations free once a month.

2) A simple portfolio could be:
XX% IWDA (IE00B4L5Y983) iShares Core MSCI World UCITS ETF USD (Acc) - 0.20% TER; on Amsterdam Exchange
XX% AGGH (IE00BDBRDM35) iShares Global Aggregate Bond UCITS ETF EUR Hedged - 0.10% TER; on Xetra Exchange

Both are accumulating funds, so find out if Bulgaria's taxman taxes unrealized gains, chances are that it does not. The IWDA on Amsterdam exchange is even free to trade once a month on Degiro.

If stocks will make up a majority of your portfolio, it means for most transactions you'll not be paying any fee. To save up on transaction costs, you can purchase only one ETF each month - whichever one is farthest from your portfolio allocation percentage.

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