EXPAT: Strategy when invested in USA and spending in EUROS

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Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

TedSwippet wrote: Mon Apr 23, 2018 5:52 pm
I am not sure I follow you?

If you are asking if you yourself could buy this particular UCITS ETF in a US broker, the answer is that you perhaps could if you choose the right broker (that might be Interactive Brokers?), but you definitely should not if you are a US citizen or any other form of US taxable person. If you hold this ETF while inside the US's vice-like tax grip, the PFIC tax regime will make you envy the dead at tax time.

It's a decent choice for non-US persons, though. I just picked it out in response to an earlier comment about general higher TERs in the EU and UK, as a random example of a case where the TER of an EU domiciled fund is lower than that of a comparable US domiciled one.
Ok.. there was a confusion. I'm a US person, so I cannot hold this fund, I wish ;-)
First FATCA, and then, even if FATCA gets ever repealed, if you have to hold it under a PFIC regime is a bad option anyway.

BTW, in Europe (for non-US friends), I recommend accumulation funds (Vanguard have a few since a couple of years ago). I don't think there are accumulation ETFs, and all the brokers I asked they charge you a commission just for holding the ETF !
trueblueky
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by trueblueky »

EverBank, an FDIC-insured US bank, offers foreign currency CDs. I have not used them and don't know how the yields compare. An expat might want to check it out.
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

Bank savings accounts and CDs are not a problem. I can open one in an European bank.

Perhaps Everbank is more convinient, but right now they are just offering APR 0.0% for all Euro CDs.
Valuethinker
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker »

international001 wrote: Tue Apr 24, 2018 12:34 pm Bank savings accounts and CDs are not a problem. I can open one in an European bank.

Perhaps Everbank is more convinient, but right now they are just offering APR 0.0% for all Euro CDs.
Would FDIC apply for a non-resident investing in their CDs?

You would expect them to offer 0% on CDs given risk free rates in the Eurozone are currently less than 0%.

Getting any positive return on Eurozone fixed income investments is a trick, and one must stay within Eurozone deposit insurance limits (100k per financial institution I believe). Southern tier banks in Europe have 1.5 trillion Euros of Non Performing Loans to write off, I believe I read in the FT somewhere this week. The resolution of the Eurozone crisis has by no means been achieved.
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

Valuethinker wrote: Wed Apr 25, 2018 11:46 am Would FDIC apply for a non-resident investing in their CDs?

You would expect them to offer 0% on CDs given risk free rates in the Eurozone are currently less than 0%.

Getting any positive return on Eurozone fixed income investments is a trick, and one must stay within Eurozone deposit insurance limits (100k per financial institution I believe). Southern tier banks in Europe have 1.5 trillion Euros of Non Performing Loans to write off, I believe I read in the FT somewhere this week. The resolution of the Eurozone crisis has by no means been achieved.
I think FDIC applies for institution, no matter your residency. Yes, Europe has similar insurances (but typically with lower limits, it's a country thing)

Theoretical question: For an Euro-person, why not invest on a US CD and buy some currency futures to have it euro-hedged? It seems a huge market inefficiency
Valuethinker
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker »

international001 wrote: Wed Apr 25, 2018 3:53 pm
Valuethinker wrote: Wed Apr 25, 2018 11:46 am Would FDIC apply for a non-resident investing in their CDs?

You would expect them to offer 0% on CDs given risk free rates in the Eurozone are currently less than 0%.

Getting any positive return on Eurozone fixed income investments is a trick, and one must stay within Eurozone deposit insurance limits (100k per financial institution I believe). Southern tier banks in Europe have 1.5 trillion Euros of Non Performing Loans to write off, I believe I read in the FT somewhere this week. The resolution of the Eurozone crisis has by no means been achieved.
I think FDIC applies for institution, no matter your residency. Yes, Europe has similar insurances (but typically with lower limits, it's a country thing)
AFAIK all countries in the EU, including non-Eurozone countries like the UK, adhere to the 100k EUR limit (or equivalent in national currency, periodically adjusted).
Theoretical question: For an Euro-person, why not invest on a US CD and buy some currency futures to have it euro-hedged? It seems a huge market inefficiency
the FDIC insured CD market is an "inefficiency" but it stems from the limit on size-- retail investors can exploit it, institutional investors cannot. So I am not sure it is "huge".

Investing in currency futures is not easy for many countries. I was not, in fact, aware you could do it as a UK retail investor.
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whodidntante
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by whodidntante »

international001 wrote: Wed Apr 25, 2018 3:53 pm
Theoretical question: For an Euro-person, why not invest on a US CD and buy some currency futures to have it euro-hedged? It seems a huge market inefficiency
If you borrow the euros at a low rate and buy higher yielding US treasuries or CDs or whatever, you've just discovered the carry trade.
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

FDIC market would be for me. Bonds would be for a big institutional investor

Leverage or not, I thought with carry trade the big risk is currency appreciation. That's why I'm suggesting currency futures to hedge this risk. But would the price of the futures make it so expensive that the final benefit would be 0. Otherwise, it seems like arbitrage.
Valuethinker
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker »

international001 wrote: Thu Apr 26, 2018 3:21 am FDIC market would be for me. Bonds would be for a big institutional investor

Leverage or not, I thought with carry trade the big risk is currency appreciation. That's why I'm suggesting currency futures to hedge this risk. But would the price of the futures make it so expensive that the final benefit would be 0. Otherwise, it seems like arbitrage.
Yes the Carry trade is Uncovered Interest Parity. It's a bet that the high yielding currency won't devalue as fast as it should. Works well for long periods (noisy data) but then fails explosively from time to time (countries devalue or have banking crises, etc. - see Iceland).

What you are describing is Covered Interest Parity. So its success depends on the cost of FX hedging - you need to investigate this.

The Credit Rating that you are arbitraging is the ability of small investors to use deposit insurance.
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ekoli
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by ekoli »

I'm also struggling with the fixed income part of my portfolio as an European investor.

Initially I was thinking as a good alternative this global Aggregate Bond hedged in EUROS , Shares Global Aggregate Bond UCITS ETFETF (AGGH) https://www.ishares.com/uk/individual/e ... ts/291770/ instated of a regular saving account.

The ER is as low as it gets in Europe, medium fund in terms of assets under management, diversified, but still is far form ideal if you are looking for safety . I would like to reduce the default risk by choosing 100% government bonds instead of an aggregate bond fund and also could reduce interest rate risk by lowering the average duration of the bond fund.

I was thinking maybe there is a counterpart ETF product of the vanguard Global Bond Index Fund - Investor Hedged Accumulation (EUR) https://americas.vanguard.com/instituti ... ##overview but so far I didn't find anything. :confused
Valuethinker
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker »

ekoli wrote: Thu Apr 26, 2018 7:13 am I'm also struggling with the fixed income part of my portfolio as an European investor.

Initially I was thinking as a good alternative this global Aggregate Bond hedged in EUROS , Shares Global Aggregate Bond UCITS ETFETF (AGGH) https://www.ishares.com/uk/individual/e ... ts/291770/ instated of a regular saving account.

The ER is as low as it gets in Europe, medium fund in terms of assets under management, diversified, but still is far form ideal if you are looking for safety . I would like to reduce the default risk by choosing 100% government bonds instead of an aggregate bond fund and also could reduce interest rate risk by lowering the average duration of the bond fund.
67% of the bonds are from Sovereign governments (investment grade) or US government Agencies (Mortgage Backed Securities backed by the US government).

Duration is 6.9 years. Due to call provisions on corporate bonds and prepayment/ extension risk on US Agency securities that won't be stable, but the swing should not be too brutal against the holder given that these risks only apply to some of the bonds in the fund.

I would be fairly relaxed on this one, tbh. Disaster happens, you might lose 10-15%: either a bear market in bonds due to unexpected interest rate rises like 1994 (30 year US Treasury dropped -20% in price from memory, so total return of -12% ish from memory; but that really was the worst year for US Treasury Bonds since 1980 or 1981), or another financial crash (credit risk comes to the fore).

Yes there's credit risk in it, the 40% private sector bonds. It's not overconcentrated on any one sector though.

I found a Short Term Gilts ishares ETF (ie UK govt bonds) but that is in GBP and its yield currently is pretty close to zero. Sterling inflation is running at 2.6-2.7% p.a. so the real losses are painful (but I hold it).
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

ekoli wrote: Thu Apr 26, 2018 7:13 am Initially I was thinking as a good alternative this global Aggregate Bond hedged in EUROS , Shares Global Aggregate Bond UCITS ETFETF (AGGH) https://www.ishares.com/uk/individual/e ... ts/291770/ instated of a regular saving account.

I'd go with it. But I cannot as as US-person!
Don't kidnap my thread ;-)
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

So far my strategy would be as follows

I typically invest in
1 Stocks
2 Long term goverment bonds (to balance stocks for high volatility)
3 Intermediate term goverment bonds (to balance stocks for low volatility)

So I was thinking on doing:
1. The same
2. The same (because it has high volatility comparable to currency volatility it should be ok)
3. Use IGOV instead

Sounds good?
Valuethinker
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by Valuethinker »

international001 wrote: Thu Apr 26, 2018 2:00 pm So far my strategy would be as follows

I typically invest in
1 Stocks
2 Long term goverment bonds (to balance stocks for high volatility)
That's not quite right.

They are both volatile-- more volatile than bond index funds (or cash).

They may, or may not, both be volatile in the same direction.

A rise in interest rates (that is unexpected) could send both down. Say the Central Banks became concerned about inflation and jack up interest rates. This is more or less what happened in 1994 when Greenspan hit the brakes hard - bond market fell c. 20%, stock market also fell.

The point is that long bonds hedge against deflation and stocks tend not to do well in deflationary periods.
3 Intermediate term goverment bonds (to balance stocks for low volatility)

So I was thinking on doing:
1. The same
2. The same (because it has high volatility comparable to currency volatility it should be ok)
That doesn't make sense to me. Long bonds have volatility, currency has volatility (which we generally believe to be unrewarded with higher returns). You could simply magnify your performance in a negative fashion (or not).
3. Use IGOV instead

Sounds good?
Sorry.. tired today. What's in IGOV again?

A widely diversified bond fund is your best bet if you can avoid credit risk as much as possible (because that correlates with equity risk). Playing games with duration? Well, maybe. There's a case that the best hedge for equities is long treasury bonds (David Swensen).
Topic Author
international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

Sure, a *very* unexpected rise on interested rates would be a bummer for long term bonds. But so an unexpected decade of smaller returns on stocks (than expected). So I'm betting the expectations are more or less right.

Historically, long term bonds diversify best stocks if portfolio has lots of stocks. Look at this thread: viewtopic.php?t=230930. But you just have to use portfoliovisualizer over different periods, and long term bonds are a winner on most periods. Mathematically, it's just because bonds and stocks are uncorrealted, and uncorrelation is more visible when both components are high risk and high volatility.

But this is only if I want a high volatility high risk porfolio (let's say stdev > 10%). If I want to reduced risk and volatility further, I can use intermediate term bodns.

IGOV is kind my substitute for intermediate terms-bonds in a non-US portfolio. Diversified non-US bonds without hedge (so ~50% in euros, the rest in other currencies)
1thinkitthru
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by 1thinkitthru »

zuma wrote: Fri Apr 20, 2018 4:23 am I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.
I'm moving to Portugal in a few months as a semi-retiree and it seems that the dollar has hit a peak against the euro... hit $1.05/euro but is now at $1.17 as of 7/2020. This is not good as one of the reasons for moving to Portugal is because it is inexpensive. Although the bottom for the dollar was ~$1.60 about 12 years ago I dont like seeing the euro gaining value against the dollar.
I've been doing a good amount of research and suggest buying VGK or IEUS through a US brokerage account. The first is from Vanguard, which is for larger cap Eurozone stocks the second is offered through iShares and is the same but for small caps. Both have low expense ratios, particularly the Vanguard offering. The key aspect here is both are UNHEDGED. If the euro continues to rise against the dollar, the returns will be enhanced as the underlying assets are euro denominated. This can be seen if you compare them to hedged ETFs, like HEDJ, while the euro is rising. All of my other holdings, plus side income are in dollars so if the euro declines I will just keep holding these funds and convert/spend my dollar denominated savings. Euro denominated bonds are not worth holding at today's tiny or negative interest rates. Factoring in any amount of inflation and you go backwards. In any case, good luck with your retirement.
zuma
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by zuma »

1thinkitthru wrote: Wed Jul 29, 2020 11:01 pm
zuma wrote: Fri Apr 20, 2018 4:23 am I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.
I'm moving to Portugal in a few months as a semi-retiree and it seems that the dollar has hit a peak against the euro... hit $1.05/euro but is now at $1.17 as of 7/2020. This is not good as one of the reasons for moving to Portugal is because it is inexpensive. Although the bottom for the dollar was ~$1.60 about 12 years ago I dont like seeing the euro gaining value against the dollar.
I've been doing a good amount of research and suggest buying VGK or IEUS through a US brokerage account. The first is from Vanguard, which is for larger cap Eurozone stocks the second is offered through iShares and is the same but for small caps. Both have low expense ratios, particularly the Vanguard offering. The key aspect here is both are UNHEDGED. If the euro continues to rise against the dollar, the returns will be enhanced as the underlying assets are euro denominated. This can be seen if you compare them to hedged ETFs, like HEDJ, while the euro is rising. All of my other holdings, plus side income are in dollars so if the euro declines I will just keep holding these funds and convert/spend my dollar denominated savings. Euro denominated bonds are not worth holding at today's tiny or negative interest rates. Factoring in any amount of inflation and you go backwards. In any case, good luck with your retirement.
Thanks for the suggestion.

Do you hold a total international fund (e.g. VXUS) in addition to the Eurozone fund(s)?

My current plan is to split equities 50/50 between VTI and VXUS, but I'm open to the idea of tilting to something like VGK for more direct Euro exposure.
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international001
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by international001 »

For stocks, volatility of the euro doesn't matter on the long term. Stocks are more volatile than any currency. Just get a world etf
EddyB
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Re: EXPAT: Strategy when invested in USA and spending in EUROS

Post by EddyB »

1thinkitthru wrote: Wed Jul 29, 2020 11:01 pm
zuma wrote: Fri Apr 20, 2018 4:23 am I am also struggling with this. I'm a semi-retired US citizen living in the EU (perhaps permanently but not sure yet) with a typical 60/40 portfolio held with a US broker. My living expenses are in Euros but I'm taking periodic withdrawals from a portfolio of USD.

Besides increasing my ex-US equity holdings, I'm considering simply holding more cash in my EU bank account to cover, say, 2 years of expenses. I'm not aware of any unhedged Euro bond ETF (US-domiciled) that I could consider as an additional measure, and I'm still not sure if that would be a good idea even if one were available.
I'm moving to Portugal in a few months as a semi-retiree and it seems that the dollar has hit a peak against the euro... hit $1.05/euro but is now at $1.17 as of 7/2020. This is not good as one of the reasons for moving to Portugal is because it is inexpensive. Although the bottom for the dollar was ~$1.60 about 12 years ago I dont like seeing the euro gaining value against the dollar.
I've been doing a good amount of research and suggest buying VGK or IEUS through a US brokerage account. The first is from Vanguard, which is for larger cap Eurozone stocks the second is offered through iShares and is the same but for small caps. Both have low expense ratios, particularly the Vanguard offering. The key aspect here is both are UNHEDGED. If the euro continues to rise against the dollar, the returns will be enhanced as the underlying assets are euro denominated. This can be seen if you compare them to hedged ETFs, like HEDJ, while the euro is rising. All of my other holdings, plus side income are in dollars so if the euro declines I will just keep holding these funds and convert/spend my dollar denominated savings. Euro denominated bonds are not worth holding at today's tiny or negative interest rates. Factoring in any amount of inflation and you go backwards. In any case, good luck with your retirement.
Not that those are bad ideas at all, but those ETFs also include U.K. companies, I believe. There is an ETF (EURZ) that includes only large- and mid-cap companies from countries that use the Euro.
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