Diversification beyond SRI ETF [US ex-pat in UK]

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Topic Author
hackingdragon
Posts: 45
Joined: Mon Sep 14, 2020 6:53 am

Diversification beyond SRI ETF [US ex-pat in UK]

Post by hackingdragon »

Hi everyone,

My investment philosophy involves investing in sustainable investment ETFs. The ETF that most closely aligns with my values is iShares MSCI World SRI UCITS ETF (SUSW). However, this ETF only holds shares in 426 companies. I was thinking that maybe adding other sector ETFs that hold companies not found in this ETF would help in diversification. I was thinking of adding iShares Global Water UCITS ETF (IH2O) and iShares Global Clean Energy ETF (ICLN). Although these two etfs contain companies not found in SUSW, I'm just worried that I would be over-weighting certain sectors and not really diversifying.

These shares will be bought in tax-free ISA accounts in the UK

Portfolio Questions
================
Emergency funds: Yes
Debt: Student Loan 6% (aiming for loan forgiveness)
Tax Filing Status: Married Filing Separately
Tax Rate: 20% (UK)
State of Residence: Foreign
Age: 42
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 40% of stocks


Current retirement assets
Taxable
100% cash (for investing – does not include emergency funds)

Edit Portfolio Questions
=====================
Due to TedSwippet's comment below, I have decided to keep the funds in my wife's account who is not a US citizen but is UK resident.

Emergency funds: Yes
Debt: Student Loan 6% (aiming for loan forgiveness)
Tax Filing Status: Married Filing Separately
Tax Rate: 20% (UK)
State of Residence: Foreign
Age: 38
Desired Asset allocation: 60% stocks / 40% bonds
Desired International allocation: 40% of stocks

Current retirement assets
Taxable
100% cash (for investing – does not include emergency funds)

Thanks for you advice!
Last edited by hackingdragon on Mon Sep 14, 2020 9:49 am, edited 3 times in total.
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LadyGeek
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Re: Diversification beyond SRI ETF

Post by LadyGeek »

Welcome! I moved your thread to the Non-US Investing forum as you are referencing UK investments.

What is your home country?
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Topic Author
hackingdragon
Posts: 45
Joined: Mon Sep 14, 2020 6:53 am

Re: Diversification beyond SRI ETF

Post by hackingdragon »

Hi LadyGeek,

Thank you. US citizen living in the UK. I didn't think my question was UK specific.
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LadyGeek
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Re: Diversification beyond SRI ETF [UK]

Post by LadyGeek »

Thanks. It is very important to understand your citizenship and where you are living, as regulations and taxation will impact your investing decision.

You are a US ex-pat living in the UK and I've retitled your thread accordingly.

See the wiki: Taxation as a US person living abroad

ex-pats are a mix between the US (personal investments) and non-US investing forums, as you need to know a bit of both.

What do you have now? Please update this thread with your portfolio info using the Asking Portfolio Questions (US) format. If you have UK investments, modify the format accordingly (My portfolio: seeking advice is for non-US investors).

Did you intend to purchase the US versions of those shares via a US investment company, e.g. Fidelity?
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.
Topic Author
hackingdragon
Posts: 45
Joined: Mon Sep 14, 2020 6:53 am

Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by hackingdragon »

Thanks, I updated my original post with the relevant information.
TedSwippet
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Location: UK

Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by TedSwippet »

Welcome.
hackingdragon wrote: Mon Sep 14, 2020 7:09 am My investment philosophy involves investing in sustainable investment ETFs. The ETF that most closely aligns with my values is iShares MSCI World SRI UCITS ETF (SUSW). ...
I'm afraid that your US citizenship will trigger draconian and punitive US tax rules that will make it untenable for you to hold this ETF. Likewise IH2O. For more, see this wiki page:

Passive foreign investment company - Bogleheads
hackingdragon wrote: Mon Sep 14, 2020 7:09 amThese shares will be bought in tax-free ISA accounts in the UK.
Except that for you, a UK ISA does not protect against US tax, only UK tax. Again, more in the wiki:

Taxation as a US person living abroad - Bogleheads
US tax pitfalls for a US person living abroad - Bogleheads

Sorry if this all comes as an unpleasant surprise. US citizenship confers on you an unenviable and awkward tax position. Please don't shoot the messenger.

As a UK resident, you also have to watch out for the UK's (far milder) equivalent of PFIC, which is HMRC 'reporting status'. If you can access Vanguard US domiciled ETFs, you can however work around this. These ETFs are your best, and perhaps only, route to avoiding both countries' anti-offshore tax rules. (ICLN is US domiciled, and might or might not have HMRC 'reporting status'; I haven't checked.)

Vanguard US domiciled ETFs that are UK HMRC reporting funds - Bogleheads

However, accessing these ETFs may be tricky if you do not already have a US Vanguard or other US brokerage account, since many US banks now refuse to open new accounts for non-US residents. And symmetrically, you may find it challenging to find any UK platform or ISA provider that will open an account for you at all. Post-FATCA, many UK banks and investment platforms now simply refuse to open accounts for any Americans, even those living in the UK and perhaps also UK citizens. For example, Vanguard UK:

https://www.vanguardinvestor.co.uk/need ... an-account
Last edited by TedSwippet on Mon Sep 14, 2020 12:42 pm, edited 1 time in total.
Topic Author
hackingdragon
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Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by hackingdragon »

Oh wow, I did not know that. My wife came across a windfall, and I thought I was being smart by splitting it up across two ISA accounts. She is not a US citizen, so might as well keep investments in her account.
Topic Author
hackingdragon
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Joined: Mon Sep 14, 2020 6:53 am

Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by hackingdragon »

So, I guess I should update the question then.This will be in my wife's account which will mixed between taxable and tax-free ISA. She has no other investments and no debt. Would this still be a good diversification strategy?
TedSwippet
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Location: UK

Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by TedSwippet »

hackingdragon wrote: Mon Sep 14, 2020 9:39 am So, I guess I should update the question then.This will be in my wife's account which will mixed between taxable and tax-free ISA. She has no other investments and no debt. Would this still be a good diversification strategy?
Likely a decent enough strategy. The UK has a £2k/year tax-free dividend allowance, and also an £12k or so a year tax-free capital gains allowance.

Given this, if your wife has no other investments she could put as much as possible into a stocks-and-shares ISA this tax year (perhaps the full £20k), and then after April sell down £20k from taxable and reinvest in the ISA, repeating annually until the entire amount has reached the ISA. With luck and a following wind there might be no UK tax liability at all on all of this shuffling.

Your wife can invest as she wishes, provided you stick to the sensible route of filing your US tax MFS. You, of course, are stuffed. :-( In some mixed nationality marriages the US partner will 'gift' money to the non-US one, thus cutting the IRS out of their lives to the maximum possible. This may or may not work for you, but it could be worth investigating. For this to feel secure, you have to put full trust in your spouse.
Topic Author
hackingdragon
Posts: 45
Joined: Mon Sep 14, 2020 6:53 am

Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by hackingdragon »

Thanks for your comments TedSwippet. They have been most helpful.
Valuethinker
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Re: Diversification beyond SRI ETF [US ex-pat in UK]

Post by Valuethinker »

hackingdragon wrote: Mon Sep 14, 2020 9:39 am So, I guess I should update the question then.This will be in my wife's account which will mixed between taxable and tax-free ISA. She has no other investments and no debt. Would this still be a good diversification strategy?
Re the split it currently favours bond investments in taxable (since they pay next to no interest) and equity investments in ISAs. That said, from memory the first £2k pa of dividends is tax free, and if the FTSE 100 is paying c 4.5% yield, that's the dividend income from a c. £45k equity portfolio.

If she is private sector employed she could also make additional contributions to her pension, normally.

The baseline for employees is you put in 4%, employer puts in 3%, govt puts in 1% (from memory). Some employers then match additional employee contributions eg employee puts in 7%, employer 6%, govt 1%. Adding enough to get that match is almost always worth doing. For an American citizen, it may be the only thing worth doing (because of US-UK tax treaties and pension money, not sure on that point).

But if you have spare cash around, that you don't anticipate needing before age 58, and you are pretty sure you won't hit the lifetime limit of currently £1,070,000 (above which you pay 55% tax on pension withdrawals) -- and you do need to model that. Current government policy is to raise this age in line with rises in the State Pension Age and to increase the lifetime limit with RPI inflation but of course there may be further "tax raids" on pensions. Then pension saving can be an attractive way of saving. There's also an annual limit to pension contributions (£40k from memory - but you'd have to check). If you are making above £100k a year you need tax advice, because the marginal tax rate shoots up to 61% for a while due to clawback of allowances (including a reduction of annual pension allowances), and then goes to 45% once you are over £150k pa.

Normally I say: pension first up to the company match. Then ISAs. Only then if any spare cash go back to investing in pensions. (and repay debt first).

But there may be room to make additional pension contributions and it could be advantageous to do so - if you can tie the money up for however many decades (and future changes in pension rules).

Defined Benefit (Final or Career Average Salary) schemes also often have clauses which permit buying an earlier retirement date, or "catch up" buying additional years (eg for teachers who took time out during child raising years). Those are regulated as to actuarial fairness and are usually a pretty good deal. If your spouse is eligible they should probably consider it seriously.

A small nightmare is if you are in a private sector FS scheme where the employer then goes bust (or a charity - many have legacy schemes from the 1990s and before). The Pension Protection Fund then takes over and there are reductions in benefits paid - which will make the investment you made a poor one. Particularly for very highly compensated executives. But you are in worse position as a deferred pensioner than if you are actually being paid benefits.

We went through this with my spouse and decided we will take the FS scheme benefits she has as soon as she is able (in those days, for women, that was 60 not 65 or higher) for precisely that concern and also because it "smooths" her glidepath to retirement- a small monthly increment to her income. Later Defined Contribution schemes she was part of will kick in at 65 or whenever we choose (when she retires fully, I presume). Since these calculations are "actuarially fair" the present value of benefits paid over the average life expectancy will be the same regardless of what age you take it at.
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