Any ex-US world ETF

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Topic Author
scv
Posts: 9
Joined: Sat Sep 05, 2020 3:18 am

Any ex-US world ETF

Post by scv »

Hi,

I'm currently owning IWDA (MSCI World ETF domiciled in Ireland) for my world index exposure. This fund needs to pay 15% dividend withholding tax on the US portion of the yield. I was thinking whether I can eliminate the WHT completely by replacing the US market exposure with S&P futures contract and hold the rest of the world exposure in ETFs (e.g., FTSE All-World ex US Index). When I'm searching for ETFs tracking World-EX US I only find ones listed on US exchanges and I wonder if anyone know a good one domiciled in LUX or Ireland and traded on LSE? My other option would be to hold S&P future contracts and buy developed Europe, asia pacific and emerging markets funds but would like to avoid having too many funds.

Thankful for any advice!
glorat
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Re: Any ex-US world ETF

Post by glorat »

If you're really trying to go down the route of avoiding the dividend taxes then you can buy ETFs that track the world index but use synthetics to obtain the total return that are not subject to those taxes. Amundi domiciled in Luxembourg offer these. I suspect this would be more cost and tax efficient than what you're thinking of doing.

That being said, I personally would rather own the physicals and pay the taxes than do either of the above approaches. There is a wiki page that covers the risks of non-physical ETFs
assyadh
Posts: 271
Joined: Tue Sep 18, 2018 12:44 pm

Re: Any ex-US world ETF

Post by assyadh »

glorat wrote: Sat Sep 05, 2020 5:55 am If you're really trying to go down the route of avoiding the dividend taxes then you can buy ETFs that track the world index but use synthetics to obtain the total return that are not subject to those taxes. Amundi domiciled in Luxembourg offer these. I suspect this would be more cost and tax efficient than what you're thinking of doing.

That being said, I personally would rather own the physicals and pay the taxes than do either of the above approaches. There is a wiki page that covers the risks of non-physical ETFs
I think there is an IRS guidance that warrants synthetic etfs to the same "virtual" tax treatment as replicated etfs.

I don't have it here, but I remember reading it.
Topic Author
scv
Posts: 9
Joined: Sat Sep 05, 2020 3:18 am

Re: Any ex-US world ETF

Post by scv »

glorat wrote: Sat Sep 05, 2020 5:55 am If you're really trying to go down the route of avoiding the dividend taxes then you can buy ETFs that track the world index but use synthetics to obtain the total return that are not subject to those taxes. Amundi domiciled in Luxembourg offer these. I suspect this would be more cost and tax efficient than what you're thinking of doing.

That being said, I personally would rather own the physicals and pay the taxes than do either of the above approaches. There is a wiki page that covers the risks of non-physical ETFs
That's interesting. I didn't know there were ETFs like that, I'll have a look.

I don't understand why you think it would be more cost effective to go that route though. By owning S&P futures I only have to pay the cost of rolling the contracts which shouldn't be too bad. I'm in Hong Kong and pay no capital gain taxes so as far as I understand futures would be cheaper than any ETF.
TedSwippet
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Location: UK

Re: Any ex-US world ETF

Post by TedSwippet »

assyadh wrote: Sat Sep 05, 2020 5:17 pm I think there is an IRS guidance that warrants synthetic etfs to the same "virtual" tax treatment as replicated etfs.
Section 871(m)?

https://www2.deloitte.com/ch/en/pages/f ... -code.html
IRC Section 871(m) has been enacted to ensure that non-US persons could no longer avoid partially or entirely US withholding tax on US-source dividend payments by using financial derivatives. It does so by introducing a new term, “dividend equivalent” payments, and treating such payments as US-source income, that is subject to US withholding tax.
Needless to say, US attempts to both levy and then enforce a US tax on two non-US parties dealing in non-US investment instruments are proving ... challenging.
TedSwippet
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Location: UK

Re: Any ex-US world ETF

Post by TedSwippet »

scv wrote: Sun Sep 06, 2020 1:42 am By owning S&P futures I only have to pay the cost of rolling the contracts which shouldn't be too bad. I'm in Hong Kong and pay no capital gain taxes so as far as I understand futures would be cheaper than any ETF.
Have you considered simply trading around the ETF ex-dividend dates, so that you sell out a day before, and then buy back at the lower price after the ex-dividend date? With no capital gains tax to worry about, this is at least one possibility.

Increased trading costs of course, and if high enough these might wipe out any advantage. Also, for this to work you would have to hold US domiciled ETFs, leading to the risk of confiscatory and egregious US estate taxes on anything above $60k.
glorat
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Re: Any ex-US world ETF

Post by glorat »

scv wrote: Sun Sep 06, 2020 1:42 am I don't understand why you think it would be more cost effective to go that route though. By owning S&P futures I only have to pay the cost of rolling the contracts which shouldn't be too bad. I'm in Hong Kong and pay no capital gain taxes so as far as I understand futures would be cheaper than any ETF.
I suppose I mean costs in terms of replicating the total return. In simple terms, Futures are not an investment vehicle but a hedging instrument. Futures don't pay dividends so it is far from obvious to me how you'd get those returns. Ted's note just above me hints at the solution and issues...The only way I can think of is to sell before ex-div and rebuy post-ex-div. You'd need to remember to do this at the right time and incur those trading costs. I'd rather pay an ETF to do all that for me. But then ETFs that use synthetics don't do that... they probably use equity swaps.

EDIT: I've just realised that Ted was suggestion an option based on buying/selling US ETFs, nothing to do with futures. I've also decided I probably don't know what I'm talking about in terms of ideas on how to get S&P total returns using S&P futures
Last edited by glorat on Sun Sep 06, 2020 4:09 am, edited 2 times in total.
Topic Author
scv
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Joined: Sat Sep 05, 2020 3:18 am

Re: Any ex-US world ETF

Post by scv »

Okay let me calculate the trading costs and see whether this is worth it. I was intending to own my exposure to world-EX-US with funds domicile in Ireland or Luxembourg.
Topic Author
scv
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Joined: Sat Sep 05, 2020 3:18 am

Re: Any ex-US world ETF

Post by scv »

glorat wrote: Sun Sep 06, 2020 3:41 am
scv wrote: Sun Sep 06, 2020 1:42 am I don't understand why you think it would be more cost effective to go that route though. By owning S&P futures I only have to pay the cost of rolling the contracts which shouldn't be too bad. I'm in Hong Kong and pay no capital gain taxes so as far as I understand futures would be cheaper than any ETF.
I suppose I mean costs in terms of replicating the total return. In simple terms, Futures are not an investment vehicle but a hedging instrument. Futures don't pay dividends so it is far from obvious to me how you'd get those returns. Ted's note just above me hints at the solution and issues...The only way I can think of is to sell before ex-div and rebuy post-ex-div. You'd need to remember to do this at the right time and incur those trading costs. I'd rather pay an ETF to do all that for me. But then ETFs that use synthetics don't do that... they probably use equity swaps.
But futures are traded at a discount for exactly that reason (lack of dividends) and the implied cost of borrowing is extremely low for ES-mini contracts (futures on S&P 500). The contracts are advertised as the cheapest way to get exposure to S&P-500, which obviously doesn’t mean that they really are, but I don’t see any reasons why they wouldn’t be. Of course if my investments in these future contracts doesn’t give me the same exposure as, e.g., SPY, then there would be no point at all with this strategy.
glorat
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Re: Any ex-US world ETF

Post by glorat »

scv wrote: Sun Sep 06, 2020 3:51 am But futures are traded at a discount for exactly that reason (lack of dividends) and the implied cost of borrowing is extremely low for ES-mini contracts (futures on S&P 500). The contracts are advertised as the cheapest way to get exposure to S&P-500, which obviously doesn’t mean that they really are, but I don’t see any reasons why they wouldn’t be. Of course if my investments in these future contracts doesn’t give me the same exposure as, e.g., SPY, then there would be no point at all with this strategy.
Just as you posted this, I was editing my post to retract those thoughts. I am simply not sufficiently informed on how futures can get total returns.

If this actually works, I'll have learned something valuable and new
Topic Author
scv
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Re: Any ex-US world ETF

Post by scv »

I’ll update this post when I’ve had time to do some calculations on the trading costs and compare with foreign withholding taxes in an etf.

But back to my original question. How to effectively get exposure to world-ex-US using the lowest number of funds as possible domiciled in Ireland or Luxembourg? One idea is developed Europe + developed APAC + emerging markets but ideally one fund covering whole world but doesn’t include US would be ideal. Any ideas about this? Haven’t found anything from the biggest fund providers.
rhe
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Re: Any ex-US world ETF

Post by rhe »

At one point I held a european equity position via futures. I used both stoxx 50 and stoxx 600 futures at different times. I paid fairly close attention to my account around the end of march, and as far as I could tell liquidity remained good even when bid-ask spreads elsewhere in the market were really blowing out. I have now switched to ETFs because my tax status changed, but over about four years I didn't see anything that would suggest that futures are inappropriate for a long-term investor.

As has already been mentioned, you will want to compare your holding costs to the equivalent ETF. In my case, the short term euro interest rate was negative, but I could hold up to 100k euro cash in my IB account without paying, so I think I came out ahead.
brrio
Posts: 11
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Location: Brazil

Re: Any ex-US world ETF

Post by brrio »

Vanguard FTSE Developed Europe UCITS ETF (EUR) Accumulating
Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF Acc
Vanguard FTSE Japan UCITS ETF Accumulating
Vanguard FTSE Emerging Markets UCITS ETF Acc
c-strong
Posts: 11
Joined: Sun Aug 02, 2020 4:10 pm

Re: Any ex-US world ETF

Post by c-strong »

scv wrote: Sun Sep 06, 2020 10:13 pm But back to my original question. How to effectively get exposure to world-ex-US using the lowest number of funds as possible domiciled in Ireland or Luxembourg? One idea is developed Europe + developed APAC + emerging markets but ideally one fund covering whole world but doesn’t include US would be ideal. Any ideas about this? Haven’t found anything from the biggest fund providers.
I looked at this about six months ago, for the same reasons (though I was going to go with a synthetic US ETF rather than a futures contract). Somewhat bizarrely, there doesn’t seem to be a global ex-US UCITS ETF. You have to get some individual funds as suggested by brrio (though he or she left out Canada :wink: ). I actually decided that this was a feature not a bug, as I decided to weight my regional exposures on a non-market cap basis. Also, the individual region or country funds can be cheaper than the global one, though of course they will lead to higher trading costs.
brrio
Posts: 11
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Location: Brazil

Re: Any ex-US world ETF

Post by brrio »

If you miss Canada you can add:

iShares MSCI Canada UCITS ETF (Acc)
Topic Author
scv
Posts: 9
Joined: Sat Sep 05, 2020 3:18 am

Re: Any ex-US world ETF

Post by scv »

Thanks for all input. This is very helpful!

I'm trying to grasp how to properly calculate roll costs. I tried to do a simulation today in IB but it actually looked like I would make money on the roll. Maybe it's because of the recent volatility in US or some other effect which I don't understand. I found this article which is very good and I recommend to everyone considering this idea:

https://www.cmegroup.com/trading/equity ... -etfs.html

I need to read it through properly and make another try on estimating my roll costs. It surely looks like S&P 500 futures are the cheapest way of getting US market exposures for non-us investors though.
Topic Author
scv
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Re: Any ex-US world ETF

Post by scv »

Okay I tried again...

I simulated rolling a ES Sep18'20 contract to Dec18'20. To simplify the calculations I assume today is the 17:th making the holding period a quarter of a year. The cost of making one future trade is $2.1 so total cost of transaction is $4.2 which I'll deem negligible. (I have to make this trade 4x year for each ~$170.000 USD I wish to expose to S&P 500).

I bought Dec18'20 for $3358.55
Sold Sep18'20 for $3369.00

This trades net me 50 (50 is the multiplier of ES future contract) * $10.45 (difference between the prices) = $522.5

Holding the equivalent value of S&P500 index for a quarter of a year will make $3369 * 50 * 1.76% (assumed yield of S&P 500) / 4 = $741

I'm losing out of $741 in dividends making the net effect of the roll $522.5 - $741 = -218.5

If I keep my collateral fully in cash without interest the cost of exposure to the index would be $218.5/(50*$3369) = 0.13%.

This is much better than maintaining the exposure in an ETF that is also paying foreign withholding taxes on the dividends.

I can also keep the collateral for the futures in 3-month treasury bills which yields exactly 0.13% today negating the costs altogether.

Of course this depends on richness of roll, S&P500 yield and risk free interest rate, but according to the article I linked to above it seems like this strategy is hard to beat.
glorat
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Re: Any ex-US world ETF

Post by glorat »

Thank you for the education on this topic. Am I right in understanding that this strategy is particularly effective in a very low interest rate environment and that if risk free rates were more like, say, 4%, you wouldn't be doing this?
pin
Posts: 51
Joined: Sat Aug 26, 2017 5:32 am

Re: Any ex-US world ETF

Post by pin »

scv wrote: Wed Sep 09, 2020 9:04 am Okay I tried again...

I simulated rolling a ES Sep18'20 contract to Dec18'20. To simplify the calculations I assume today is the 17:th making the holding period a quarter of a year. The cost of making one future trade is $2.1 so total cost of transaction is $4.2 which I'll deem negligible. (I have to make this trade 4x year for each ~$170.000 USD I wish to expose to S&P 500).

I bought Dec18'20 for $3358.55
Sold Sep18'20 for $3369.00

This trades net me 50 (50 is the multiplier of ES future contract) * $10.45 (difference between the prices) = $522.5

Holding the equivalent value of S&P500 index for a quarter of a year will make $3369 * 50 * 1.76% (assumed yield of S&P 500) / 4 = $741

I'm losing out of $741 in dividends making the net effect of the roll $522.5 - $741 = -218.5

If I keep my collateral fully in cash without interest the cost of exposure to the index would be $218.5/(50*$3369) = 0.13%.

This is much better than maintaining the exposure in an ETF that is also paying foreign withholding taxes on the dividends.

I can also keep the collateral for the futures in 3-month treasury bills which yields exactly 0.13% today negating the costs altogether.

Of course this depends on richness of roll, S&P500 yield and risk free interest rate, but according to the article I linked to above it seems like this strategy is hard to beat.
yeah, but you need to know what you are doing. I read the above and struggled to understand much of what you were able to achieve. Sure if you know what you are doing, go for it, but I reckon for the majority of buy and hold investors this is just way too complex.
Topic Author
scv
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Re: Any ex-US world ETF

Post by scv »

glorat wrote: Wed Sep 09, 2020 10:23 pm Thank you for the education on this topic. Am I right in understanding that this strategy is particularly effective in a very low interest rate environment and that if risk free rates were more like, say, 4%, you wouldn't be doing this?
I don't think you can make that conclusion. The cost of the roll would be affected by the risk free rates and it would be more expensive to own futures with longer time until expiration, but at the same time higher interest rates means that you will also earn more interest on your collateral basically cancelling out the higher cost of the roll.

I recommend this article for a much deeper analysis on the cost of employing this strategy: https://www.cmegroup.com/trading/equity ... -etfs.html. In the article they are concluding that for a foreign investor wanting to get exposure to S&P500 is has historically always been cheaper to invest in future contracts rather than ETFs. But as the cost of the roll is determined by the market you'll have to keep monitor them and cannot simply buy and forget which you can with ETFs.
Topic Author
scv
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Re: Any ex-US world ETF

Post by scv »

pin wrote: Wed Sep 09, 2020 11:33 pm
scv wrote: Wed Sep 09, 2020 9:04 am Okay I tried again...

I simulated rolling a ES Sep18'20 contract to Dec18'20. To simplify the calculations I assume today is the 17:th making the holding period a quarter of a year. The cost of making one future trade is $2.1 so total cost of transaction is $4.2 which I'll deem negligible. (I have to make this trade 4x year for each ~$170.000 USD I wish to expose to S&P 500).

I bought Dec18'20 for $3358.55
Sold Sep18'20 for $3369.00

This trades net me 50 (50 is the multiplier of ES future contract) * $10.45 (difference between the prices) = $522.5

Holding the equivalent value of S&P500 index for a quarter of a year will make $3369 * 50 * 1.76% (assumed yield of S&P 500) / 4 = $741

I'm losing out of $741 in dividends making the net effect of the roll $522.5 - $741 = -218.5

If I keep my collateral fully in cash without interest the cost of exposure to the index would be $218.5/(50*$3369) = 0.13%.

This is much better than maintaining the exposure in an ETF that is also paying foreign withholding taxes on the dividends.

I can also keep the collateral for the futures in 3-month treasury bills which yields exactly 0.13% today negating the costs altogether.

Of course this depends on richness of roll, S&P500 yield and risk free interest rate, but according to the article I linked to above it seems like this strategy is hard to beat.
yeah, but you need to know what you are doing. I read the above and struggled to understand much of what you were able to achieve. Sure if you know what you are doing, go for it, but I reckon for the majority of buy and hold investors this is just way too complex.
Oh absolutely. I wouldn't recommend this to anyone that doesn't have a genuine interest in trading derivatives. The brokers only require 5% posted collateral so if you make a mistake you could end up 20x leveraged to S&P 500 without knowing... I already am selling options as a hobby and very small source of income and am quite familiar with these products (but still a beginner) which is why I thought it would be fun to see whether I could utilize them to reduce the cost of my market exposure in my buy and hold portfolio. But for the vast majority, buying and holding a world index ETF is far simpler and less risky which outweigh the small reduction in their holding costs and taxes.
funwithfunds
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Re: Any ex-US world ETF

Post by funwithfunds »

TedSwippet wrote: Sun Sep 06, 2020 3:13 am
Have you considered simply trading around the ETF ex-dividend dates, so that you sell out a day before, and then buy back at the lower price after the ex-dividend date? With no capital gains tax to worry about, this is at least one possibility.

Increased trading costs of course, and if high enough these might wipe out any advantage. Also, for this to work you would have to hold US domiciled ETFs, leading to the risk of confiscatory and egregious US estate taxes on anything above $60k.
Just came across your post, TedSwippet, and it seems like something I could implement in my portfolio. I'm a NRA investor, but not in the EU, so while I can invest in US ETFs, they're not the most tax-efficient, therefore most of my portfolio is in Irish domiciled ETFs.

However, I'm interested in US domiciled small-cap value stocks ETFs (SLYV or AVUV) - which pay dividends that, as a NRA, are are subject to a withholding tax of 30% - as a small share (10% to 15%) of my portfolio, since UCITS SCV ETFs are not that interesting (mostly due to low AUM).

I had just accepted the tax inefficiency of 30% dividend withholding tax, but this strategy of selling on the last cum-dividend day and rebuying the ETF shares on the first ex-dividend day seems like a way to avoid the tax altogether??

It just looks too good to be true and I wonder if any US investors do it on taxable accounts when the shares could be sold at a loss (no capital gains tax - no refund though due to wash sale rules).

To be clear, I can sell up to 35k BRL (about 6k USD) worth of foreign assets per month with no capital gains tax, so that would be doable for a small share of my portfolio.

Aren't there any downsides? The only one I can think of is a difference of price (aside from the dividend yield) between market close on the last cum-dividend and the ex-dividend day market open, but I'm not sure how often that happens.

All this of course assuming zero brokerage fees, which I think are common among many US brokers.
Valuethinker
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Re: Any ex-US world ETF

Post by Valuethinker »

funwithfunds wrote: Tue Nov 10, 2020 9:35 pm
TedSwippet wrote: Sun Sep 06, 2020 3:13 am
Have you considered simply trading around the ETF ex-dividend dates, so that you sell out a day before, and then buy back at the lower price after the ex-dividend date? With no capital gains tax to worry about, this is at least one possibility.

Increased trading costs of course, and if high enough these might wipe out any advantage. Also, for this to work you would have to hold US domiciled ETFs, leading to the risk of confiscatory and egregious US estate taxes on anything above $60k.
Just came across your post, TedSwippet, and it seems like something I could implement in my portfolio. I'm a NRA investor, but not in the EU, so while I can invest in US ETFs, they're not the most tax-efficient, therefore most of my portfolio is in Irish domiciled ETFs.

However, I'm interested in US domiciled small-cap value stocks ETFs (SLYV or AVUV) - which pay dividends that, as a NRA, are are subject to a withholding tax of 30% - as a small share (10% to 15%) of my portfolio, since UCITS SCV ETFs are not that interesting (mostly due to low AUM).

I had just accepted the tax inefficiency of 30% dividend withholding tax, but this strategy of selling on the last cum-dividend day and rebuying the ETF shares on the first ex-dividend day seems like a way to avoid the tax altogether??
I believe (don't know) that the dividend withholding is when a company pays a dividend. So the ETF is collecting dividends all the time, with the tax withheld already?
It just looks too good to be true and I wonder if any US investors do it on taxable accounts when the shares could be sold at a loss (no capital gains tax - no refund though due to wash sale rules).

To be clear, I can sell up to 35k BRL (about 6k USD) worth of foreign assets per month with no capital gains tax, so that would be doable for a small share of my portfolio.

Aren't there any downsides? The only one I can think of is a difference of price (aside from the dividend yield) between market close on the last cum-dividend and the ex-dividend day market open, but I'm not sure how often that happens.

All this of course assuming zero brokerage fees, which I think are common among many US brokers.
I am always sceptical of zero brokerage fees - because the broker gets paid for directing your business to someone. So someone, somewhere, has to be paying the broker out of profits they make from that order flow.
TedSwippet
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Re: Any ex-US world ETF

Post by TedSwippet »

Valuethinker wrote: Wed Nov 11, 2020 4:22 am
funwithfunds wrote: Tue Nov 10, 2020 9:35 pm However, I'm interested in US domiciled small-cap value stocks ETFs (SLYV or AVUV) - which pay dividends that, as a NRA, are are subject to a withholding tax of 30% - as a small share (10% to 15%) of my portfolio, since UCITS SCV ETFs are not that interesting (mostly due to low AUM).

I had just accepted the tax inefficiency of 30% dividend withholding tax, but this strategy of selling on the last cum-dividend day and rebuying the ETF shares on the first ex-dividend day seems like a way to avoid the tax altogether??
I believe (don't know) that the dividend withholding is when a company pays a dividend. So the ETF is collecting dividends all the time, with the tax withheld already?
Poster funwithfunds is proposing to use US domiciled ETFs holding US stocks. In this case, there would be no dividend withholding within the ETF, but the broker will withhold 30% (or lower treaty rate) on every dividend paid out by the ETF to nonresident alien investors. By selling such an ETF one day before its ex-dividend date and then buying again immediately after ex-dividend, an investor can avoid receiving the dividend; at its purest, this converts dividends into capital gains.

Particularly for investors who live in countries with no capital gains tax or with usable capital gains tax exemptions, this could be one way to entirely avoid US tax on dividends, while at the same time being locally tax-efficient. There are trade-offs, of course. Increased trading costs, and (at minimum, overnight) out-of-market risk. Over a long period, you could expect the out-of-market risk to average out to near zero, but that long period might be longer than investor timescales. (For UK and US investors, wash sale and bed-and-breakfast tax rules make this strategy problematic.)

Also, one would want to restrict this to at maximum $60k of holdings, otherwise US estate tax becomes the overriding problem. At $60k, dividends are perhaps $1.2k, so the maximum saving from indulging in this, for someone in a country with no US tax treaties of any kind, would be around $400/year.
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