[Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

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longvista
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[Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Thu Sep 20, 2018 10:30 am

Hello.

I initially planned to go with the Vanguard FTSE All-World ETF for my equity portion, but it has the following problems:
* It distributes dividends quarterly. I prefer accumulating, so I don't have to worry about re-investing dividends every 3 months for the next 60+ y.
* It's TER is 0.25%. This could be lowered to around 0.20% if I combine 2 iShares ETFs.

Replacement
iShares Core MSCI Emerging Markets IMI (0.18% TER, EIMI)
iShares Core MSCI World (0.20% TER, IWDA)

The respective indexes are:
MSCI Emerging Markets IMI (USD)
According to the factsheet of the index, it has 5,183,539.48 M USD market capitalization (August 31, 2018).

MSCI World Index (USD)
According to the factsheet of the index, it has 41,618,223.27 M USD market capitalization (August 31, 2018).

Together, they make up the total stock market of the world. I want to be as diversified globally as possible. No over-/underweighting of EM/DM. Cap-weighted all the way. Therefore, the allocations would be:
EM: 5,183,539.48÷(41,618,223.27+5,183,539.48) ≃ 11%
DM: 100% - 11% = 89%

During rebalancing events (annually and following Swedroe's 25/5), I would re-establish the correct EM/DM ratio according to the latest information from MSCI.

I am a non-US investor and buying the ETF shares via Interactive Brokers.

Question: Is this approach a proper way or would someone strongly recommend me to go with the original 1-ETF for equity approach instead?

Question: Any obvious downsides or gotchas I might be missing? Tax is not an issue, as my country of tax residence doesn't tax capital gains nor distributions.
Last edited by longvista on Thu Sep 20, 2018 10:48 am, edited 2 times in total.

Thesaints
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by Thesaints » Thu Sep 20, 2018 10:34 am

Since those are ETF’s, in principle going with the two funds solution you double transaction costs.
Additionally, tracking error (with respect to the total global index) will likely increase.
I believe these are small effects, however they are there and the ~0.05% difference in ER is also a small effect.

longvista
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Thu Sep 20, 2018 10:41 am

Thesaints wrote:
Thu Sep 20, 2018 10:34 am
Since those are ETF’s, in principle going with the two funds solution you double transaction costs.
Additionally, tracking error (with respect to the total global index) will likely increase.
I believe these are small effects, however they are there and the ~0.05% difference in ER is also a small effect.
Doubled transaction costs are a valid point, I'll look into how much it would affect the long term.

Why would the tracking error increase?

~0.05% is indeed small. The main reason for considering 2 ETFs instead of 1 is the accumulation of distributions.

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ruralavalon
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by ruralavalon » Thu Sep 20, 2018 10:44 am

What fund firm or brokerage is this account with, Vanguard, Fidelity, Schwab, etc.? It's important not to incur transaction expenses, so account location and which ETFs are available without comissions helps determine which ETFs are best to use.

You could consider:
Vanguard Total International Stock ETF (VXUS) ER 0.11%
Vanguard Total Stock Market ETF (VTI) ER 0.04%
Vanguard Total World Stock Index ETF (VT) ER 0.10%
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

longvista
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Thu Sep 20, 2018 10:49 am

ruralavalon wrote:
Thu Sep 20, 2018 10:44 am
What fund firm or brokerage is this account with, Vanguard, Fidelity, Schwab, etc.? It's important not to incur transaction expenses, so account location and which ETFs are available without comissions helps determine which ETFs are best to use.

You could consider:
Vanguard Total International Stock ETF (VXUS) ER 0.11%
Vanguard Total Stock Market ETF (VTI) ER 0.04%
Vanguard Total World Stock Index ETF (VT) ER 0.10%
I updated my OP to say that I'm a non-US investor and that I am using Interactive Brokers to buy the ETF shares. All trades incur IB's commissions. Since I trade only on LSE in USD, the commissions are the same whether I buy the Vanguard ETF or any of the iShares ETFs.

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vineviz
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by vineviz » Thu Sep 20, 2018 10:51 am

longvista wrote:
Thu Sep 20, 2018 10:30 am
During rebalancing events (annually and following Swedroe's 25/5), I would re-establish the correct EM/DM ratio according to the latest information from MSCI.
If the two funds are fully accumulating, there would not be any rebalancing events (at least not between the two MSCI funds): they are both market-cap weighted index funds, so they will always maintain the global ratio.

Also, you might check out Lyxor Core MSCI World (DR) UCITS ETF. It's tiny, but tracks the same index at a lower TER.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch

longvista
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Thu Sep 20, 2018 10:58 am

vineviz wrote:
Thu Sep 20, 2018 10:51 am
longvista wrote:
Thu Sep 20, 2018 10:30 am
During rebalancing events (annually and following Swedroe's 25/5), I would re-establish the correct EM/DM ratio according to the latest information from MSCI.
If the two funds are fully accumulating, there would not be any rebalancing events (at least not between the two MSCI funds): they are both market-cap weighted index funds, so they will always maintain the global ratio.

Also, you might check out Lyxor Core MSCI World (DR) UCITS ETF. It's tiny, but tracks the same index at a lower TER.
I didn't think about the fact that they would naturally maintain the correct EM/DM ratio, given that they are both based on MSCI EM/DM indexes. That's good to know!

I considered Lyxor as well. What put me off initially is the fact that it's domiciled in Luxembourg and according to this article, "However, many Luxembourg-based funds suffer a higher deduction—30%—from US dividend income because of a less favourable tax treaty between the two countries.". Therefore, the Lyxor ETF has a lower TER, but suffers more L1 dividend withholding in case of US stocks. I am not entirely sure about this. Can anyone confirm/negate this?

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ruralavalon
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by ruralavalon » Thu Sep 20, 2018 11:02 am

longvista wrote:
Thu Sep 20, 2018 10:49 am
ruralavalon wrote:
Thu Sep 20, 2018 10:44 am
What fund firm or brokerage is this account with, Vanguard, Fidelity, Schwab, etc.? It's important not to incur transaction expenses, so account location and which ETFs are available without comissions helps determine which ETFs are best to use.

You could consider:
Vanguard Total International Stock ETF (VXUS) ER 0.11%
Vanguard Total Stock Market ETF (VTI) ER 0.04%
Vanguard Total World Stock Index ETF (VT) ER 0.10%
I updated my OP to say that I'm a non-US investor and that I am using Interactive Brokers to buy the ETF shares. All trades incur IB's commissions. Since I trade only on LSE in USD, the commissions are the same whether I buy the Vanguard ETF or any of the iShares ETFs.
For ex-U.S. stock investing the better one fund comprehensive choice is Vanguard Total International Stock ETF (VXUS) ER 0.11%, which includes stocks of both larger and smaller companies, in both developed and emerging markets at market weight.

Another ex-U.S. one fund comprehensive possibility is iShares Core MSCI Total International Stock ETF (IXUS) ER 0.10%. This also covers stocks of both larger and smaller companies, in both developed and emerging markets at market weight.

Either one will give you your desired market weight allocation, will never need rebalancing, and limit your commissions.
Last edited by ruralavalon on Thu Sep 20, 2018 11:13 am, edited 1 time in total.
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

longvista
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Thu Sep 20, 2018 11:11 am

ruralavalon wrote:
Thu Sep 20, 2018 11:02 am
For ex-U.S. stock investing the better one fund comprehensive choice is Vanguard Total International Stock ETF (VXUS) ER 0.11%, which includes stocks of both larger and smaller companies, in both developed and emerging markets at market weight.

Another ex-U.S. one fund comprehensive possibility is iShares Core MSCI Total International Stock ETF (IXUS) ER 0.10%.
I am a non-U.S. investor. As such, I am effectively limited to non-U.S. domiciled ETFs for various reasons. Perhaps you misunderstood me - I am not intending to do ex-U.S. stocks. I want to invest in the whole world in a cap-weighted manner.

assyadh
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Re: [Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by assyadh » Thu Sep 20, 2018 11:12 am

Since you are not a US resident, please do not follow the advices of buying US based etfs.

Your two chouces are amongst the best ETF. As noted above, Lyxor just launched a Core range of products, including an MSCI World with 0.12% er the lowest ever. One thing to note is that Lyxor is doing full replication on this one, along with NO security lending. It grew its AUM really fast in the last 3 months, I would expect it to reach 100M pretty fast given how Institutional Investors like low er.

Now if you are a EU Citizen, you could open up a DeGira account, where both the iShares etf are free to trade.

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ruralavalon
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by ruralavalon » Thu Sep 20, 2018 11:15 am

longvista wrote:
Thu Sep 20, 2018 11:11 am
ruralavalon wrote:
Thu Sep 20, 2018 11:02 am
For ex-U.S. stock investing the better one fund comprehensive choice is Vanguard Total International Stock ETF (VXUS) ER 0.11%, which includes stocks of both larger and smaller companies, in both developed and emerging markets at market weight.

Another ex-U.S. one fund comprehensive possibility is iShares Core MSCI Total International Stock ETF (IXUS) ER 0.10%.
I am a non-U.S. investor. As such, I am effectively limited to non-U.S. domiciled ETFs for various reasons. Perhaps you misunderstood me - I am not intending to do ex-U.S. stocks. I want to invest in the whole world in a cap-weighted manner.
I did misunderstand you. Sorry :( .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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ruralavalon
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by ruralavalon » Thu Sep 20, 2018 11:16 am

longvista wrote:
Thu Sep 20, 2018 11:11 am
ruralavalon wrote:
Thu Sep 20, 2018 11:02 am
For ex-U.S. stock investing the better one fund comprehensive choice is Vanguard Total International Stock ETF (VXUS) ER 0.11%, which includes stocks of both larger and smaller companies, in both developed and emerging markets at market weight.

Another ex-U.S. one fund comprehensive possibility is iShares Core MSCI Total International Stock ETF (IXUS) ER 0.10%.
I am a non-U.S. investor. As such, I am effectively limited to non-U.S. domiciled ETFs for various reasons. Perhaps you misunderstood me - I am not intending to do ex-U.S. stocks. I want to invest in the whole world in a cap-weighted manner.
I did misunderstand you. Sorry :( .
"Everything should be as simple as it is, but not simpler." - Albert Einstein | Wiki article link:Getting Started

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galeno
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Re: [Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by galeno » Thu Sep 20, 2018 12:25 pm

Our portfolio:

40% VWRD + 20% VDTY + 20% VDCP + 15% ITPS + 5% CASH

Used SUAG (TBM) with ER = 0.25%. Decided to go with 50/50 VDTY/VDCP with ER = 0.12% so ER savings of 0.13% plus we avoid the MBS in SUAG. A "twofer".

We prefer distributing ETFs from Ireland Vanguard. Our only accumulating ETF is an Ireland Ishares ETF called ITPS (USD TIPS). We use it because Ireland Vanguard does not yet have an ETF for USD TIPS.


By subsitituing the two Ireland Ishares equity ETFs for VWRD you also get a "twofer" you lower ER by 0.05% and you get accumulating ETFs as you prefer.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

imperia
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by imperia » Thu Sep 20, 2018 2:40 pm

longvista wrote:
Thu Sep 20, 2018 10:58 am
vineviz wrote:
Thu Sep 20, 2018 10:51 am
longvista wrote:
Thu Sep 20, 2018 10:30 am
During rebalancing events (annually and following Swedroe's 25/5), I would re-establish the correct EM/DM ratio according to the latest information from MSCI.
If the two funds are fully accumulating, there would not be any rebalancing events (at least not between the two MSCI funds): they are both market-cap weighted index funds, so they will always maintain the global ratio.

Also, you might check out Lyxor Core MSCI World (DR) UCITS ETF. It's tiny, but tracks the same index at a lower TER.
I didn't think about the fact that they would naturally maintain the correct EM/DM ratio, given that they are both based on MSCI EM/DM indexes. That's good to know!

I considered Lyxor as well. What put me off initially is the fact that it's domiciled in Luxembourg and according to this article, "However, many Luxembourg-based funds suffer a higher deduction—30%—from US dividend income because of a less favourable tax treaty between the two countries.". Therefore, the Lyxor ETF has a lower TER, but suffers more L1 dividend withholding in case of US stocks. I am not entirely sure about this. Can anyone confirm/negate this?
http://monevator.com/lyxor-core-etfs-ve ... -wrinkles/

Lyxor has confirmed to us that dividends on its US equity fund are paid after 30%...., read the article

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galeno
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Re: [Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by galeno » Thu Sep 20, 2018 3:19 pm

Many of us have been doing this (non-USA domicile Boglehead investing) for years.

Use IB, Saxo Bank, or some other broker which allows access to the LSE and buy and hold Ireland domicled Vanguard or iShares ETFs.

Keep it simple. Keep it cheap.

Our portfolio's ER = 0.19% and TR (tax ratio) = 0.08%. We add another 0.13% for IBC maintenance costs, commissions, spreads, currency conversions (USD to CRC has a 1% bid-ask spread) and wire transfer fees.

Our portfolio's TER (total expense ratio) = 0.40%.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

longvista
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Fri Sep 21, 2018 2:13 am

imperia wrote:
Thu Sep 20, 2018 2:40 pm
http://monevator.com/lyxor-core-etfs-ve ... -wrinkles/

Lyxor has confirmed to us that dividends on its US equity fund are paid after 30%...., read the article
That's exactly what I am looking for. Thank you! To reiterate for future readers, the ETF in question (Lyxor Core MSCI World (DR) UCITS ETF) is domiciled in Luxembourg. It's legal form is SICAV. According to KMPG's Withholding Tax Study 2017, such ETFs suffer from 30% L1 taxation on U.S. source dividends.

According to MSCI's World Index (USD), U.S. makes up 62.14% of the index.

Following the dividend leakage calculations, we can calculate:
For iShares, the L1TW for the US-component is:
L1TW = 62.14% * 15% = 9.32%
For Lyxor, the L1TW for the US-component is:
L1TW = 62.14% * 30% = 18.64%

Assuming that the ex-US components are roughly the same for iShares and Lyxor, we can calculate the TWR for both ETF's US component:
YIELD = 2.0% (estimated for comparison purposes)
iShares:
TWR = 2.0% * 9.32% = 0.19%
Lyxor:
TWR = 2.0% * 18.64% = 0.37%

Therefore, taking into account dividend leakage, the total costs are:
iShares: 0.19% (TWR for US) + 0.20% (TER) = 0.39%
Lyxor: 0.37% (TWR for US) + 0.12% (TER) = 0.49%

In other words, when only looking at TERs, it might indeed seem that lower is better, but when taking other factors such as dividend leakage into account, it's clear that Luxembourg-domiciled ETFs that include U.S. Stocks are not that attractive.

I hope this serves as a good reference point for future non-US investors considering Luxembourg-domiciled funds. If anybody sees a mistake in my calculations, please let me know.

TedSwippet
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Re: Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by TedSwippet » Fri Sep 21, 2018 3:00 am

imperia wrote:
Thu Sep 20, 2018 2:40 pm
Lyxor has confirmed to us that dividends on its US equity fund are paid after 30%. ...
Thank you for this direct confirmation.
longvista wrote:
Fri Sep 21, 2018 2:13 am
In other words, when only looking at TERs, it might indeed seem that lower is better, but when taking other factors such as dividend leakage into account, it's clear that Luxembourg-domiciled ETFs that include U.S. Stocks are not that attractive.
A couple of our wiki pages mention Luxembourg domiciled ETFs as a possible alternative to Ireland domiciled ones. I will see if I can update them to add the subtlety that Luxembourg domiciled ETFs that hold underlying US stocks will be tax-inefficient relative to equivalent Ireland domiciled ones.

It is actually a bit of a difficult distinction to make clearly and unambiguously in a sentence or two (particularly where a lower TER could still win out over 30% US tax withholding where the TER is spectacularly low and/or the ETF's US stock component is low). Perhaps simplest is to consider a Luxembourg domiciled ETF only if it holds no US stocks, so more or less as you wrote, then.

Thank you for the analysis. It is rather puzzling that an ETF provider with a choice of ETF domiciles would choose Luxembourg above Ireland when creating an ETF with a significant US stock component. But then, I don't know what other constraints ETF providers operate under. Shrug.

longvista
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Re: [Non-US] Advice on replacing Vanguard FTSE All-World with iShares (MSCI World + MSCI EM IMI)

Post by longvista » Fri Sep 21, 2018 3:40 am

galeno wrote:
Thu Sep 20, 2018 12:25 pm
By subsitituing the two Ireland Ishares equity ETFs for VWRD you also get a "twofer" you lower ER by 0.05% and you get accumulating ETFs as you prefer.
Indeed. Of these two, the accumulation part is the most important factor for me.
galeno wrote:
Thu Sep 20, 2018 3:19 pm
Keep it simple. Keep it cheap.
I would go with 1 ETF for bonds, 1 for stocks, but unfortunately there are no such perfect ETFs for me, so I'll keep it as simple as reasonably possible. Accumulating helps with simplicity in my case.
TedSwippet wrote:
Fri Sep 21, 2018 3:00 am
A couple of our wiki pages mention Luxembourg domiciled ETFs as a possible alternative to Ireland domiciled ones. I will see if I can update them to add the subtlety that Luxembourg domiciled ETFs that hold underlying US stocks will be tax-inefficient relative to equivalent Ireland domiciled ones.

It is actually a bit of a difficult distinction to make clearly and unambiguously in a sentence or two (particularly where a lower TER could still win out over 30% US tax withholding where the TER is spectacularly low and/or the ETF's US stock component is low). Perhaps simplest is to consider a Luxembourg domiciled ETF only if it holds no US stocks, so more or less as you wrote, then.

Thank you for the analysis. It is rather puzzling that an ETF provider with a choice of ETF domiciles would choose Luxembourg above Ireland when creating an ETF with a significant US stock component. But then, I don't know what other constraints ETF providers operate under. Shrug.
I'm glad I could help to further clarify this aspect for anyone having this question in the future and return something to the forum. If it wasn't for the hivemind of this forum, I would have probably made some very expensive mistakes.

Luxembourg is indeed mentioned from time to time, but the 30% dividend WHT gotcha isn't really mentioned. Would be great if you could update the Wiki about this! Indeed, Luxembourg ETFs can still be considered in certain circumstances. Also, a more complete analysis would include the risks of securities lending and full replication vs optimized sampling, but here's where I draw my own personal line and will simply stick with the iShares ETF.

It's indeed interesting why the ETF provider chose Luxembourg instead of Ireland. In fact, according to justETF, Lyxor only has ETFs in France and Luxembourg. Being that Lyxor itself is a company based in France, it could have something to do with it.

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