Building a simple European ETF portfolio

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Topic Author
ramaj
Posts: 18
Joined: Sat Dec 28, 2019 1:14 am

Building a simple European ETF portfolio

Post by ramaj »

Hello,

I have some euros to invest and would like to build a simple Bogleheads-style portfolio in euros. I would contribute to it on a quarterly basis and rebalance once or twice a year. Timeframe is 15+ years as it would go towards my son's college expenses should he stay in Europe to study. Asset allocation will be 80% equities and 20% bonds. I gleaned as much information as possible from the Bogleheads non-US portfolio site https://www.bogleheads.org/wiki/Simple_ ... portfolios. Grateful for your advice / peer review:

EQUITIES

90%: Vanguard FTSE All-World UCITS ETF (USD) Accumulating - Presumably this covers almost all global large and mid-cap stocks (US; developed ex-US; emerging markets) but does not include global small caps.
5%: Vanguard S&P 500 UCITS ETF (USD) Accumulating - I would like to slightly overweight US exposure. Combined with the above Vanguard All-World, the US weighting would be around 60%. I would prefer a total US stock market equivalent (like Vanguard Total Stock Market Index Fund ETF available in the US) in order to skew away from US large caps and get a more accurate representation of the US stock market, however, my understanding is that such a fund is not available on the European market.
5%: iShares MSCI World Small Cap UCITS ETF (USD) Accumulating - I would like exposure to global small caps. This allocation gets me to roughly the small cap portion of a market-cap-weighted index of global stocks.

OPTIONAL: I could also include iShares Core MSCI EM IMI UCITS ETF (Acc) or Vanguard FTSE Emerging Markets UCITS ETF (Acc) to the mix (5-10%) to get greater exposure to emerging markets. Or does the Vanguard All-World give me enough exposure (ie, appropriate weighting based on market-cap-weighted index of global stocks)?

BONDS

100%: iShares Global Aggregate Bd ETF EUR Hedged or Vanguard Global Aggregate Bond UCITS ETF EUR Hedged - My understanding is that you want to hedge the bond allocation of your euro portfolio in euro to limit volatility.

Thanks for your time and advice.

ramaj
TedSwippet
Posts: 3747
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Building a simple European ETF portfolio

Post by TedSwippet »

ramaj wrote: Mon Jul 19, 2021 3:14 am I have some euros to invest and would like to build a simple Bogleheads-style portfolio in euros. I would contribute to it on a quarterly basis and rebalance once or twice a year. Timeframe is 15+ years as it would go towards my son's college expenses should he stay in Europe to study. Asset allocation will be 80% equities and 20% bonds. I gleaned as much information as possible from the Bogleheads non-US portfolio site https://www.bogleheads.org/wiki/Simple_ ... portfolios.
Will this portfolio be held in your name, your son's, or somebody else's?

Note the warning on the page you linked: "It does not apply to United States (US) investors, or to US citizens and US permanent residents (green card holders) living outside the US.". According to this prior post, you are a US citizen. Because of the way US citizenship transmits, there is a reasonable chance your son and any other children are also.

For US citizens, holding UCITS or other non-US domiciled funds or ETFs is a US tax death-sentence. Your wife is I think clear of these problems.
Topic Author
ramaj
Posts: 18
Joined: Sat Dec 28, 2019 1:14 am

Re: Building a simple European ETF portfolio

Post by ramaj »

Excellent point! It will indeed go in my wife's name. She is neither a US citizen nor resident. My son does not yet have US citizenship (currently French and German), however, I will get the citizenship process moving for him in the coming months.
TedSwippet
Posts: 3747
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Building a simple European ETF portfolio

Post by TedSwippet »

ramaj wrote: Mon Jul 19, 2021 7:15 am Excellent point! It will indeed go in my wife's name. She is neither a US citizen nor resident.
Right choice.
ramaj wrote: Mon Jul 19, 2021 7:15 am My son does not yet have US citizenship (currently French and German), however, I will get the citizenship process moving for him in the coming months.
Technically, your son probably already has US citizenship, just not yet registered as such with the US bureaucracy. However, there are reasons why you might actually want to delay registering him.

From Wikipedia: Accidental American - Birth abroad and role of registration
Under a strict reading of U.S. nationality law, consular registration is not required in order for a child born outside of the U.S. to a qualifying parent to "become" a U.S. citizen; the child is a U.S. citizen from the moment of birth. However, for practical reasons, if a child's birth is not reported to a U.S. consulate or United States Citizenship and Immigration Services, the child would not have any proof of U.S. citizenship and the U.S. government might remain unaware of the child's citizenship status. ... This ambiguity has resulted in American emigrant parents, particularly those married to people of other nationalities, choosing not to report the births of their children born in other countries to U.S. consulates, in the hopes that this would allow the children to escape notice by the U.S. government. Mark Matthews of Caplin & Drysdale stated, "When clients who have lived abroad for years come in, concerned about whether they have an obligation under FATCA, they sometimes react to the suggestion that their kids might be American the way one might react to a horrible medical diagnosis."
Topic Author
ramaj
Posts: 18
Joined: Sat Dec 28, 2019 1:14 am

Re: Building a simple European ETF portfolio

Post by ramaj »

Interesting, will review. Thanks.

Still no responses to my original request. I find the non-US investing board less frequented than the general US board.
TedSwippet
Posts: 3747
Joined: Mon Jun 04, 2007 4:19 pm
Location: UK

Re: Building a simple European ETF portfolio

Post by TedSwippet »

ramaj wrote: Wed Jul 21, 2021 10:10 am Still no responses to my original request. I find the non-US investing board less frequented than the general US board.
You could re-post on a US board. Perhaps that will garner more responses, though you will have to be very careful to filter there for US-specific notions that will have no relevance to you (or more specifically, your wife, since she must hold the purse-strings here), So, tax-loss harvesting, 529 accounts, kiddie tax, ..., that sort of thing.

My sense though is that your proposed portfolio is good enough that nobody has chosen to pick holes in it. I certainly have not. You've a US bias, but you've said why so no point in anyone questioning that, and your addition (or not) of a bit of extra emerging markets seems neither here nor there. An 80/20 stock/bond split is also entirely conventional.

Post something more contentious and replies will flood in. :-)
jg12345
Posts: 123
Joined: Fri Dec 11, 2020 1:03 pm

Re: Building a simple European ETF portfolio

Post by jg12345 »

Hi Ramaj,

As TedSwippet said there's not much to add to your portfolio. Propose a 20% allocation into TSLA or FAANG and you'll get a lot more replies :D

Few points:
1) Both EM and US are represented in ftse all-world at market cap weight, so that's exactly what you want. I would suggest no US or EM tilt as both tilts presume you know better than the market. However, at 5%, adding one of them/both of them or not will have a limited impact.

2) Small caps can be added or not. The point is that they are highly correlated to mid-large caps already included in Ftse all-world. Therefore the benefit of diversification appears to be limited, while cons of higher costs and lost simplicity are certainly there. If you add them, you're right, and if you don't, you're right as well ... probably boils down to how much you value simplicity.

In other words, if you value simplicity, you could easily choose 100% Ftse all-world. But your choices above are good as well!

Bonds:
No comment, all good.
Topic Author
ramaj
Posts: 18
Joined: Sat Dec 28, 2019 1:14 am

Re: Building a simple European ETF portfolio

Post by ramaj »

Thanks to you both. My feelings exactly about TSLA and FAANG!

I will probably go with the simple two-fund solution. There are also the Vanguard LifeStrategy funds which look interesting. My understanding is that they are essentially Vanguard FTSE All-World UCITS ETF + Vanguard Global Aggregate ETF and they charge slightly more for the convenience of an all-in-one fund. I believe in order to get the all-world allocation they have to use a bunch of different equity ETFs due to UCITS law limiting any single component to maximum of 20%. Anyway, they offer another choice. Happy that choices are expanding in Europe!
helloyou
Posts: 48
Joined: Sun Apr 26, 2020 6:09 am

Re: Building a simple European ETF portfolio

Post by helloyou »

ramaj wrote: Thu Jul 22, 2021 8:27 am Thanks to you both. My feelings exactly about TSLA and FAANG!

I will probably go with the simple two-fund solution. There are also the Vanguard LifeStrategy funds which look interesting. My understanding is that they are essentially Vanguard FTSE All-World UCITS ETF + Vanguard Global Aggregate ETF and they charge slightly more for the convenience of an all-in-one fund. I believe in order to get the all-world allocation they have to use a bunch of different equity ETFs due to UCITS law limiting any single component to maximum of 20%. Anyway, they offer another choice. Happy that choices are expanding in Europe!

The issue with LifeStrategy funds compared to keeping all world FTSE + bonds ETF is when there is a downturn, you cannot sell your Bonds to buy stocks, which is one of the main benefit of holding bonds in the era of low interest rates.
seajay
Posts: 221
Joined: Sat May 01, 2021 3:26 pm

Re: Building a simple European ETF portfolio

Post by seajay »

helloyou wrote: Thu Jul 22, 2021 8:58 am
ramaj wrote: Thu Jul 22, 2021 8:27 am Thanks to you both. My feelings exactly about TSLA and FAANG!

I will probably go with the simple two-fund solution. There are also the Vanguard LifeStrategy funds which look interesting. My understanding is that they are essentially Vanguard FTSE All-World UCITS ETF + Vanguard Global Aggregate ETF and they charge slightly more for the convenience of an all-in-one fund. I believe in order to get the all-world allocation they have to use a bunch of different equity ETFs due to UCITS law limiting any single component to maximum of 20%. Anyway, they offer another choice. Happy that choices are expanding in Europe!

The issue with LifeStrategy funds compared to keeping all world FTSE + bonds ETF is when there is a downturn, you cannot sell your Bonds to buy stocks, which is one of the main benefit of holding bonds in the era of low interest rates.
LS funds will rebalance towards target weightings so for instance sell some bonds to add to stocks internally, I assume that by holding two separate funds the intent is to deviate from the original target weightings (time the market)?
helloyou
Posts: 48
Joined: Sun Apr 26, 2020 6:09 am

Re: Building a simple European ETF portfolio

Post by helloyou »

seajay wrote: Thu Jul 22, 2021 9:34 am
helloyou wrote: Thu Jul 22, 2021 8:58 am
ramaj wrote: Thu Jul 22, 2021 8:27 am Thanks to you both. My feelings exactly about TSLA and FAANG!

I will probably go with the simple two-fund solution. There are also the Vanguard LifeStrategy funds which look interesting. My understanding is that they are essentially Vanguard FTSE All-World UCITS ETF + Vanguard Global Aggregate ETF and they charge slightly more for the convenience of an all-in-one fund. I believe in order to get the all-world allocation they have to use a bunch of different equity ETFs due to UCITS law limiting any single component to maximum of 20%. Anyway, they offer another choice. Happy that choices are expanding in Europe!

The issue with LifeStrategy funds compared to keeping all world FTSE + bonds ETF is when there is a downturn, you cannot sell your Bonds to buy stocks, which is one of the main benefit of holding bonds in the era of low interest rates.
LS funds will rebalance towards target weightings so for instance sell some bonds to add to stocks internally, I assume that by holding two separate funds the intent is to deviate from the original target weightings (time the market)?
That’s a good point. I’m not sure how the lifestrategy fund would react here. What I would do in case of a crash is invest every single penny of my bond allocation to stocks. But I’m 30 so I understand that someone close to retirement would prefer to stay the course at whatever fixed percentage of allocation to bonds.
jg12345
Posts: 123
Joined: Fri Dec 11, 2020 1:03 pm

Re: Building a simple European ETF portfolio

Post by jg12345 »

ramaj wrote: Thu Jul 22, 2021 8:27 am Thanks to you both. My feelings exactly about TSLA and FAANG!

I will probably go with the simple two-fund solution. There are also the Vanguard LifeStrategy funds which look interesting. My understanding is that they are essentially Vanguard FTSE All-World UCITS ETF + Vanguard Global Aggregate ETF and they charge slightly more for the convenience of an all-in-one fund. I believe in order to get the all-world allocation they have to use a bunch of different equity ETFs due to UCITS law limiting any single component to maximum of 20%. Anyway, they offer another choice. Happy that choices are expanding in Europe!
Very good choice about using two funds only.

LS definitely a great option. Your understanding is right, including on the use of multiple ETFs due to UCITS rules. I think the fact that LS does rebalancing and basically cancel the risk of you trying to play with weights is a benefit. Probably the only possible issue is when/if you'd want to change your AA, then you'd need to add a second fund or sell/re-buy (possibly paying tax).
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