which vanguard ETFs should i buy? (nonUS citizen)

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leey
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which vanguard ETFs should i buy? (nonUS citizen)

Post by leey »

Hi!

I'm a nonUS resident located in my home country and the only access to Vanguard that I have is through ETFs. I'll like to keep things simple and limit things to 3-4 funds, so I'm thinking of starting with 50% VTI, 30% VT and 20% VCLT.

Does anyone have any recommendation for any ETFs? Or a better asset allocation?

Thanks for your help!
Last edited by leey on Sat Apr 05, 2014 3:41 pm, edited 2 times in total.
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asset_chaos
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Re: which vanguard ETFs should i buy? (located outside the U

Post by asset_chaos »

Are you a US person resident overseas or a non-US person resident in your home country? It's unclear to me from your description.
Regards, | | Guy
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leey
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by leey »

Should have clarified that, I'm non US citizen located in my home country
TedSwippet
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by TedSwippet »

If you hold US domiciled ETFs the US taxes your dividends at 15-30%. And if you exceed $60k you open yourself up to US gift and estate tax liabilities. Have you looked at Vanguard's EU domiciled ETF range? No US tax entanglements with these.
Valuethinker
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by Valuethinker »

TedSwippet wrote:If you hold US domiciled ETFs the US taxes your dividends at 15-30%. And if you exceed $60k you open yourself up to US gift and estate tax liabilities. Have you looked at Vanguard's EU domiciled ETF range? No US tax entanglements with these.
I just wanted to thank you for that link. Very helpful.

Between the UK govt gilts fund, and the All World fund, one has the necessary ingredients of a portfolio. I would, churlishly, wish for an indexed linked gilts fund, and for a global small cap fund (better, a small cap value fund!). But with the 2 ETFs, one can create a portfolio.
hafius500
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by hafius500 »

leey wrote:I'm a nonUS resident located in my home country and the only access to Vanguard that I have is through ETFs. Since I'm not in the US, I'll be buying the ETFs through a brokerage firm....I'm thinking of starting with 50% VTI, 30% VT and 20% VCLT...
Vanguard USA, VTI, "View prospectus and reports" or "Terms and Conditions of Use - international use":
Special notice to non-U.S. investors:
Each of the investment products and services referred to on this website is intended to be made available to U.S. residents. This website shall not be considered a solicitation or offering for any investment product or service to any person in any jurisdiction where such solicitation or offer would be unlawful. Persons residing outside the United States are invited to visit Vanguard's Global Investors site for more information about products and services available to them.
Ted Swippet wrote:If you hold US domiciled ETFs the US taxes your dividends at 15-30%. And if you exceed $60k you open yourself up to US gift and estate tax liabilities. Have you looked at Vanguard's EU domiciled ETF range? No US tax entanglements with these.
Isn't the first and most important question if the fund or ETF had been registered in your home country?
Wouldn't make it sense to think of (additional) US taxes (to avoid a double taxation) only if the fund or ETF had been registered in your country?
For example, the tax status of some European ETFs:
Vanguard UK "Terms and Conditions":
Vanguard Investment Series plc and Vanguard Funds plc have been ...registered for public distribution in certain EU countries...Prospective investors are referred to the Funds' prospectus for further information. Prospective investors are also urged to consult their own professional advisors on the implications of making an investment in, and holding or disposing shares of the Funds and the receipt of distributions with respect to such shares under the law of the countries in which they are liable to taxation.

For further information on the fund’s investment policy, please refer to the Key Investor Information Document (“KIID”) or Non-UCITS Retail Scheme Key Investor Information Document (“NURS KII”), as relevant. The KIIDs or NURS KII (as relevant) and Prospectus are available in the relevant languages.
IOW, be aware of the consequences of buying unregistered funds of ETFs. The fact that you can buy these funds/ETFs is meaningless.

According to the UK factsheet of the FTSE-all-world-ETF:
Countries registered Denmark, France, Ireland, Germany, Netherlands, Sweden, Switzerland and United Kingdom
According to the UK factsheet the of SPDR MSCI ACWI UCITS ETF:
UK REPORTING STATUS
Yes
GERMAN TAX TRANSPARENT
Seeking
SWISS TAX REPORTING
Yes
AUSTRIAN TAX TRANSPARENT
Yes
COUNTRIES OF REGISTRATION UNITED KINGDOM, SWITZERLAND, SWEDEN, NORWAY, NETHERLANDS, ITALY, IRELAND, GERMANY, FRANCE, FINLAND...
For investors in France:...Germany:...Netherlands...Switzerland:...UK:...
And, BTW, these companies offer capitalising and distributing shares. Both of them are taxable (mostly or often annually - depending on the laws of your home country)
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TedSwippet
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by TedSwippet »

Valuethinker wrote:I would, churlishly, wish for an indexed linked gilts fund ...
I assume you know about the Vanguard U.K. Inflation-Linked Gilt Index Fund? As a fund, that would probably be hard (or impossible) for non-UK residents to use in comparison with an ETF, but should be usable for you.
hafius500 wrote:Isn't the first and most important question if the fund or ETF had been registered in your home country?
Ideally yes, but the OP did not say where they were, only where they were not. Perhaps they are somewhere where locally registered funds are poor or non-existent.

Even if an EU domiciled ETF is not registered in ones home country for income tax, it can still be worth using instead of a US domiciled one. Only residents of a handful of countries with US estate tax treaties get more than the standard (and low) $60k US estate tax exemption. For some folks the US estate tax is a much greater threat than dividend tax withholding. US estate tax rates are monstrous.
hafius500 wrote:IOW, be aware of the consequences of buying unregistered funds of ETFs.
By which you mean consider your home country tax treatment of the investment before anything else? Yes, absolutely.
Topic Author
leey
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by leey »

OP: I'm from Malaysia, and I'm aware of the 30% withholding on the dividends.There is no capital gains tax for equities. The unfortunate thing is that the markets in Malaysia are not as well developed as those in say US/UK/Europe and a lot of the local mutual funds have very high expense ratios (1.5-2.5%). There are very few index funds with low costs locally, so that's why I started looking at Vanguard. Even with the 30% reduction in dividends, that's still better than an annual expense ratio of 2%.

And Vanguard funds are not directly available to individual investors in malaysia.
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InvestorNewb
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by InvestorNewb »

Don't let the tax tail wag the investment dog.
My Portfolio: VTI [US], VXUS [Int'l], VNQ [REIT], VCN [Canada] (largest to smallest)
hafius500
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by hafius500 »

TedSwippet wrote:
hafius500 wrote:Isn't the first and most important question if the fund or ETF had been registered in your home country?
...Even if an EU domiciled ETF is not registered in ones home country for income tax, it can still be worth using instead of a US domiciled one. Only residents of a handful of countries with US estate tax treaties get more than the standard (and low) $60k US estate tax exemption. For some folks the US estate tax is a much greater threat than dividend tax withholding. US estate tax rates are monstrous.
hafius500 wrote:IOW, be aware of the consequences of buying unregistered funds of ETFs.
By which you mean consider your home country tax treatment of the investment before anything else? Yes, absolutely.
Just let me make it clear:
The problem I mentioned is not the foreign estate or withholding tax.
It's the penal DOMESTIC tax holders of "intransparant" funds may have to pay.
To my knowledge, funds are classified as intransparant if the fund has not reported data on taxable income and capital gains (defined under the laws of y o u r country) to your tax authority.
In this case, a -very high- flat tax may be charged.
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JD
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by JD »

InvestorNewb wrote:Don't let the tax tail wag the investment dog.
+1
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asset_chaos
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by asset_chaos »

leey wrote:I'm thinking of starting with 50% VTI, 30% VT and 20% VCLT.
If I have the symbols right
VTI---US stock market
VT---Global stock market (about 45% US and 55% non-US)
VCLT---long term corporate bonds (all---or nearly all?---US corporations)

You propose about 80% of your stocks to be US listed companies. I suggest as a non-US person you start from the global stock market (represented by VT, or whatever particular investment vehicle you settle on) and then ask yourself if there are tax or cost reasons to favor overweighting your own domestic stock market. For a non-US person I don't see any reason to overweight the US stock market.

I'm glad you have a bond allocation, even though young. You'll want more one day, so you might as well gain first hand experience with their risk-return characteristics versus stocks over several markets cycles. You'll also get the live-fire exercise of judging your true risk profile during stock market down turns. With that said however, long term corporate bonds are at the higher risk end of bonds. Moreover, the bond investment proposed is all in a foreign currency, adding even more risk to what should be the stabilizing part of your investment portfolio. I suggest you consider a mainstream mix (both government and corporate) of intermediate term bonds denominated in your home currency. Something like total bond market index, but representing the bond market of your home currency. Only if my home country government were prone to default or to devaluing the currency would I consider holding bonds in a foreign currency.
Regards, | | Guy
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by TedSwippet »

InvestorNewb wrote:Don't let the tax tail wag the investment dog.
Vanguard's US-domiciled S&P500 ETF is VOO, 0.05% TER. Vanguard's EU-domiciled S&P500 ETF is VUSD, 0.09% TER. In absolute terms this annual TER difference is small even for significant portfolios, likely a few tens of dollars. For non-resident aliens, VOO has significant US tax issues (especially estate and gift taxes), and VUSD has no US tax issues.

Preferring VUSD over VOO is not letting the "tax tail wag the investment dog". The underlying investment is the same. We are discussing the best vehicle in which to hold it.
hafius500
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by hafius500 »

TedSwippet wrote:
InvestorNewb wrote:Don't let the tax tail wag the investment dog.
Vanguard's US-domiciled S&P500 ETF is VOO, 0.05% TER. Vanguard's EU-domiciled S&P500 ETF is VUSD, 0.09% TER. In absolute terms this annual TER difference is small even for significant portfolios, likely a few tens of dollars. For non-resident aliens, VOO has significant US tax issues (especially estate and gift taxes), and VUSD has no US tax issues.

Preferring VUSD over VOO is not letting the "tax tail wag the investment dog". The underlying investment is the same. We are discussing the best vehicle in which to hold it.
I googled 'intransparent funds' and found this example. It demonstrates how a German investor in 'intransparent' funds is punished.
If I understand correctly, every year the investor has to pay taxes on
- the full distribution (Components that would have been tax-free are ignored)
and, additionally, on the highest of
- 70% of the increase of the Net Asset Value over the last 12 months, or
- 6% of the last Net Asset Value.
I think this means the investor must sell shares every year to pay the taxes even if the fund return was negative.
This could significantly decrease the total return and make such investments unattractive even in comparison to transparent expensive funds.

KPMG - Germany Taxation 2010
(page 3) A fund qualifies a transparent fund (§ 5 Investment Tax Act), if...
the fund unitholders are given notice about the amount of the distributions and the deemed distributions, the taxable part of the distributions and certain other tax relevant components of (deemed) distributions,
• these tax relevant components are published in the electronic German Federal Gazette (Bundesanzeiger) within four months after...,
• the accumulated deemed distributions are published together with the redemption price the interim profit... and the Equity Gain..., if calculated, on a daily basis,
• a German auditor or tax advisor provides a certificate that the tax figures have been calculated in accordance with the German Investment Tax Act...

(page 4:)Tax consequences for investors in funds qualifying as intransparent investment funds

If the fund does not comply with the before mentioned transparency requirements in terms of § 5 Investment Tax Act, the fund qualifies as a so called intransparent investment fund, as a result of which a disadvantageous punitive taxation according to Sec. 6 InvStG applies to the investors.
German investors are principally taxed on all actual distributions plus a deemed (lump sum) distribution of 70 percent of the increase of the redemption price throughout the calendar year. The minimum assessment basis for such deemed distribution, however, is 6 percent of the last redemption price within the calendar year.
Last edited by hafius500 on Fri Jun 07, 2013 7:03 am, edited 1 time in total.
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Re: which vanguard ETFs should i buy? (nonUS citizen)

Post by HongKonger »

leey wrote:OP: I'm from Malaysia, and I'm aware of the 30% withholding on the dividends.There is no capital gains tax for equities. The unfortunate thing is that the markets in Malaysia are not as well developed as those in say US/UK/Europe and a lot of the local mutual funds have very high expense ratios (1.5-2.5%). There are very few index funds with low costs locally, so that's why I started looking at Vanguard. Even with the 30% reduction in dividends, that's still better than an annual expense ratio of 2%.

And Vanguard funds are not directly available to individual investors in malaysia.
I hear you OP being out here in HK (along with a few others trying to acheive what you are). A lot depends on what exchanges you have access to and which brokerages you are willing to work with to gain that access. Me - I just stick with HSBC as its the only one I can link to my bank account but it limits me to US and HK domiciled. Due to tax treaty situation, I get hit with the 30% dividend tax on US holdings, but I suck it up as there is no other way to get the access to the ETFs I want without using a non-bank linked platform and changing things into Euros or sterling - the US$ peg, low ERs and ease of use make the 30% hit livable. Plus of course no cap gains tax :sharebeer
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