Starting out, in Japan

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ewerton
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Joined: Wed Jun 06, 2018 3:08 pm

Starting out, in Japan

Post by ewerton » Wed Jun 06, 2018 4:13 pm

Hello Boogleheads, I am here to seek your good advice!

This is my first post, so, first of all, many thanks! -- this forum has been extremely useful for my education.

I am currently domiciled in Japan, and therefore do not have direct access to vanguard funds (access does exist through Japanese brokers, but at a cost), and will likely continue to live here for the foreseeable future. I do not have US citizenship, so the traditional restrictions on US citizens living / investing abroad do not apply.

I have checked the very useful Investing in Japan page, as well as other posts from people living here, but since many were from more than a couple of years ago, and our personal situations differed, I've reckoned it'd be a good idea to ask here :)

My situation:
- I haven't done much investing before, therefore I have a lump sum to invest, currently sitting at a savings account
- At the moment, I save about 45% of my income
- No expectation of needing to access invested money for the next 15 to 20 years
- Brokers account with Rakuten; in addition to a standard investment account, I've opened a tax-advantaged NISA account (old style NISA, limit of 1,200,000 JPY per year / 5 year period), as well as applied for an iDeCo account (Japanese equivalent of a 401k, more or less)
- Full employment at the moment, expect to retire in Japan


My initial plan:
(a) Allocation
Given my 15 to 20 years horizon, I was considering starting with 100% stocks, and incrementally increase bonds until a 60/40 stocks to bond ratio to be achieved say 15 years from now. Does that sound reasonable? I am in my early 30s now.

(b) Funds:
In terms of vanguard funds, ETFs for VT and VTI (World, and US Total Market, respectively) are available, but at a 0.486% purchase fee. For the NISA account only, my broker appears to have a cashback policy of this fee applicable to US ETFs.

Here is my broker's page, for reference (in Japanese): https://www.rakuten-sec.co.jp/nisa/commission.html

Given the above, my current plan is the following:
(b.1) For the NISA account: 100% VTI (Vanguard Total Stock Market, 0.07% expense ratio)
(b.2) For normal account:
- 20% 1348 MAXIS TOPIX ETF (Total Japanese Stock Market, 0.07% expense ratio)
- 80% 1657 iShares Core MSCI Kokusai ETF (Developed Countries not including Japan, 0.19% expense ratio); details
(b.3) For iDeCo account: TBD, not many options to choose from.

Since (b.1) and (b.3) are tax-advantaged, I intent to max them out first, and put whatever spills over into the normal investing account.

Any comments / suggestions are very much appreciated. If you have questions, also please let me know.

Thanks!

Karamatsu
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Re: Starting out, in Japan

Post by Karamatsu » Wed Jun 06, 2018 9:25 pm

ようこそ!

Since our situations are a bit different (I'm a US citizen) a lot of the craziness won't apply, so it just comes down to the choices that work best for you. I would, however, recommend something less aggressive than 100% stocks. I know all the arguments (been there, done that), but would seriously consider age-in-bonds as a more stable alternative. That's particularly so for someone just starting out during what has been more or less a bull market, where all you had to do was wait a bit and equities would recover.

Sometimes they don't. Or at least... not for a long time. And you really won't know what your risk tolerance is until you're looking at statements showing that your portfolio is down 50% and there is no bottom in sight. At some point even people like Bogle started talking about "Plan B."

In my experience, it's better to have that boring, tax-inefficient bond allocation there to keep you afloat when things go crazy, as they do from time to time. That said, bond yields in Japan are so stunningly low (the government can't afford for rates to go up, so they're not allowed to go up) that the opportunity cost probably isn't worth it. Right now all my bonds are in the US, where there are a lot of index fund options.

Otherwise the one thing I can say is don't lock yourself too tightly into a plan that's based on a vision 15/20/30 years ahead. It's important to have a plan but at the same to realize that things will never go as planned. Best to be a little on the conservative side... leave some room to adjust direction when/if it becomes necessary. But that's just a general thing, not specific to portfolios. Meanwhile enjoy life in Japan!

bpp
Posts: 1925
Joined: Mon Feb 26, 2007 12:35 pm
Location: Japan

Re: Starting out, in Japan

Post by bpp » Thu Jun 07, 2018 5:48 am

1657 is an ETF of ETFs, so I believe you are paying the underlying expense ratios on top of the advertised rate. In addition, the underlying ETFs are US-domiciled, so you are paying an unnecessary extra 10% US tax on non-US stock dividends.

Might suggest looking at Japanese ETFs which hold foreign stocks directly, without the US (or other country) intermediary in between.
Last edited by bpp on Thu Jun 07, 2018 8:53 am, edited 1 time in total.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Thu Jun 07, 2018 8:25 am

Thanks both for the replies!

Karamatsu-san,
Yep, I think it makes sense to start with a more conservative allocation, and see how I feel about it. Probably something around 60/40 stock, bonds ratio. That said, as you illustrated, finding attractive bond options in Japan seems challenging at best.

Does anyone know of good index fund options for bonds, available from Japan?

bpp,
Thanks for he heads-up, I hadn't realized 1657 was an ETF of ETFs. To the benefit of my education, how did you figured it out? I sort of read the brochure, but could not read in-between the lines.

I guess, what I am looking for are not-too-costly broad index funds -- total (developed) world market, or total US market -- which I can buy from a broker in Japan. Or, is vanguard still the way to go even in spite of the purchase fees (0.486%) I'd have to leave with my broker?

Thanks again!

bpp
Posts: 1925
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Location: Japan

Re: Starting out, in Japan

Post by bpp » Thu Jun 07, 2018 9:19 am

ewerton wrote:
Thu Jun 07, 2018 8:25 am
bpp,
Thanks for he heads-up, I hadn't realized 1657 was an ETF of ETFs. To the benefit of my education, how did you figured it out? I sort of read the brochure, but could not read in-between the lines.
Look under the ‘Holdings’ tab.
I guess, what I am looking for are not-too-costly broad index funds -- total (developed) world market, or total US market -- which I can buy from a broker in Japan. Or, is vanguard still the way to go even in spite of the purchase fees (0.486%) I'd have to leave with my broker?
I would recommend non-US citizens to avoid US financial products entirely, if possible. Besides the extra layer of income taxes, I would worry about the possibility of assets being frozen at death by the broker until heirs can produce US estate tax paperwork, even in the presence of an estate tax treaty which might reduce the US estate tax to zero.

For MSCI-Kokusai index funds, either 1550 or 2513 should be ok. (Or 2514 if you want hedging back to yen, but at the added cost of hedging and the addition of hedge counterparty risk.)

For bonds, the only domestic ETF is 2510, with expense ratio of 0.07%. Or else use 個人向け国債, or even just plain cash in the bank.

For foreign bonds, 1677 (er 0.25%) and 2511 (er 0.12%) are unhedged, while 2512 (er 0.12%) is hedged back to yen.

ewerton
Posts: 9
Joined: Wed Jun 06, 2018 3:08 pm

Re: Starting out, in Japan

Post by ewerton » Sat Jun 09, 2018 8:41 am

Thanks again bpp, that was all very helpful!

My current thinking now is to go with 1348 (Topix) and 1550 (MSCI kokusai) for equity, and 1677 for bonds. As a deflation hedge, I'll probably keep a bit more cash around than I had first anticipated since returns on Japanese government bonds (個人向け国債) seem rather dismal anyways.

bpp
Posts: 1925
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Location: Japan

Re: Starting out, in Japan

Post by bpp » Sun Jun 10, 2018 11:27 pm

Sounds good.

By the way, I was wrong about the expense ratios of etfs-of-etfs. I called BlackRock Japan and they told me the ERs of the underlying funds are included in the reported ER of the outer fund, and don’t need to be accounted for separately.

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peterinjapan
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Location: Japan!

Re: Starting out, in Japan

Post by peterinjapan » Mon Jun 11, 2018 2:42 am

Beware fees. Folks here would laugh if I told them what my Japanese wife -- who just *has* to have the hand holding -- allows to be taken in fees. It's like Japan is still in the year 1985 or something.

I will be starting a NISA (a 5 year limited retirement account) soon, I hope they extend the timeline since 5 years is next to meaningless.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Wed Jun 13, 2018 8:12 am

By the way, I was wrong about the expense ratios of etfs-of-etfs. I called BlackRock Japan and they told me the ERs of the underlying funds are included in the reported ER of the outer fund, and don’t need to be accounted for separately.
Cool, thanks for checking! That ETF seems more appealing now; the ER difference from 1550 is not that much (0.06%), but it might just be the least expensive "total developed world excluding Japan" index fund available here.

By the way, I am also thinking about getting some exposure to emerging market equities. Does 1681 (上場インデックスファンド海外新興国株式) seem reasonable?

bpp
Posts: 1925
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Re: Starting out, in Japan

Post by bpp » Wed Jun 13, 2018 9:01 am

ewerton wrote:
Wed Jun 13, 2018 8:12 am
By the way, I was wrong about the expense ratios of etfs-of-etfs. I called BlackRock Japan and they told me the ERs of the underlying funds are included in the reported ER of the outer fund, and don’t need to be accounted for separately.
Cool, thanks for checking! That ETF seems more appealing now; the ER difference from 1550 is not that much (0.06%), but it might just be the least expensive "total developed world excluding Japan" index fund available here.
2513 is even cheaper, and doesn’t have the extra layer of US taxes applied to dividends from non-US stocks in the index that 1657 has. They both have low liquidity, though that may be tolerable if not buying large chunks at a time.
By the way, I am also thinking about getting some exposure to emerging market equities. Does 1681 (上場インデックスファンド海外新興国株式) seem reasonable?
It is really the only choice for a fund that actually holds the underlying securities, which I prefer over futures-based funds (like 1681). Unfortunately, its only holding is a US-based ETF, so add US tax on the dividends to the effective expense ratio (this adds maybe 0.2%+ to the effective ER?). But not much one can do about that if one wants EM exposure.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Thu Jun 14, 2018 6:00 am

Your right, 2513 is even cheaper!
It is really the only choice for a fund that actually holds the underlying securities, which I prefer over futures-based funds (like 1681).
Just to see if I understand correctly, but is 1681 the eft which holds futures (couldn't guess that from the linked pdf, but my Japanese isn't that great)? In that case, what is the sole choice you mention for exposure to EM while actually holding the underlying securities?

bpp
Posts: 1925
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Location: Japan

Re: Starting out, in Japan

Post by bpp » Thu Jun 14, 2018 6:46 am

ewerton wrote:
Thu Jun 14, 2018 6:00 am
Your right, 2513 is even cheaper!
It is really the only choice for a fund that actually holds the underlying securities, which I prefer over futures-based funds (like 1681).
Just to see if I understand correctly, but is 1681 the eft which holds futures (couldn't guess that from the linked pdf, but my Japanese isn't that great)? In that case, what is the sole choice you mention for exposure to EM while actually holding the underlying securities?
Sorry for the confusion. :oops:

1681 holds futures
1658 holds a US-domiciled ETF (IEMG)

See:
http://www.jpx.co.jp/equities/products/ ... 01-08.html
or,
http://www.jpx.co.jp/english/equities/p ... 01-08.html

ewerton
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Re: Starting out, in Japan

Post by ewerton » Thu Jun 14, 2018 7:00 am

Cool, that makes sense. Thanks!

Interesting how the volatility of 1658 is around 20%, and that of 1681 around 15% to 18%.

bpp
Posts: 1925
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Location: Japan

Re: Starting out, in Japan

Post by bpp » Thu Jun 14, 2018 7:09 am

Actually, looking at the prospectus for 1681, it seems to hold a mix of ETFs and futures:
http://www.nikkoam.com/files/fund_pdf/6 ... moku_s.pdf

Possibly they will move to fewer futures and more equities in the future as fund size grows?

Though their developed-markets index fund, which is much bigger, is all futures. So perhaps the problem is actually a lack of available futures for some smaller markets?

(No idea, just pondering out loud.)

rhe
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Re: Starting out, in Japan

Post by rhe » Thu Jun 14, 2018 10:41 am

A couple of years back I looked at the etfs that were available in japan. I concluded that there were very good domestic etfs, but that the options for foreign investment were not so good. I think you are better off opening an account with interactive brokers for all your non-japanese investing. They have a japanese office that is available during japanese business hours, and they have always solved any problems quickly for me. You will save a ton on the currency spreads alone.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Fri Jun 15, 2018 7:46 am

Incidentally, what are the thoughts on 1554, MSCI ACWI excluding Japan? Unfortunately, it seems to hold futures (like 1681), but at 0.25% ER, it would have a great potential for simplifying one's portfolio.

bpp
Posts: 1925
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Location: Japan

Re: Starting out, in Japan

Post by bpp » Fri Jun 15, 2018 5:18 pm

ewerton wrote:
Fri Jun 15, 2018 7:46 am
Incidentally, what are the thoughts on 1554, MSCI ACWI excluding Japan? Unfortunately, it seems to hold futures (like 1681), but at 0.25% ER, it would have a great potential for simplifying one's portfolio.
Yes, 1554 would be ideal if not for the futures thing. Very tempting, but I personally would feel too nervous about how a futures-based fund would behave in a market crisis, like the Lehman Shock of a few years ago or worse. I just don’t like the idea of adding counterparty risk to market risk.

Don’t know how rational that fear is, though. The same fear makes me distrust currency-hedged funds,which don’t seem to bother most Bogleheads.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Sat Jun 16, 2018 6:09 am

I had been looking at the retirejapan forum, and came across http://shintaro-money.com/index-cost/, with costs for several (traditional) index funds. Some funds seem promising, with costs lower than comparable ETFs; for total world market excluding Japan eMAXIS Slim 全世界株式(除く日本), with ER 0.15%, appears to be pretty good .

rhe
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Re: Starting out, in Japan

Post by rhe » Sat Jun 16, 2018 6:23 am

The stated expense ratios for some of the international etfs do look good, but the problem is that the benchmark they track is the net return index, not the gross return index. If you look at vanguard international funds in other countries that track a net return index, they actually outperform their benchmark because the net return index assumes that tax withholding happens at the standard (rather than tax treaty) rate. I didn't see this sort of outperformance in japan, which makes me think that some additional money is disappearing somewhere.

Regarding etfs that use futures, there is no counterparty risk with exchange traded futures. Counterparty risk happens with swaps that are not traded through an exchange. The problem with futures is that they usually need to be rolled every quarter, and so you will be paying the bid ask spread four times a year, unless the fund managers are nice enough to figure out something cheaper... but the cheaper thing would probably have counterparty risk. Also, futures are unfunded, so they have to do something with all the cash they have. They may do something that is good for them, but not for you.
Last edited by rhe on Sat Jun 16, 2018 7:18 am, edited 4 times in total.

rhe
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Re: Starting out, in Japan

Post by rhe » Sat Jun 16, 2018 6:39 am

Regarding mutual funds like the emaxis slim series, you have to put a lot of faith in the fact that there are no fees taken out anywhere further down the line. I don't think you can ask anybody about this, because there are too many places where the money could disappear. As far as I can see, the only way to check is to try to compare the dividend payments and nav changes to the index and other funds you trust. This fund is new, though, so that comparison would be difficult.

For example, I believe expense ratio generally exclude certain kinds of "transaction costs". The mitsubishi people could decide to do some creative transactions with their friends that have substantial costs.

ewerton
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Re: Starting out, in Japan

Post by ewerton » Sat Jun 16, 2018 7:46 am

Thanks for the input rhe!

By the way, the http://shintaro-money.com/index-cost/ website has some "real cost" estimate for other, older, emaxis funds, and indeed it seems costs can go 0.1% over or more sometimes.
If I understand how things work correctly, I think one of the advantages of using a traditional fund (over an "equivalent" ETF) in this case would be that dividends can been reinvested automatically, thus effectively deferring the tax collected on them.

rhe
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Re: Starting out, in Japan

Post by rhe » Sat Jun 16, 2018 11:01 am

Yes, there is something weird about japanese mutual funds, because some of them appear to accumulate dividends rather than distribute them.

One of the unusual features of the japanese tax system is that capital gains and dividends are both taxed at the same rate, and this is fixed regardless of your income. It is thus entirely possible that the funds that accumulate dividends internally are paying tax on them. You would not necessarily get any forms to notify you that this is even happening. My japanese brokerage has never mailed me a tax withholding form, although if i dig deep enough I can see that taxes are being paid on my dividends. No tax forms are sent presumably because almost nobody in japan needs to file taxes, but it does make the whole system harder to understand.

Another alternative is that hidden mutual fund fees are so high that the dividends aren't being accumulated at all, they're just entirely eaten up by fees each year.

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